The subject of money is obviously a permanent form of flexibility, which can be seduced by its practicality. However, it remains risky if you get carried away in a spiral of consumption and can lead to over-indebtedness.
To enjoy the benefits of a cash reserve
The first advantage of the revolving debt system is obviously its flexibility. The money is available: you can use at your convenience, without justification. And this feeling is sometimes significant.
In addition, the cash reserve is accompanied by convenient tools: Credit card enables payment, but also the withdrawals from distributors, and is often accompanied by support services or insurance…
Finally, the subject of money and your current account can sometimes communicate: the reserve money is available to fund your current account overdraft; conversely, your current account can replenish your cash reserve in case of return unexpected money for example, and allow you to make lower monthly payments.
However, if there are advantages to this system of revolving credit, disadvantages or risks that accompany it can be significant. First, the cost of this credit is not negligible. There are of course costs that accompany the opening of such a loan: fees, commission use any insurance card fee … But we must also consider the rates in permanent appropriations, often close to the wear rate (18-20%)! In addition, the rate may vary between the time you sign the contract and when you actually use the cash reserve, depending on changes in market rates and the policy of the lending institution. Your monthly payment is fixed but the interest to pay may be more than advertised.
In addition to the high cost, the system of revolving debt gives an impression of abundance. The purchase may seem guilt-free, seen as inconsequential: careful not to get caught spending more than reason. Each hollow additional purchase is the debt owed to the lender, interest accrues and repayment duration increases. If you cannot pay your monthly payments, repayment of principal and interest still owed may be required, together with a late payment fees. There may be excessive use of the revolving debt, a real risk of debt distress.