Americans love their credit cards. Did you know that the average American household has not one credit card, not two credit cards, but five credit cards? According to the Federal Reserve, the average credit card debt is about $15,000. This is unsecured credit card debt only. These figures don’t include auto loans or student loans or home loans. It’s easy enough to get into credit card debt, but usually not quite so easy to get out of it. That’s because the credit card industry has some dirty little secrets they don’t want you to know about.
In the good old days, if you wanted to buy something you found out how much it would cost, you saved up the money, and you bought whatever it was that you wanted. Not in today’s “instant gratification” culture. Now you don’t need the money to buy whatever you want, you just need a little plastic card – and apparently most families have five of them to choose from!
You probably have the best intentions when you use your card. You’re just a little tight this month, or you are in-between paychecks, or just as soon as your tax refund comes in, you’ll pay off your credit card balance in full. That’s what’s best for everyone, right? Wrong!
Your credit card company doesn’t want you to pay off your card – ever. If you pay off your balance when you receive your statement, all the credit card company gets is a measly percentage they collect from the store called a merchant fee. But, if you pay just the minimum balance, then it’s a whole different ball game. That’s where they make their real money. That’s why when you get your statement there is a very prominent box with the words “Minimum Payment Due”. If you only pay this amount, they get to charge you interest. In fact, they are banking – quite literally – on you using the card again for more purchases since the minimum payment due is so affordable. Did you know that a $10,000 purchase at 19.98% interest will take you 37 years to pay off? Care to take a guess at how much interest you’ll pay on that $10,000 in the meantime? You might want to sit down. Over the 37 years, you will pay almost $19,000 in interest alone!
Have you ever noticed that your credit card due date seems to move around? Some credit card companies are no longer on a 30-day cycle, but a 21-day cycle. The likelihood of you being late with a payment is pretty good. When that happens, they get to charge a late fee. This is usually around $39. In 2004, the credit card industry took in approximately $13 billion in late fees and penalties. How’s that for an additional income stream!
When you are late on your payments, the fine print in your contract also gives your credit card company the right to increase the interest rate they charge. Sometimes they ill charge as much as 29.98% in interest! You don’t even want to know what that $10,000 purchase in Secret #1 would cost you in interest at that rate!
90 days, or 6 months or 12 months same as cash agreements are rarely kept. It’s like going to a casino and expecting to outsmart the “house”. If the odds were in your favor, the casinos would go out of business. The credit card industry is much the same way. If all they received was the small merchant fee at the time of the initial purchase, it wouldn’t be worth the risk of lending money – some people never pay their accounts. Again, they are literally banking on you defaulting on the agreement. At that point, they will not only charge you a higher rate of interest than if you had gone with a standard revolving charge, but it’s a balloon interest that goes all the way back to day one. This is true even if you are just one month shy of paying off your 12-month payment plan.
You have to have a credit card to rent a car, buy airline tickets, reserve a hotel, or purchase something online. This may have been true at one time, but now virtually all of these businesses will accept a debit card as long as it has a Visa or MasterCard symbol. The difference is when you use your debit card it truly is the same as cash. There is no interest, and no debt incurred. Of course, the caveat here is you actually have to save money up for purchases, just like in the good old days.
Being in debt is miserable. You may have gotten into it innocently enough. But, the problem is, you never know when life is going to throw you a curve ball. Those payments that seemed so affordable at the time can become impossible if you lose your job, or have your hours cut back, or suddenly run into some other emergency. Your best bet with credit cards is to not use them at all. Save some money aside in an emergency fund for those true emergencies, and then start saving money for those larger purchases so that you can pay cash in full and not dig yourself into debt.
Believe me, I’ve been where you are. I’ve been broke, with creditors calling, writing, and sending court summons. I’ve had my bank account garnished and wondered how I was going to feed my family. But, I can tell you that you can get out if you remain focused on the end goal instead of wallowing around in a pity pool feeling sorry for yourself.