4 Ways You’re Probably Misusing Your Credit: What to Look for

If you are among the 128-million American households with one or more credit card facilities, are you managing your credit properly?

Credit cards, store cards, and other forms of consumer credit account for a $4-trillion market in the United States. That’s a staggering amount of money.

The Problem with Credit Cards

While many Americans use their credit responsibly, there are plenty that throws caution to the wind with their credit accounts. According to statistics published in the Federal Reserve’s G-19 report this year, over 253-million Americans have credit cards. The average balance owing is $5,839. The last time the total credit card debt of Americans was this high, was before the 2008 Financial Crisis.

According to data from the report, people who are responsible with credit have far lower outstanding balances than those that are irresponsible with their credit. The research shows that those Americans with low levels of debt have an average credit card balance of $1,154. This figure is far lower than the average of $7,527 for those that load up on their credit facilities.

Studies also show that those Americans that go deeper into debt have a harder time paying it off. People who enter debt counseling, typically have an average debt load of $24,000 spread over 6-credit cards. This figure accounts for around 60-percent of their income in most cases.

As a result, the person ends up paying 17-percent interest, or more, on their revolving credit facility. Many employees end up living paycheck to paycheck, caught in a downward spiral of debt. This debt spiral steadily increases, as the APR takes its toll on their outstanding debt and available income.

Once you reach a tipping point where you owe more than 60-percent of your annual income, it’s very challenging to get out of the debt trap. Many Americans require credit rehabilitation to get them out of the hole.

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The Problem with Student Loans

Student debt is starting to get out of control in the United States. Recent studies show that the current total outstanding student debt in the United States exceeds $1.6-trillion. The average student graduates college with more than $36,000 in student loans, and there are some with far higher balances.

However, going to college and taking on a degree does not mean that you will end up finding a job in your area of study. Research shows that the majority of students entering university do so to study courses that have no practical value in the world, with less than 20-percent of all students entering the STEM fields, (Science, Technology, Engineering, Mathematics.)

As a result, students that took on that juicy student loan to study philosophy, end up thinking deep thoughts about why they are unemployed. Many of these students resort to finding other forms of work outside of their field of study. In many cases, these jobs involve working for the minimum wage, as a barista or part of the “gig economy.”

Trying your best to survive while making minimum wage, and having thousands of dollars of student loans, is not a practical living situation for many graduates. As a result of burgeoning debt loads and weak incomes, many young Americans are delaying their development, with many millennials choosing to live at home into their forties.

Given the fact that many young Americans with substantial outstanding student loans have limited resources to pay off their debts to the Federal government. It’s not surprising to see an increase in delinquency rates, which are now approaching more than 22-percent of all outstanding balances.

Read: How To Pay Off Student Loans Fast: Complete Guide

The Problem with Consumer Debt

Unsecured consumer debt accounts for more than $1.49-trillion in the United States, with personal loans accounting for more than $132-billion. People take on personal loans for a variety of different reasons, and around 19.6-percent of the American population have outstanding personal loans in varying amounts.

Changes to the way financial bureaus calculate credit scores, lowered the bar for lending standards. This change led to a steady increase in Americans taking on forms of consumer debt, such as a personal loan.

The average credit score in the United States in 704, as measured by the credit bureaus. You would think that most Americans don’t have a problem with how they manage their debts.

However, studies show a very different economic situation to what’s we see in the media.

Around 3.5-percent of all outstanding personal loan balances are in delinquency, and this figure continues to rise.

The Dangers of the Credit Markets

Access to credit is a benefit of living in an industrious society with a booming economy. Banks and financial institutions rely on lending people money to increase their institutional profits and keep the shareholders happy with increasing earnings reports.

As a result, lenders are desperate to loan consumer’s money in any way possible. Auto loans, student loans, credit cards, personal loans, these are examples of ways in which the American consumer acquires debt to fund their lifestyle. Unfortunately, in most cases, Americans are one financial crisis away from defaulting on their debt repayments.

When consumers default, someone has to pay the cost of the outstanding debt. Many financial institutions rely on insurance companies and underwriters to back their lending practices. However, after the 2008 Financial Crises, that saw the near-collapse of AIG – a prominent global underwriter, the government had to step in to bail out the banks.

This bailout means that American taxpayers are now liable for outstanding debts that the irresponsible lending public cannot pay. As a result, financial institutions are no longer as stringent with their lending practices, as they know that the government, and the US taxpayer, will bail them out in a time of need.

Unfortunately, this is not the best strategy to maintain a fiscally healthy economy. If the American public were to default on debts all at once, it could bankrupt the nation. This type of default would not limit its fallout to the United States. The entire global financial market is at risk of spiraling into economic suicide if such a default were to occur.

