The Use & Misuse of Credit Cards

The use of credit cards is a controversial subject among many in the financial sector. Some proponents encourage responsible credit card use, particularly in emergency situations and also to help establish a stable credit history. However, some critics condemn the use of credit cards, arguing that the average American does not have the discipline to use them responsibly.

As of April 2013, the average U.S. household has more than $15,000 in credit card debt, according to statistics analyzed by Nerd Wallet. It is the third largest household debt after mortgage and student loan debts. And 24 percent of respondents in a February 2013 Bankrate survey stated that the amount of money they owed in credit card debt was greater than what they had in an emergency fund or savings account. In addition, the number of consumers delinquent on their credit cards fell to 2.47 percent, which represents the lowest delinquency rate in 18 years, according to the American Bankers Association fourth quarter 2012 report.

Sometimes it's better to use a credit card instead of cash since the cards offer more purchase protection. The Fair Credit Billing Act allows consumers to dispute charges made on their credit cards – but not on their debit cards, or if they made a cash purchase. And until the dispute is settled, consumers don't have to pay the credit card charge. This is invaluable in cases where merchandise hasn't been received, the consumer was double-charged or identity theft has occurred. Credit cards can also be a life-saver in emergencies, such as unexpected car repairs. In addition, responsible credit card use can help consumers build a stable credit payment history.

However, many consumers use credit cards like cash for routine purchases such as food, gas, movie tickets and other daily expenses. When cards are used in this fashion, consumers tend to view them as "free cash," instead of loans, and with this mentality, they may quickly reach their spending limit. Consumers also misuse credit cards when they only pay the minimum monthly payment amount, since this increases the time it will take to pay off the card -- which, in turn, increases the amount of interest owed on the card. Another misuse occurs when consumers go over the spending limit or don't pay before the due date, both of which can substantially increase the credit card's interest rate, incur fees and negatively affect the consumer's credit rating. A poor credit score can prevent borrowers from receiving other, more important, financing, such as mortgages and car loans.

Other forms of credit card misuse include charging weddings, vacations and other expensive events. Long after these events are a distant memory, consumers can still be paying for them. Some students also charge their student loan debt on their credit card, but a better choice is to get a student loan with an interest rate lower than that of a credit card. In addition, the IRS allows taxpayers to pay their tax debts using credit cards, but it's a smarter financial option to select the IRS payment plan, which charges a much lower interest rate than most credit cards.