The Good, the Bad and the Ugly of Credit Cards, Part 3: The Ugly

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Last updated on May 26, 2009 Views: 547 Comments: 5

This is the third and final part in a short series about credit cards and the people who use them. If you haven’t yed, read Part 1: The Good and Part 2: The Bad. Keep reading for something ugly.

Part 3: The Ugly

Eli Wallach, the UglyCredit cards are in business to make money. The fact of the matter is whether you are a Type A or Type B user, that is whether you’re paying late fees, interest, and maybe annual fees, or you’re taking advantage of rewards programs and paying full balances on tome every month, they’re still going to make money off of you.

That’s capitalism, and that’s what customers agree to when the credit card application is signed. The difference between Type A and Type B is the first doesn’t control how the company makes money and the latter does control this aspect. But even this control is a matter of debate.

Credit cards are basically ingrained into our society. It is difficult to make purchases online without a credit card, and impossible armed with only cash. The companies use this ubiquity to go beyond the obvious tricks mentioned in Part 2: The Bad and can trick users without their awareness. These techniques are mostly designed to take advantage of the usually-too-smart Type Bs.

child with credit cardMethod 1: Two-cycle billing. Most people I’ve talked to about this topic have no idea what two-cycle billing is, even though chances are their credit cards use this tactic. Put simply, if you carry a balance for one month, you’ll be paying interest for two months, even if you pay off the balance right after the first cycle ends. Details here.

Method 2: Universal default. Credit card companies constantly monitor your credit report. If you default on a loan or are significantly late on another credit card payment, any credit card may begin assessing the default interest rate — much higher than the normal interest rate. More here.

Method 3: Over-limit fees. Once upon a time, if you tried to charge more than your credit limit would allow, the purchase would be denied. Now companies allow the purchase, raise your limit, and charge you a fee for the “priviledge.” More here.

Method 4: Due times. Never send a payment too close to your due date. If the payment arrives by mail on the due date, for example at 1:00 pm, but the “due time” was 10:00 am that morning, you’ll be charged a late fee. More here.

There’s more, and I alluded to this in Part 2. Credit card companies report the status of your accounts to agencies like Experian, and your FICO score is also determined by this information. What the credit card companies send is not always correct. When sending your “credit limit” some companies, such as Capital One, send another number.

If your balance is $500 and your credit limit is $25,000, you might think you’re in good shape. However, if the most amount of credit you’ve used on that card was only $750, then some companies will report that your limit is $750. The report will show that you’re utilizing 67% of your available credit rather than 2%. This can cause a big hit to your credit score, and it’s another way credit companies will try to screw their customers.

With all this ugliness, shouldn’t we stop using credit cards completely? That’s the message a number of motivational speakers take. Shouldn’t we listen?

girl with credit cardSome people need discipline, particularly those who are stuck in a cycle of increasing consumer debt, like Todd Townsend. They need to be told that their life should be debt free at all costs. Debt is bad, and all items, even cars and houses, should be purchased with cash. People pay money to go to seminars to be told that “debt free” is the way to be and credit cards are evil. (If those seminars accept credit cards for payment, which some do, then I hope you understand the irony and hypocrisy.)

Statements like, “No one should attempt these risky gimmicks,” or, “credit cards are evil,” are over-simplified, faux-philosophical catchphrases whose speakers assume all listeners are running low on brain cells and need to latch on the first thing that sounds helpful. Or less harshly, these lessons are for people who never learned the basic tenets of managing money.

Simple mathematics shows that with all things (such as risk) being equal, in some cases leverage can be used to earn much more money than using cash. This is the theory powering those who take on 0% balance transfer offers. If these offers are used sparingly, the reward gained from interest outpaces the risk of default, but it is tied to the individual. This is also the theory behind almost all people who purchase real estate using a mortgage loan. It’s a dangerous theory for those who are not ready to handle the challenge.

young girl with credit cardHere’s the thing about these seminars. They have an intended audience which does not include everyone. Dave Ramsey, for example, wants to get people out of debt (and let’s not forget make some money for himself in the process, which is his right). So don’t assume that his advice would apply to anyone not stuck in the cycle of debt.

To go back to the alcoholism analogy, alcoholics must work on ridding their life of alcohol completely. The majority of the public has little problem consuming alcohol responsibly. Even when the alcoholic has recovered, he must be careful not to relapse. But you wouldn’t give the same advice to the alcoholic you would to one who is not addicted.

drunksThe credit card companies don’t care whether you’re addicted; they’d prefer that you are. They will offer people credit whether the consumer can handle it or not. It’s up to the individual to make the decision as to what tools they will use. Credit cards are a part of life in this country, and they’re not going away.

Many people can take advantage of credit cards without falling into their traps. Credit can be used as a tool, as businesses leverage debt, to the advantage of the consumer if handled appropriately. Those who are responsible, have studied their own spending habits, have weighed the risks and rewards, and have an emergency plan shouldn’t be discouraged from beating the credit card companies at their own game. It’s not for everyone — not for most — but it can be done.

Article comments

Anonymous says:

BAD CREDIT..why is it that lending tree and Ameriquest can continually put out false advertisement and continually get away with it? They advertise all over the place that bad credit no credit isn’t a problem, they boost how they will help you and then they reject you because of bad credit..why are we willing to have companies put out informaiton that is deceiving and untrue and no one does anything to shut them down?

Anonymous says:

Here is one I learned the hard way. It may be common knowledge to others, but it was the first time I had experienced it.

I routinely charge things in the course of my job and get reimbursed. The upside is the airline miles and other points. Recently, I billed over $100,000 on my cards (three different ones). Two of them were fine, but the third hit me with a large interest fee because the balance was on the card for a few days. They calculate interest based on the average daily balance which was skewed by a $50,000 charge. The other two cards did not do this, but it was hard for meto complain as it was in their literature, albeit in a font of 1.

Anonymous says:

but are there really any great, wonderful things that can be said about alcohol in general? Same for credit cards.

Uhhh, yes and yes. You’ve obviously never savored a velvety, well-aged Cabernet. Or felt the joy of getting a $300 check in the mail for doing nothing more than charging your usual grocery and gas purchases.

But there’s obviously no convincing you.

Please, for your own sake, try and rent a car without a credit card in this country (the US), then come back and tell me if you still think you don’t *NEED* a credit card.

Anonymous says:

I think if you pay your balance every month there are a lot of benefits of having a credit card. If you have poor credit then they can be a burden.

Anonymous says:

I really can’t imagine any great reasons that we NEED credit cards. It really just makes life easier, short term. But they can make life more complex if not handled very, very carefully. The author makes an analogy with alcohol. Sure there is a big difference between an alcoholic and those that drink responsibly, but are there really any great, wonderful things that can be said about alcohol in general? Same for credit cards. Wouldn’t it be better to just live without it and simplfy your life? Don’t over-complicate the issue.