Credit cards can be a wonderful tool if they are used properly, but very often they are not, and there’s nothing like credit card debt to bring you down. While there are other ways to get yourself into unmanageable debt, credit cards have a lot more potential to be used to do damage to one’s finances due to the way that they are set up.
Every time someone buys something on credit, there is a risk involved. Buying with one’s own money does involve risks as well, for instance with cash or debit, and one can overspend with these means as well.
For instance, one may overspend on non-essential purchases and this may leave themselves short during a given pay period, where they may not have enough money for the essentials, such as food or paying bills that must be paid.
Some of these bills may involve making loan payments, and one can destroy one’s credit pretty easily without incurring credit card debt, although credit card debt can certainly increase the risk here.
Since credit cards offer readily available credit, up to one’s credit limit, this available credit can serve as a financial resource in times of need, for instance in the situation where you can’t make your mortgage payment because you have not budgeted properly, or maybe you don’t have enough money left over to buy the groceries you need to keep food on the table.
If you’re faced with these situations though, while having the ability to use your credit cards to bridge the gap in cases where you have a cash flow problem that prevents you from getting necessities, you do need a plan to get out of whatever mess you are in, and can’t just rely on the credit cards as a means to constantly make up for shortcomings in your finances.
Having A Plan to Pay Off the Credit Cards
Now there may indeed be situations where one is forced into this situation longer term, if one’s income is reduced through job loss or other unfortunate turn of events, but it’s best to have a good exit strategy when you use your credit cards to help you through these tougher times. That means being able to reasonably foresee a time where you’ll be able to stop the spending on the cards and look to repay the debt you have accrued.
This might simply mean managing your finances better, it might just mean getting over an unusual circumstance that could not be put off, such as the cost of car repairs when you need your car to get around, to work for instance, or handling whatever else may be going on that has caused this.
What you don’t want is to be carrying on without a good plan on how you’re going to repay the debt that you are accumulating, and you especially need a plan where you’re going to at least be able to stop the net borrowing and at least make the interest payments to get the boat on an even keel, not rising up perhaps but not sinking further into the water.
Just like boats that reach a critical point where they take on so much water that they are doomed to sink, the same thing can happen with your credit card debt and debt in general. If you are running a negative balance and you are borrowing to keep things level, borrowing the payments in other words, once you get very close to your credit limit, then you reach this point.
This is how things go wrong with people who default with credit card debt, they use up all their available credit and do not even have the means to maintain the interest payments on them, and this leads to default every time.
Whenever you are in a situation where you cannot make the interest payments from your own income and have to borrow even a portion of this, this is when your boat is filling up with water and it is about to go down unless you turn things around.
Depending on the amount of available credit you have left, you may be able to keep things afloat for a while, and this is one of the reasons why more available credit can mean more security, and the main reason why the percentage of available credit used affects your credit score so much.
In the end though, the cost of servicing this debt goes up as you borrow more and more, and even if you’re able to straighten things out on an even keel and stop sinking, you’re still going to need a plan to reduce your debt, the percentage of available credit used, to re-build your cushion and take you further away from your boat sinking.
Credit Cards Can Get You Spending Too Much
Regardless of how you got yourself in such a mess, whether it is from an unfortunate financial event or events, or more by your own hand, the result is the same, which is being placed into a debt burden.
The sheer ease of borrowing on a credit card, where one is fully able to max themselves out at any time based upon any whim, is something that can be a problem if abused. For most people, there are plenty of things that they wish to buy if they had the money, and with credit cards they may not have the money but they still have the means to buy it now, and worry about paying for it later.
You can get yourself in trouble with this as well, in the same way as you can by putting way too much on credit cards if you lose your job or whatever, and hoping you’ll get another one before you become unable to make the payments on the debt.
There is a benefit to businesses and the economy in general in fact from people spending too much, buying things they really can’t afford, although it’s the people that must bear the burden of this.
Should one simply want something now over later and are willing to pay the extra interest involved in having it now, as opposed to saving up for it for instance, and they can afford the interest payments, that’s fine, although it’s best to weigh all the options and not just act too impulsively.
The desire to consume can be a great one though, and many people struggle with making the right decisions here, in other words acting with enough financial responsibility, and one of the biggest threats with credit card spending is that people don’t think enough on their strategy if at all.
This applies to borrowing in general though, not just credit card borrowing, and people all the time buy cars, homes, recreational vehicles, vacation properties, and all sorts of other things that they can’t afford, using a variety of credit facilities, including very low interest rate ones.
The Particular Risk Involved with Credit Cards
With other credit facilities, especially ones granted by banks, one’s capacity to repay the debt is taken well into account, as the banks with these products at least do want to set people up for success and not failure. Sure, events may occur which may prevent you from paying back the debt, job loss for instance or some other financial crisis, but they want you to at least be able to pay back the debt should these things not happen.
In other words, you are required to have enough income to reasonably support the debt load that you could take on should you use the credit granted to you to the maximum. So if you get a $10,000 line of credit at a bank, you’re going to need to have the ability to make payments on this amount should you max it out.
Credit cards pay far less attention to capacity though, and in some cases they may even be thought of as acting recklessly. So someone with a very modest income may have had their credit limits on their cards increased over time to the point where they couldn’t even come close to handling the debt they could rack up on the cards if they wanted or had to.
There are reasons for this, it’s not that the credit card companies are stupid, and in most cases they are issued by the same banks that approach other credit facilities much more tightly. However, credit card issuers have more of a vested interest in people spending on their cards, due to the processing fees earned, and their higher rates that they charge to everyone allows them much more of a buffer to deal with the higher rate of defaults that ensue by their greater disregard of capacity for people to repay.
At one time, the U.S. government actually had to make a law to stop them from just sending their cards to anyone, and although that would never happen today even if they could do it, this shows that they aren’t anywhere near as concerned as they are with lines of credit when it comes to worrying about people paying back the money they borrow from them.
The burden of responsibility with credit cards therefore resides in the credit card user primarily, and we must take care not to overextend ourselves, given that we often are provided the means to do so. In a real sense, people are often given the means for their own financial destruction should they wish, but this is a wish that clearly must be avoided if at all possible.
Credit cards must therefore always be used with care and consideration, and if you cannot pay for what you are looking to put on a credit card, this alone should give you pause for thought, and especially when it comes to your ability to repay the debt without hardship. Credit card borrowing isn’t all bad, but it’s always bad to do so without it being worth it and without a good plan to repay it.