Are Credit Cards Evil?
Yes and no. They can be an important credit building tool but this tool is a double edged sword. Credit card companies are, after all, for profit companies and as such they are trying to maximize their profits Ethics are not a huge part of the business model. So, lets look at a few of the ways that credit car companies trap us.
Huge Credit Limits
Why should a college student have a $3000 limit? It just doesn’t make sense. In fact, most credit card limits do not make sense. Credit card limits often do not correspond to the annual income of a person. But why would a credit card company give a consumer a super high credit limit?
The reason is that they know that people will use it. They will use it because getting something now is human nature. Immediate gratification is what people want and they often do not think about the consequences. So ,they charge their credit cards up to the maximum.
Once those cards are at the maximum, they start making payments. Unfortunately, all they can afford to pay is the minimum payment. This keeps their account in good standing but does little to pay off the principal.
The end result is that the consumer ends up paying on the debt for years, racking up huge interest and making the credit card companies a fortune. So much in fact that they can still make money if a large portion of their customers default.
Cash Back Bonuses
This is all the rage. You use your credit card and get 1% to 2% back of whatever you spend. Free money, right? Not so much.
The credit card companies are once again playing to human nature. They want you to try to get those HUGE cash back bonuses so that you use your card more. They want you to use it to pay your electric bill for groceries and to fuel up your car. All so that they can gift you 1% to 2% back.
So, what do they get in return? Why would they give you money for free? It is simple, they know that most people want to pay the minimum payment. They want you to charge the card up and then pay just the minimum. This yields huge profits in interest. Hope you enjoyed the $10 back you got last month because when you pay just the minimum, that purchase will cost you $300 in interest. It is a great deal for the credit card companies.
Low Introductory Rates
You see this often, a low introductory rate for new customers. Why this low rate? Two reasons.
First, they want to lure consumer over and get them to transfer large balances over to the new account. Then, they can eventually reap the rewards with big interest payments.
Second, they want to urge consumers to spend, spend, spend. The interest is low or free, so why not. Human nature being what it is, they know that people will rack up huge debts and not pay them off before the introductory rate expires. The result, huge interest payments.
Basically everything credit card companies do is for a reason. As a consumer you need to realize this and reign yourself in. They know that you are desperate to spend and want to capitalize on that.
Discipline is what it takes to turn thin around on credit car companies and it cn be used to negate everything that they try to do to trick you.
If they give you a huge credit limit, do not use it. Instead, let that huge available credit show on your credit report and increase your score.
If they give you a nice cash back bonus, pay your monthly bills with your card to capitalize. Then, be disciplined and pay off that card every month.
When they give you a fantastic introductory rate, use it to lower your interest while you pay down your dent. Resist the urge to pay minimums or to rack up more debt.