Read: How to Repair a Bad Credit Score: Complete Guide

Four Ways You’re Probably Misusing Your Credit

The only way to improve the health of the economy is to improve the financial responsibility of American consumers. Learning about credit, and how it affects your financial future, is a prudent fiscal strategy.

Not all debt is bad. Some forms of credit, such as purchasing a mortgage for your home or an auto loan, helps to improve your financial position. However, there are a few ways in which you may be using credit, that are detrimental to your financial future.

If you find yourself using credit in any of the following ways, then we suggest that you speak to a debt counselor. A counselor can help you create a roadmap to get out from under the thumb of crippling debts that ruin your financial health.

1. Using Credit to Pay off Other Debt

The biggest mistake American consumers make with credit facilities is using them to pay off other forms of debt. For instance, taking out a personal loan to settle your credit card debt, probably is not a very useful financial strategy.

2. Paying for Vacations

Many people take on debt to fund vacations, and it’s a terrible financial decision. While you may feel that you deserve a vacation, if your bank account balance says you can’t afford it, then maybe you should keep saving.

If you’re tired of seeing Instagrammers post images of exotic getaways while you slave away at your job, then create a second income to save for a vacation. Putting a week’s stay at an island paradise on a new credit card will cause you more financial stress when the bills start rolling into your account.

3. Funding Unnecessary Lifestyle Expenses

If you spot a new 65-inch curved UHD TV on sale, maybe you should exercise some financial restraint. Using credit facilities to buy things that you can’t afford is a fast-track to credit rehabilitation.

Using credit facilities to fund your lifestyle expenses will only result in financial misery. Eventually, the excitement of the new TV will wear off, and you’ll regret spending that money.

4. Hiding Expenses from Your Family

Some people may develop problems with addictions or gambling, and use credit to fund their disease. In many cases, these individuals take out credit facilities like loans and cards to support their habit, resulting in an accumulation of thousands of dollars of debt.

These individuals may have the best intentions to pay off the debt before it gets out of hand. However, in reality, they end up caught in a cycle of addiction and liability that makes them keep their finances hidden from their family. When the family finds out, the feeling of betrayal may cause them to turn their backs on the addict, resulting in divorce or separation.

Signs That You Are Misusing Credit Cards

The most commonly abused form of credit is credit cards. Many lenders make facilities available to consumers, even if they have a low credit score. As a result, the average American dealing with over-leveraged credit card debt, has more than 6-cards, accounting for more than $24,000 in outstanding debt.

Here are a few examples of how you may be misusing your credit cards.

  • Do You Know Your Credit Card Balance? – If you are conscientious with your credit facilities, you should know the outstanding balance at all times. If you don’t know how much you owe, then the chances are that you are spending irresponsibly.
  • You Feel Anxiety When It Comes Time to Pay Your Credit Card Bill -If you are wondering how you are going to settle your bills this month, then you are misusing your credit card facilities.
  • You Struggle to Meet the Minimum Payment on Your Credit Card Facility -If you can barely afford to meet your monthly minimum payment on your credit card, you are asking for trouble. Eventually, the interest you owe on the facility will exponentially rise, leaving you in a bad financial position.
  • You use the Budget Facility on Your Card to Pay for Groceries – Budget facilities are for large or emergency purchases, not your daily expenses. Eventually, you’ll tap out this facility. As a result, you are more likely to get another card to continue your spending habits.
  • You Apply for Another Card Because You Maxed Out Your Other Card – This financial strategy will leave you struggling to pay your bills at the end of the month. As we already mentioned, taking on debt to pay other debt or maintain your lifestyle, is a bad idea.
  • You Take Part in Retail Therapy -If you max out your credit cards when you are feeling sad, then you have a severe financial problem. These individuals may take out multiple card facilities and max them out, resulting in a great wardrobe, but a terrible financial state.
  • Shopping without a Budget – If you visit a restaurant or retail establishment and pay without looking at the price, it’s a matter of time before you get yourself into financial trouble.
  • You Never Know if Your Card Has Any Funds Available – If you ever visit a retailer or grocery store and don’t know if your card will approve the sale, then you need to reel in your finances.
  • You Transfer One Balance to Another – If you’re shuffling around your credit card balances during the month, it means you are irresponsible with managing any credit facility.
  • Discussions About Credit Cards Make You Feel Uncomfortable – Have you ever found yourself relaxing with friends, and someone brings up the topic of credit cards? If it makes you feel uncomfortable, you have severe financial issues you need to address.

Wrapping Up – Take Heed of the Warning Signs

If any of the points addressed in this article rings true with you, then its time to get a hold of your finances, before they drive you into the ground. Put your credit cards on hold, and pay for things with cash until your balance improves. When you do go back to using your card, try to keep your debt to within 30-percent of the total card limit.

Should you be unable to live without your credit card, speak to a debt counselor. The counselor will recommend a strategy to help you get out of debt without ruining your credit record.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business. His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More. He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.


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