CreditCube Blog

Mental and physical health hazards

According to the American Psychological Association (APA), about 72% of the people using credit cards in the US suffer from stress due to their financial situation.

The fear of falling behind payments and the consequences that follow, keeps many of them up at night. This leads to sleep deprivation, anxiety, high levels of stress and in severe cases it can cause depression. Additionally, living under constant pressure and fear has physical implications such as developing ulcers, migraines and can even lead to heart attacks when combined with other conditions.

Loss of long-term financial growth

When people start using their credit card, the debt is small and barely noticeable. Without proper self-control however, the situation alters rapidly to a point in which a person MUST actively dedicate a significant part of their paycheck just to keep their debt in check.

As a result, they focus only on their short-term financial state. Long-term goals such as saving for a house, retirement, vacation or even just having a safety net for rainy days can slip between their fingers while the saving process slows down dramatically or even brought to a complete halt.

Garnished wages

Those who wish to get a credit card must sign a legal agreement which normally consists the following disclosures:

Falling behind payments can be considered as breaking the contract which can lead to court and wage garnishment. In some cases, the company may sell the debt to collection agencies.

This may increase the debt and inflate it with late fees, penalties, high interest, court fees and other liabilities.

Remember, debt collectors may also sue you for wage garnishment for up to 25% of your disposable earning!

• Minimum monthly payments, usually 1-3% of the outstanding balance.
• Annual fees.
• Dispute resolution processes.

Credit score reduction

Having a credit score over 700 has tremendous importance on one’s financial life. 65% of the credit score is made from “credit utilization ratio” and “payment history”. “Credit utilization ratio” is defined as the fraction between your total credit card balance and your credit limit.

For example, if the credit limit is $10,000 and the balance of all cards is $500, the ratio is 5%.

However, if the balance was $9500 the ratio would be 95%.

High ratio has will hurt the credit score.

Financial experts recommend keeping the ratio under 30% of the total credit limit.

Payment history shows the behaviour pattern of a person under debt.

Being late on payment or missing them completely will hurt the credit score as well, deeming a person a risky client for potential creditors. This information is not limited only to creditors but is available for other service providers as well.

For example:

• Landlords can use it to determine the rent.
• Insurance companies adjust their rates according to credit score along with insurance score
• Employers may use this information to determine how responsible a person is and even use it to negotiate wages (people with low scores may be more desperate for work and agree to a lower salary).
• Banks will adjust the APR on their products based on credit score.

Reviewing just some of these points may make you think that credit cards are better avoided, but like many things in life, there is another side to the story and in the hands of informed people, they can be very convenient and positive.

Here are four pointers that can help you use credit cards safely:

Check your bills regularly and thoroughly

We advise our clients to maintain a monthly financial chart that is being updated daily with all their expenses. This way they know what they spend their money on at any given time throughout the month. Whenever you make a transaction using your card, keep the receipt and update the chart.

When the credit card bill comes, check every single line and compare it to the receipts you have. If something seems unusual, you will be able to contact the company immediately and sort it out.

Pay off your balance as fast as possible

There is a myth saying that paying only the minimum payment can improve your credit score.Paying the minimum helps the credit card company make more money from interest on your back. You want to avoid paying the minimum amount that the company offers whenever possible. If you can’t clear the full debt in a single payment, try adding additional amount to your regular payment. Any amount paid today will save you a lot of interest in the long term.

Avoid maxing out your credit card

As explained previously, you may want to keep your credit utilization ratio below 30% of your total credit limit. This may help you increase your credit score which, if done right, can improve your life quality dramatically.

Do not miss any payments

According to FICO score loss information, clients with credit score of 780 can lose over 140 points for missing payments!

If you see that you can’t make the payment contact the company in advance. In most cases they will try to work a solution with you rather than let you default on your payments.

In conclusion, credit cards can be a very convenient way for us to get by on our day to day lives but we must be calculated and aware of the risks and dangers of misusing them and the hardships they might cause us if misused.

About the Author: Good Nelly is a financial writer who lives in Milwaukee, Wisconsin. She has started her financial journey long back. Good Nelly has been associated with Debtconsolidationcare.com for a long time. Through her writings, she has helped people overcome their debt problems and has solved personal finance related queries.