The buy-now-pay-later convenience of credit is attractive to consumers. Credit provides financing for mortgages, car loans, large appliances and other big-ticket purchases. But when consumers commonly use credit instead of cash and are slow to pay down what they owe, they're overusing credit. The consequences could be too much debt and limited access to credit in the future.
Taking out loans to cover recurring expenses such as utilities, insurance and medical bills signals credit overuse. Monthly income normally should cover these budget items. Using credit cards to buy groceries, gas, clothing, retail goods and pharmacy items can signal overuse if the card balances aren't paid in full each month. Skipping payments, alternating payments among creditors and paying only the minimum amount due on credit statements are signs that credit overuse is causing financial distress.
Having some credit is a plus for consumers, but overusing it shows up on credit reports if you miss or are late with payments, or if you have too many active accounts with balances. Banks, mortgage companies, retailers and other creditors report your payment information to the three main credit bureaus, Experian, TransUnion and Equifax, which calculate credit scores based on your creditworthiness. Consumers with low credit scores are less likely to get loans or other additional credit and are more likely to be charged high interest rates.
Behavioral economists study how people make decisions about their personal finances, including their rationale for overusing credit and accumulating and paying down debt. Economists Howard Beales and Lacey L. Plache cite one possible cause as "hyperbolic discounting," whereby consumers favor a short-term gain -- immediate pleasure from buying on credit -- over a greater, long-term benefit -- postponing the pleasure until they have the cash to pay for it. The short-term gain often leads to long-term distress in the case of credit overuse. Beales and Plache also cite other possible causes, including "unrealistic optimism," whereby consumers can't envision ever being unable to pay their obligations, and "miswanting and relative position," which causes consumers to make credit purchases solely to enhance their status and compete with others.
The U.S. Federal Trade Commission advises indebted consumers to start getting their finances under control by maintaining a household budget. A budget lists income sources and major expenses, which, according to the FTC, lets consumers observe spending patterns, identify essential expenses and prioritize payments. The commission also recommends telling creditors when payments become difficult to make before accounts are turned over to collection agencies. Some creditors are willing to work out payment plans within consumers' budgets.
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