The average amount of debt held by balance-carrying American households stands at more than $16,000, according to data from the Federal Reserve. Credit card companies have been a little more lenient with granting credit cards in the past few years, even to consumers who don’t have the best credit histories.
While access to credit may be easier than during the years of the Great Recession, the risks of relying on your credit card are just as high. Here are a few things to watch out for if you’re using your credit cards to fund your lifestyle.
You’ll run out of credit.
Your credit card issuer only allows you to borrow a certain amount of money. Your credit limit doesn’t renew each month. Instead, you only create more available credit after you pay off some of what you’ve already charged.
If you’re relying on your credit card to make ends meet, you risk using all your available credit. Once you run out of credit on your credit card, you’ll have to find another way to make ends meet.
You may have a hard time paying back what you owe.
Think about it. If you’re relying on your credit card because you don’t have enough money right now, there’s a strong possibility you won’t have enough money to repay what you’re borrowing on your credit card. Sure, your credit card issuer gives you the flexibility to make minimum monthly payments over a period of time. But when you’re strapped for cash, even the minimum credit card payment can be difficult to make.
Your credit card issuer can close your credit card anytime.
When you’re relying on your credit card, you’re at the mercy of your credit card issuer. Your credit card issuer can close your credit card or lower your credit limit at any time. You increase the likelihood of this happening by going over your credit limit or missing your credit card payments. Credit card issuers also cancel credit cards for business reasons, even if you’ve kept your account in good standing. If your credit card is closed, there’s no guarantee you’ll be able to get another one.
Your credit score could suffer.
The amount of credit card debt you’re carrying impacts a large part of your credit score. The higher your credit cards balances are relative to your credit limit, the more your credit score is affected. Generally speaking, it’s best to keep your credit card balances below 30% of their credit limits. The lower the better. If you’re relying on credit cards, there’s a risk that high credit card balances will hurt your credit score.
You’ll pay a lot of money in interest.
Unless you’re paying your full credit card balance each month, you’re paying interest on whatever balance you’re carrying. That could be a significant amount of interest depending on your balance and your interest rate. For example, you’ll pay nearly $30 in monthly interest on a $2,000 credit card balance at 18% APR. In a year, you’ll pay more than $300 for the “convenience” of relying on your credit card.
You can’t improve your financial life.
It’s easy to feel like you’re doing ok as long as you can use your credit cards to fund your lifestyle. However, relying on your credit card keeps you stuck in a financial rut, making it harder to get ahead. Your finances get better when you live within your means, save and invest, and pay off debt, not create more of it.
You’re covering up the real problem.
If you don’t make enough money to pay your bills or you’re not managing your money well, using a credit card will only hide the true problem. Since there’s a cap on the amount you can borrow on your credit card, you can only rely on your credit card for awhile before you’re forced to deal with the reality of your finances. Putting it off won’t make it any easier. In fact, your finances will be a little worse off with maxed out credit cards on top of any other money troubles.