Problems Using Credit

Many people depend on credit to make major life purchases, such as homes and vehicles. Credit can also be used for everyday purchases or to cover financial emergencies when cash is in short supply. While the use of credit offers a number of important benefits, it also poses some potential problems.

Ease of Use

Some forms of credit, such as credit card, can be easy to obtain and use. You can fall into the habit of using the cards for most purchases, with the knowledge that you won't have to pay the bill in full at the end of the month. As a result, the outstanding balance can escalate to the point where it becomes unmanageable. In extreme situations, you might need to resort to filing bankruptcy to keep your home or vehicle.

Security Issues

Using credit can lead to security issues that can have far-reaching implications. If you use a credit card to make purchases online, hackers could break into the merchant's payment system and steal your card information. When you open a department store credit account, store personnel have access to your personal information. In addition to your account information, thieves can also obtain your Social Security number, creating the potential for identity theft.

Low Credit Scores

If you have problems making timely payments on loans or credit cards or need to file bankruptcy, your three-digit FICO score, a primary determining factor used by potential creditors when evaluating your creditworthiness, is likely to drop. Not only will this make it more difficult and expensive to obtain credit, it can negatively impact other areas of your life. Most car insurance companies use credit as a rating factor, so you may need to pay higher premiums. Some employers also evaluate credit as part of the job application process.

Additional Charges

Unless you have access to no-interest financing, most forms of credit require the payment of interest. In the case of credit cards, interest rates can easily range from 15 percent to 20 percent. The additional money you pay in interest can make it more difficult to find funds for saving or investment purposes. If you fall behind on credit payments, you'll also likely have to pay additional fees, and your lender may have the right to raise your interest rate.