What Are the Dangers of Consumer Credit?

Borrowing money is a way of life in America. Consumers take out loans for mortgages, credit cards, car loans and student loans. Revolving consumer credit, like a credit card, is used for everything from renting a car to booking a flight online. The proper use of credit can be beneficial to a consumer's financial life, but there are risks to using credit that consumers should be aware of.

Too Much Debt

According to USA Today, consumer spending rose in March of 2010 and increased U.S. household debt to $2.45 trillion. Compared to some other nations, such as China, where household debt is 17 percent of household income, in the U.S., household debt is 136 percent of household income, according to Forbes. Danger ensues when consumers borrow money for loans, take out mortgages or use credit cards but then are unable to repay the loan. Failure to make payments can lead to foreclosure, repossessions and a list of penalty fees. The more the debt accumulates, the harder it becomes for the consumer to pay it all back. For some consumers, paying back their debts becomes impossible and bankruptcy ensues.

Ruined Credit Score

According to the Fair Isaac Corporation, inventors of the FICO scoring model, how much debt you have accounts for 30 percent of your score. How you pay those debts represents another 35 percent. When a consumer takes on too much debt or maxes out a credit card beyond the available credit limit, a drop in the credit score may occur. Paying bills late will also drop your score. The later the payment, the worse of an impact it will have. Charge-offs, foreclosures and repossessions will cause a serious drop in a a credit score and can lead to other negatives consequences, such as a lien, judgment or wage garnishment, which all appear on the credit report as public items that further erode the credit score. These negative items can remain on your report for 7 to 10 years.

Identity Theft

Identity theft was the number one complaint filed by consumers in 2009, according to the Federal Trade Commission. Whenever a consumer uses a credit card, whether online or in a retail establishment, there always exists the potential for a criminal to obtain access to that number and rack up huge charges. In 2007, consumer credit information was compromised when criminals hacked into the database of TJ Maxx and Marshalls department stores. Criminals can also gain access to consumer's identities when consumers fill out credit applications online. Once a criminal has this personal data, he can actually open bogus credit accounts in the consumer's name and leave that individual with a financial mess to clean up.

Predatory Lending

A consumer with a higher credit score usually receives a more favorable interest rate when borrowing money. Unfortunately, those with poor or bad credit may find themselves on the receiving end of a loan with an extremely high interest rate and high fees. First Premier, a subprime credit card issuer, has a credit card with an interest rate of 79.9 percent and fees that equate to 25 percent of the credit card limit, which is usually around $250 to $300. This card is marketed to consumers with lower credit scores. According to FreddieMac, mortgage predatory lending can lead to home loans with high interest rates and unaffordable repayment terms. Consumer credit is available for those with blemished credit, but those consumers may pay a substantial price for it.