If used properly, credit cards can work to your advantage. But with the average American household nearly $16,000 in credit card debt as of 2012, it is obvious that these cards also pose a danger. Overspending is only one of the many possible dangers of using credit cards. When used improperly, credit cards can do long-term damage to your FICO credit store, potentially preventing you from achieving your long-term financial goals. The negative effects of credit card debt can cause you to be declined for a mortgage or lose out on a job.
Changing Terms
One of the dangers of credit cards is that the issuer can change the terms of the credit card agreement without asking for your consent. Your interest rate and grace period can both change, without the card issuer warning you. In some cases, the increase in interest rate after a welcome period is specified in the fine print of the original card application.
Debt-to-Income Ratio
Your debt-to-income ratio measures the amount of money you bring in to the total amount of debt you owe. According to InCharge Debt Solutions, a non-profit financial counseling organization, your debt payments should not exceed 20 percent of your monthly income. Once your debt-to-income ratio exceeds 20 percent, you may be penalized with higher credit rates on new loans. You may also be ineligible for any new credit cards or loans.
Charged-Off Accounts
Unpaid credit card accounts can eventually be discahrged by the creditor. These are called charged-off accounts. In addition to negatively affecting your credit score, charged-off accounts can be a headache for many years to come. Your creditors can sell these debts to collection agencies, which may chase you for payments on these accounts for an additional five to seven years.
Minimum Payments
A credit card company will accept a small minimum monthly payment from you, which allows you to go many years without paying off the total balance. The minimum payment is only a tiny portion of the total amount you owe, and if you only pay these monthly minimum payments, you will end up paying a large amount of extra money in interest. According to financial guru Suze Orman's website, if you owe a credit card company $5,000 at 18 percent interest, and you make only the minimum payment, you will end up making payments for 30 years before the balance is paid off.
