There are four primary factors that cause people to abuse the use of credit, and each one can lead to debt problems.

1.  Insufficient income to pay for necessities. Some people think that using credit to pay for necessities will solve their problem of not having sufficient income, but the truth is that using credit to pay for necessities will create an even more severe problem.  Money that could otherwise be used to pay for necessities will need to be diverted to make payments of principal and interest.   As a result, the family’s ability to purchase necessities will decline and more credit will need to be used to maintain even a modest standard of living.

Rather than using credit, people with such problems need to explore all the alternative ways they may be able to increase their income.  They also may need to seek creative ways to reduce their spending for necessities.  Although food, clothing, and housing are necessities, most families can find ways to spend less money for these items. [Note: For insights into how to spend less, please refer to our articles under the category of “Spending Money.”]

Since the Bible indicates that God will provide for our needs (Matthew 6:31-33; Philippians 4:19) and that He will give us wisdom if we ask Him for it (James 1:5), people whose needs are not being met by their current income need to make their situation a matter of earnest prayer for wisdom to know what they need to do.  In most cases, they should also seek financial counseling.

2.  Paying for too many “extras.” In this regard, we are referring to excessive spending for discretionary items; (i.e., spending more than is prudent for your level of income for items that are not necessities).  The items we are referring to may not individually require a large expenditure, but when added together, they can total a very substantial amount.

Before making such expenditures, ask yourself if there are  better alternatives.  Is it really important for you to eat out as frequently as you do or to purchase relatively expensive items on the menu?  Is it really important for you to have as many phone and/or cable services as you currently have?   Is it really important for you to give lavish gifts or to give so many gifts for Christmas and/or for other occasions?  And, there are other expenditures that also could be questioned.

Paying for too many “extras” often causes people to live above the level of their regular income, so they use credit.  What these people do not seem to understand is that no one can continue indefinitely to live above the level of their regular income.   If they continue to increase their use of credit, sooner or later their debts are likely to become unmanageable.

3.   Making unaffordable major expenditures.  Many people purchase “big ticket” items that they cannot afford, because the amounts that they will spend are more than is prudent for their level of income.   They may not be able to afford an expensive car, but they buy one anyway, because they think they can handle the “easy monthly payments” that turn out to be onerous.  Or, they may not be able to afford an expensive vacation, but they spend the money for it anyway, because they are willing to incur an imprudent amount of additional debt.

By using credit, these people are jeopardizing their financial future, since payments for principal and interest will take money from their other budget categories.  Money that otherwise could have been used to pay for expenditures that have a higher priority than the major expenditures to which we are referring will not be available without additional borrowing.  Also, the debt payments will prevent these people from being able to put aside ample savings for long-term financial needs such as college education expenses and retirement.  [Note: To learn how to be able to pay cash for most types of major expenditures, please refer to our article entitled “Costly Credit.”]

4.   Emergencies.  Many people seem to believe that they do not have much choice when it comes to using credit when emergencies arise.  Perhaps, they do not expect to have to deal with any emergencies, since they make no provision in their financial budget for emergencies.   Such people wait for an emergency to occur before they try to determine how they will pay for it.  Instead, they should prepare to pay for emergencies before they occur.

Every family should regularly set aside money in a separate savings account to help pay for emergencies, until that account has an amount equal to at least two months – and, preferably, six months or more – of the primary wage earner’s after-tax income.  (The better the family’s medical, disability, and property insurance coverage, the lower the amount that needs to be kept in emergency savings.)  If the savings for emergencies are not adequate, it is likely that credit will be needed to pay for emergencies.  As a result, the family will have to reduce either its standard of living or its savings for other purposes until the debt is paid.  And, if further credit is incurred to pay for additional emergency expenditures, the family’s total debts could rise to a level where they become unmanageable.

It is hoped that, as a result of this discussion, you will exercise extra care each time you consider using credit in the future.  And, remember the following bit of wisdom:  If you don’t borrow, you can’t get into debt.  If you are already in debt, you won’t get further into debt if you don’t borrow more (assuming that you make your payments on time).