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Mortgage Dictionary -> Credit

One thing that has greatly changed over the past forty years in terms of finance is credit. While people once had only credit at particular stores and with particular companies, they now have credit cards that can be used everywhere. However, there are many dangers associated with credit cards that you may not know about. You'll be learning all about credit here.

The Four Dangers of Credit and Credit Cards

While credit cards can be a very, very good thing because they do help you to establish the credit necessary to get a loan for a home or vehicle, they're also something that should be exercised with caution. Below are the four dangers of credit card use.

1. It's Exceptionally Easy to Live Beyond Your Means. You've been given a credit card with a credit line of $10,000, yet you have only $1000 saved in your bank. Rather than spending only a small amount of your credit line, you max out the card. You obviously cannot repay the balance right away, and it will probably take you years to do so because you have very little saved. This is the perfect example of using credit to live way beyond your means, and is one of the dangers of credit cards.

2. They're Not a Simple Loan. Using credit is not the same as borrowing money from your mom and then paying just the borrowed money back a little bit later on. Rather, with credit, you are not only paying for every purchase, but you are also paying interest for every purchase. That means something that costs you $100 in the store may cost you as much as $150 if you've used credit. An easy way to avoid this huge extra charge is to pay the balance in full every month.

3. Bankruptcy. Bankruptcy is huge problem in the United States, and continues to be one due to massive credit card use. Prolonged, extensive use of credit cards can lead to bankruptcy, which creates a whole new set of problems for the borrower.

4. Hidden Fees. If you thought interest was the only thing you had to worry about with regards to credit, you'd be wrong. Many credit cards feature hidden fees (such as over the limit charges, annual fees) that can be very dangerous, especially if you consistently max out your card or come close to it. It's just another risk of credit card usage.