In today's credit-dependent society, credit card use is viewed as the norm. With an average household credit debt of about $9,000, it's clear that many people use credit cards irresponsibly. When credit card companies issue credit to consumers, they do so on good faith. The amount of credit they issue is not in direct relation to the amount of credit a consumer can necessarily afford to pay back. When consumers run into trouble financially, high interest rates and aggressive late fees make paying off credit card debt an almost insurmountable feat.
The Facts
Responsible use of credit cards involves the ability to, and eventuality of paying them off. Using a credit card to pay an unexpected bill and then paying that charge off at the end of the billing cycle is responsible. Credit card abuse begins when consumers start charging balances against their credit cards that they are not able to pay off.
Risk Factors
Consumers who spend more than they make in a year run the highest risk of abusing credit cards. In order to afford the lifestyle they wish to have but cannot obtain legitimately; they use credit cards to pay for expenses over and above their income. Generally, these expenses are for luxury items such as trips, dinners out, clothing and shoes. Funding a lifestyle with credit cards sets up an unrealistic expectation in their social group as to what they can actually afford. To avoid the shame of admitting to their friends that they can't--or maybe never could--afford certain material items or activities, people may feel compelled to continue spending above their means, thus creating a vicious cycle.
Effects
Credit card abuse can affect many aspects of a consumer's financial world. As the credit card abuser's debt-to-income ratio rises, his Fair Isaacs Credit Score (FICO), which is a numerical measure of credit worthiness, drops. A low FICO score caused by abusing credit cards impacts interest rates on auto loans, equity loans, credit cards and other lines of credit. Credit card abuse also increases the financial responsibility of the abuser to pay back debts--tying up future money and limiting freedom.
Significance
Because many businesses view FICO scores as a reference for how trustworthy a consumer is, a low FICO score can hurt a consumer's ability to obtain employment, buy a home or rent an apartment. Since the new bankruptcy laws have been enacted, it is more difficult than ever to declare bankruptcy and untangle yourself from credit card debt. Responsible use of credit cards is imperative to ensure a future unburdened by debt.
Misconceptions
Many consumers do not realize they are abusing credit. Thinking they can pay it off in the future--maybe when they "close that big deal" or "get that bonus"--they continue to spend and wrack up more debt. To avoid such a predicament, place limits on the amount of credit card debt you allow yourself to amass and don't spend money you think you will be receiving--until you receive it.
