Drawbacks of Credit Cards and Credit Use

One of the primary reasons consumers run into credit issues and subsequently suffer with a low credit score is too much credit card debt.  Excessive and unmanageable credit card debt not only causes credit and credit score problems but also is a primary cause of personal bankruptcy filings.

The use of credit usually involves spending money that is not readily available.  Obtaining a home mortgage is one form of credit in which borrowers use the money extended with the credit to buy a house.  Most individuals would not have the cash available to buy a home without credit being extended with a mortgage.  Historically, obtaining a mortgage to buy a house has been a sound use of credit since the borrowed funds were used to purchase and asset, and that asset usually appreciates in value while the debt obtained to buy the assets is reduced in value over time with monthly mortgage payments. 

Credit card debt is also used to make purchases with money not readily available, similar to mortgage loan used to buy a house, but credit card debt is usually incurred to purchase disposable items not assets.  Credit card purchases are rarely used to buy an asset that is going to appreciate rather they are used for toys, trips, TVs and related consumption goods. 

Since consumers can spend more than they currently have with credit, they can easily spend more than they can afford.   This is true when credit is used to buy a home but is especially true or more common when credit cards are used.  The primary reason is that access to credit cards has been relatively easy and accessible allowing more consumers to lose control over this type of credit. 

With credit card use, as the credit card balance increases with purchases and other transactions, the minimum monthly payments also increase, and soon many credit card users find themselves in over their head.  This problem is exacerbated if interest rates on the credit card are high or have become high due to late payments and the credit card fees are accumulating.  Unmanageable credit card monthly payments tens to lead to late payments and a deteriorating credit history.

Credit card debt generally carries a high interest rate.  When someone buys a home, the interest rate on the loan is often 10% lower than the rate on a credit card.  Since credit cards are so prevalent, very few consumers pay attention to just how expensive credit card debt is. 

Due to these high interest rates, the minimum monthly payment on the total balance due may cover little more than the monthly interest charge.  Consequently, the minimum payment may only minimally decrease what is already owed.  The low minimum payments, high interest rates and ease of access frequently adds up to trouble for many consumers who end up struggling to pay off the debt they have accumulated to buy everyday items.  The end result is a poor credit score, added stress and a decreased standard of living. 

Many credit card holders try to manage the high interest rates by accepting promotional credit card offers to transfer credit card balances or open new credit cards with a lower rate.  Often these moves simply exacerbate the debt load problem by adding new debt without paying off the accumulated credit card debt.  

Some of the reason that new low rate credit cards and balance transfers fail to help is that the low rate offers may be offered on balance transfers with new purchases and cash advances are billed at a higher interest rate and the charges offset the savings you would otherwise enjoy. There are also limitations on the new low rates that are frequently ignored by the card holder as well as the problem that many credit card holders fail to stop using the older credit cards.  The result again is higher monthly payment that can lead to late payments, a poor credit history and a low credit score.

To minimize the chances of being a victim of too much credit card debt and a low credit score as result of these burdensome payments, minimize or eliminate credit card use.  If the funds are not available simply forgo the purchase.  The headache of trying to pay off high rate debt is hardly worth the joy of a new TV, dinner out or other immediate consumption items.  Low credit scores and poor credit histories start with too much credit card debt that started with just a little credit card debt.