Misuse Of Credit Essay

1412 Words 6 Pages
Consistent with the life-cycle hypothesis, expectations about future income leads to the misuse of credit (Kish, 2006). Soman and Cheema (2002) noted that if naïve consumers have access to large amounts of credit, they are likely to infer that their lifetime income will be high, which increases their willingness to spend beyond their means. Under this scenario, consumers utilize more credit in anticipation of their income increasing, which may or may not materialize. Optimism, overconfidence in financial knowledge, and mental accounting are additional reasons attributed to the misuse of credit. Moreover, the gamification of purchases entice more convenience users to make purchases using credit in an effort to acquire future discounts, free …show more content…
Consumer knowledge of financial matters influences spending habits and repayment decisions as knowledge of financial matters affects a person’s ability to comprehend the cost of borrowing (Navaro-Martinez, et al., 2011). Frank (2011) identified that many people may not know their credit card interest rate, underestimate their credit card balances, and that consumers may systematically underestimate the interest rate they are paying by as much as 30 to 33%. Also, more consumers are content to carry credit card balances and ignore the double-digit interest rates that are being charged (Taub & Bitti, 2011). The lack of financial literacy, consumer behavior, and the questionable practices of credit issuers have contributed to a sizeable amount of consumer debt. Providing evidence that consumers have a difficult time understanding the details of financial contracts, in 2010 alone, U.S. consumers paid more than $20 billion dollars in credit card penalty fees (Lowe, 2013). Stango & Zinman (2009) analyzed credit card transactions and determined that consumers could avoid most credit card fees by utilizing a low-rate card versus a high-rate card, paying a bill using available checking account balances, or by using a different card with sufficient available credit; providing further evidence that consumers have a low understanding of the cost of credit. Overall, the researchers noted that the average consumer could avoid sixty percent of all credit card interest charges, overdraft fees, and over-the-limit fees by changing their

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