Families use credit to meet needs or obligations. The need may be real or imaginary. If the initial cost of a commodity seems too large to save before the purchase is made, families borrow money to possess the commodity immediately; for example, land. The cost of the good is spread over a long period of time and the family can have the advantage of using the good during the payment period.

Another reason for borrowing is to meet family emergencies like sickness of a family member. Families also borrow to meet obligations like marriage of children or performing rituals during death of a member. A self-supporting and self-sufficient family can always use credit in emergencies and do so with a feeling of confidence.

A lender will make a loan only when she/he believes that the borrower will repay the money she/he borrows. The lender may be a bank or any other financial institution. Their decision to give credit to individuals and families is governed by 4C’s, which are mentioned below.

1. Character means willingness and determination to repay a loan as agreed, even though it is at greater cost and inconvenience than the borrower anticipated. 2. Capacity means the ability to meet an obligation when it is due. Ordinarily capacity depends upon income. It is important to understand that the capacity of family to repay a loan depends not so much upon total income as upon the available margin over and above necessary expenses. 3. Capital means net worth. A family’s capital is determined by the difference between what it owns and what it owes. The existence of this capital provides a margin of safety for the lender, since if the family’s income proves to be inadequate to repay the loan, it can draw upon its invested capital. 4. Collateral consists of specific units of capital which are pledged as security for a given loan. Usually these units are placed in the possession of the lender with the understanding that if the borrower fails to pay the loan as agreed, the lender is to reimburse himself in so far as he can from the sale of the pledged collateral.

Commercial banks, cooperative banks and agricultural banks, credit unions, etc., are the main source of taking credit. One can also take credit from self-help groups of which one is a member. The members of this self-help group contribute some money every month and make a corpus amount. From this credit is given to the needy member based on her/his requirement and repaying capacity. These groups have members known to each other and hence no collateral is needed and the interest rate is nominal.

Before using credit the family should consider not only satisfaction gained by possession of the good or service but also future adjustments in family budget imposed by repayment of the loan. Managing credit includes determining when to use credit and when its use has become excessive. Credit is a useful resource when handled with an understanding of its potential and its cost.

If used indiscriminately credit can be disastrous for a family. Avoiding use of credit and taking credit at the lowest possible cost should be the first target for most families.