Possible Reasons Why People Use Credit Cards Irresponsibly

I am not a big credit card fan, but I want a blog that has some other viewpoints. So Mr Credit Card was kind enough to do a guest post.

Today Mr Credit Card from www.askmrcreditcard.com, who reviews and recommends the best credit cards is going to share with us what he thinks are some causes for why folks do not use credit cards responsibly.

For me, responsibly credit card use means you pay you bills in full every month. Yes, folks may carry a balance occasionally due to some emergencies and I do not consider that totally irresponsible use. But irresponsible use simply means you are spending more than you earn, carry a balance and making no attempt to pay off your credit card debt.

Do Not Understand the Math: Many credit card holders have no clue how they actually work. And I think this is one of the major reasons folks get into credit card debt. They simply look at them as free money and then when it’s time to pay their balances they don’t understand how they got in trouble. The biggest and most important part of credit that a person should be aware of involves understanding the math. How much will you actually be paying for that new flat screen television if you put it on your card? How much will you pay for it if you only pay the minimum monthly payment?

For example, I looked at my recent credit card statement and in compliance with the CARD Act, they had to show me how much and how long will I take to repay my bills if I had just paid the minimum payment. In this example, my bill was $1589. If I had carried a balance on my credit card with a 14% interest rate. Paying the minimum monthly payment of $32 results in me paying $3365 after 13 years!.

Paying off the credit card in FULL is almost always the best option in managing credit, if that is not possible then you certainly don’t want to stick with the minimum that is required. If you have no choice, the purchase is probably not a purchase that should be made.

Falling For Deals – We are all bombarded and surrounded by deals. That is what marketers are for – to craft a compelling offer to entice us to try their products and hopefully stick to it. In the credit card world, these deals come in a variety of sorts. For example, many sub prime credit card issuers sent “junk mails” (to us it’s junk, to them it’s marketing flyers!). On these mails, you will see large bullet points like

Many folks fall for things like that. What is not known are the fine prints at the bottom of the junk mails! All those fees!

Another common deal is the 0% balance transfer credit card deal. This is again very tempting to many folks, especially those who carry a balance. Hey, you mean I can pay 0% for 12 months. If used properly, these deals are a tool to help you reduce your credit card debt faster. But many folks simply transfer balances from one card to another without making any effort to reduce their debt.

Not understanding the reasons for overspending: We could be overspending for a variety of reasons. Shopaholics have a real problem and few recognize the cause of that problem. Why do we actually want the flat screen television and why do we think we need it so badly right now that we are willing to put it on a credit card at 20% interest? Taking an honest look at ourselves is an important aspect of using and managing credit responsibly. Honesty, of course being the key word. Buy what you “want” rather than what you “need” on credit is a recipe for financial disaster.

Another reason for overspending is perhaps income is too low. Maybe that person need to get another job. If we are overspending because we can’t pay for the necessities in life then we need to find another option. Necessities, of course are those things we need for survival. A home, food, water, etc. Necessities are not flat screen televisions, iPhones or designer clothing.

Other reason for overspending involves the purchase something we actually need on credit (like perhaps a car for work, a washing machine? Buying a more expensive model than you need or not delaying the purchase could result in being overstretch financially. Will the debt be manageable if we lose our job or go through a divorce? These are things to consider as well when looking at credit purchases (like a washing machine or even a car).

Lack of Budgets – Folks also overspend because they don’t have a budget? Many people have no idea what they’re spending on food, clothes, entertainment or utilities. They simply spend and buy and pay and then wonder why they have no money. Budgets are integral in using credit responsibly because you have to know where your money is going if you want to have any control over your credit. You can’t possibly have an idea if you’re making a good fiscal decision if you have no clue what you’re spending your money on.

Not understanding How Creditors Look at You: If you only pay the minimum payments on your cards, you may never be looked at favorably to a creditor. Though credit card issuers cannot just simply raise your rates (after the CARD Act), you are doing things like slashing people’s credit limit to “just above their balance”. Credit card issuers these days simply have little tolerance for folks who carry high balances even though they pay on time and have great credit scores.

A large part of your credit score, 30%, is based upon how much credit you have available. If your credit cards are maxed out, your credit score could drop significantly. Besides affecting your credit score negatively, there are other important reasons for not overspending and maxing out credit cards. Balances are more difficult to repay if your cards are maxed out and other lenders may not be willing to extend credit or a loan if you already have a handful of maxed out credit cards.

Ending Thoughts – I’m sure there are other reasons for folks falling into the trap of not using credit properly. Please share your thoughts here.