Part 3: The Ugly
Credit 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.
Method 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, youÃ¢â‚¬â„¢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?
Some 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.
Here’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.
The 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.
Updated May 26, 2009 and originally published December 21, 2006.