Personal Finance

Three Inappropriate Uses of Credit

| by PhilipTirone

According to the Federal Reserve, Americans owed a staggering $2,418.5 billion in debt as of June 2010; unfortunately, much of this constitutes inappropriate uses of credit.

As a consumer advocate, I am in the business of helping Americans learn how to use credit wisely. By learning to distinguish inappropriate uses of credit from appropriate uses of credit, you will earn a great credit score, have the resources to invest in your future, and be free of burdensome debt. A person who regularly misuses credit will suffer the opposite: bad credit, inability to make investments, and mounting debt.

In this article, I describe three inappropriate uses of credit:

Inappropriate Uses of Credit #1: Retail Therapy

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Do you find yourself using your credit cards more frequently if you are bored or depressed? Retail therapy makes you feel worse in the long run, particularly if you are maxing out your credit cards to finance the shopping spree. Find less expensive and more effective means of coping. Here is a list of things you can do that will actually make you feel better. And you will notice that none of them cost a dime:

  • Invite your best friend for a bike ride, run, or walk in the park.
  • Snuggle in for movie night with a bowl of popcorn.
  • Re-read your favorite book.
  • Take your kids to the park for a play date.
  • Call an old friend.
  • Take a couple of hours to start that project you have been postponing.
  • Handwrite a letter to someone you miss.  
  • Invite your friends over to play board games.
  • Wash your car, give your dog a bath, or clean out your closet. These might not seem fun, but I guarantee you will feel much more productive after conquering a chore than you will after a day of abusing your credit cards.

Inappropriate Uses of Credit #2: Holiday Shopping Sprees

It’s only August, and some of the stores are gearing up for Halloween already. Before we know it, Thanksgiving and then Christmas will be at our doorsteps. Use your credit cards wisely to avoid a holiday hangover!

Many parents want to create memories for their children, so they go overboard when it comes time to shop for the holidays. But remember that your children will remember the time they spent with you more than they will remember the gifts they received. Want proof? Think back to your own childhood. How many gifts do you remember? Probably not many!

The holidays are supposed to make a person feel peaceful. If you use credit to finance gifts, decorations, or wardrobes, you will add stress to your life. Always, always leave the credit cards at home during the holidays.

Inappropriate Uses of Credit #3: Financing Debt

Of all the inappropriate uses of credit, this one takes the cake. Too often, people apply for loans or credit cards because they are deeply in debt. But how will taking out another loan help them dig themselves out of debt?

Unless you have a budget that proves a loan or credit card will help your financial situation, getting a loan to pay debt is the worst use of credit out there. Sure, you would be wise to take out a lower-interest loan to consolidate credit card debt. A business loan that helps you increase cash flow is another appropriate use of credit.

But you will only complicate matters if you apply for a loan without proof that it helps you relieve your financial burden. Run the numbers. Determine whether the loan or credit card will actually solve the problem. Otherwise, you are simply postponing the inevitable.  Remember that your decisions must be based on substance. If you decide that you want to take out a loan, but you have no long-term plan detailing how this loan will provide a permanent solution, why bother? If the loan is a band-aid instead of a true cure, it will eventually fall off.

Instead, find ways to make more money or spend less money. I know this seems like an overly simplified solution to a complicated problem, but the only way to get out of debt is to make more money or spend less money. That’s it. Building more debt to dig yourself out of debt is the biggest inappropriate uses of credit out there.