Introduction
We all hear about credit cards and almost everyone nowadays is using one. It has been termed as the modern money, and the safest way to possess money but what most people are not aware of is the psychological trap aimed at ensnaring uninformed consumers. Its mere definition is a card which can be employed as a structure of payment that consents the possessor to purchase products on the possessor’s guarantee of paying for the products at a later date after transacting. The financial firm that issues the cards forms a revolving account which funds a line of credit to the possessor and can be used to have access to money for payment as cash advance to the possessor. Just by closely evaluating the definition, one should be able to know that it is a system that is aimed at creating debt to the holder if not used controllably.
Analysis
The analysis will focus on determining the negative effects of using credit cards and why people tend to use credit cards.
Credit cards tend to help a lot of people in instances of emergencies and at times in impulse buying. The cards should be used well, and only by people who understand the terms and conditions involved. People are often attracted by the credit scores that one derives by making numerous purchases but ignore the fact that credit scores are actually based on the numerous accounts that one has, and the ratio of unpaid amounts in relation to the overall credit limits. The more there are more balances close to the limit or have reached the limit, the more it reflects negatively on your credit score. This will create a situation where you will spend more money paying higher interest rates in other future loans like mortgage (Tokunaga, 1993).
A lot of people are filing up for bankruptcy in the United States which is making people fall into depression and most of these cases are related to misuse of credit cards. A survey was done and it was discovered according to the United States Census Bureau that there is a population of around 307,006,550 people and out of this figure, 5,900 people file for bankruptcy daily with 80% of them being credit card holders (Yi-wen and Devaney, 2001). If this trend is allowed to continue, it will have a more adverse effect to the economy than it already has.
It is better to use either cash or even cheques. The people who find themselves in bankruptcy cannot be blamed entirely. Most of them just find out there deeply in debt. If a people spend money without physically seeing, they will be tempted to spend more. Every holder acquires a card and uses it sensibly but as time goes by; one tends to loosen up and starts making impulse purchases (Tokunaga, 1993). They might be useful purchases but they come with interest which increases the cost to the holder.
A card holder will end up paying twice or at times even thrice the purchasing amount if balances keep on being carried forward and the interest rate increases. Also if these purchases and interests continue to pile up a lot of debt is accumulated but and the creditors may report negatively to other credit bureaus. And if a limit is exceeded, the creditors normally charge an over the limit fee (Yi-wen and Devaney, 2001). These costs in the long term are higher than ordinary cash or cheque purchases, and lot of card holders don’t take into consideration the long term costs when they opt to use the credit cards.
The debts are not only bad for the card holders but they are also affecting the U.S. economy at large. Another study conducted by the American Bankers Association revealed that debts related to credit cards amount to $ 387 billion this can be averaged to $3900 worth of debt for each family in the United States (Tokunaga, 1993). People have become so accustomed to using the credit card to a point where they don’t realize they are falling into huge debt which they cannot pay. This situation in turn is causing a negative effect to the economy since it reduces the money in circulation because people are spending money beyond their means. It has been fueled by the convenience derived from credit cards because a lot of people nowadays avoid carrying cash, and even small retailers like grocery stores are accepting credit cards as a means of payment.
Lastly, it is ruining the saving culture amongst people especially the young card holders. Money spent on paying credit card bills could be better utilized if it was being saved (Yi-wen and Devaney, 2001). The money used to pay for a vacation for example, can be saved and it will actually be cheaper if to finance the same vacation with saved money since it will be interest free. What most people fail to understand is that it is cheaper to purchase something with cash or using a cheque, and one is normally less conscious on spending when using credit cards.
Conclusion
Credit cards have been perceived as the modern money, and the safest way to possess money but what most people are not aware of is the psychological trap aimed at ensnaring uninformed consumers. Credit cards may help during emergencies or in purchasing important things but card holders’ end up paying more money than the purchases made due to additional costs incurred like interest rates, and over the limit charges. The debts are not only bad for the card holders but they are also affecting the U.S. economy at large. What most people fail to understand is that it is cheaper to purchase something with cash or using a cheque, and one is normally less conscious on spending when using credit cards.
References
Tokunaga, H. (1993). The Use and Abuse of Consumer Credit: Application of Psychological Theory and Research. Journal of Economic Psychology, 5, 285-316.
YI-wen, C. and Devaney, S. (2001). The Effects of Credit Attitude and Socioeconomic Factors On Credit Card and Installment Debt. Journal of Consumer Affairs, 162-179.