Why Is It Important to Use Credit Cards Responsibly?

Credit cards can be dangerous when used irresponsibly.

Credit card use is a hot topic, with an increasing number of people turning to their trusty plastic cards to cover living expenses. BankRate.com reports that the average American household carries around $14,500 worth of debt, not counting the mortgage. With numbers like this, it's clear that most people do not use their credit cards responsibly. However, irresponsible credit card use can carry some heavy consequences both in the short- and long-term.

Cost

Irresponsible use of credit cards will not only hurt you in the long run, but it can cause serious problems in the immediate future. If you fail to pay the minimum on your credit cards on time, you will be charged a late fee, usually around $30. This just adds to the total amount that you owe and are paying interest on. The best way to use credit cards is to pay off the entire balance each month. Carrying a balance will always cost you more in the long run than simply making purchases with cash would have.

Employment Opportunities

Many employers now run credit checks as a standard part of the hiring process. When a poor credit score turns up, the employer is more hesitant to hire that person. People who cannot handle their personal finances responsibly may have a harder time performing their job at an adequate level. The financial strain and additional stress of being in debt is also detrimental to worker productivity. Given the choice, employers will choose the applicant with the better credit rating, meaning that irresponsible use of credit cards could end up costing you the very job that you need to pay those cards off.

Interest Rates

With a lower credit score, you will face increased interest rates on any type of money that you need to borrow. Future credit cards will charge you a higher interest rate and existing cards may raise your rate. If you are able to get a loan for a home, car, business or other venture, this will come at a higher interest rate as well. According to MyFICO.com, a borrower with a credit score between 500 and 589 will have an 18.68% APR on a $25,000 36-month auto loan, while someone with a higher score of 660 to 689 will only have a 9.38% APR. This is the difference between paying $912 a month or $799.

Insurance Premiums

Even insurance companies have caught on to the risks of protecting someone with poor credit. A special insurance score has been developed by Fair Isaac that uses an individual's credit report to help predict the types of claims they will file. The worse your credit report is, the higher your premiums for homeowners insurance and auto insurance are likely to be. BankRate.com reports that individuals with a high credit score of 650 or more may be able to save up to 15% in insurance costs.

Home Financing

It may seem like a given at this point that irresponsible credit use will result in a higher interest rate on your mortgage. The truth of the matter is that individuals with a bad enough credit history may not be able to get any home loan at all. In fact, rental properties may turn you down if you seem like too much of a risk. Irresponsible credit use can turn your housing situation into a serious problem. Even if you are offered a lease on a home or apartment, you will be charged a higher deposit if you have a poor credit report -- often as much as an entire month's worth of rent.

References

• Bank Rate: 25 fascinating facts about debt
• MSN Money: What bad credit really costs you
• Credit Repair Kit for Dummies, 2nd Edition; Steve Bucci; 2008