This article is an excerpt from Amortize Debt into Prosperity. This article was written by Marc Griffin and edited by Bart Griffin.
Consumers save money when they buy items on sale, but now when it comes to borrowing.
People save money when they negotiate for the lowest price possible for goods and services. They can really save big when they shop around for the best deal on large ticket items (e.g., homes, cars, RV’s, boats etc.). But as borrowers, most consumers don’t do as well. The average household pays out thousands of dollars in interest on debt every year, and debt owed to credit card companies is responsible for most of that loss.
Here are some things you probably don’t know about Major Credit Card companies:
- Credit card holders currently carry over Eight Hundred Billion in unpaid balances.
- Credit Card companies have Five Hundred Billion more dollars available to lend consumers.
- There is an average of 8 credit cards per family spread out among 144 Million consumers. 55 Million of them pay off their balance every month, 35 Million consumers only make the minimum payment each month, and 90 Million consumers (revolvers) add new debt every month.
- There are 100 thousand credit card transactions per minute.
- If you have too many Major and Minor Credit Cards (about five and up) your FICO Credit Score will begin to lower, even if you don’t use them very often and/or carry a balance on a regular basis.
- If any card balance exceeds 30 percent of the cards available credit line, your FICO Credit Score will begin to lower. Keep in mind that store credit cards are not considered major credit cards however, owning any of these cards will automatically lower your FICO Credit Score. The primary reason is because with one major purchase on your store card you can easily exceed 30 percent of the card’s credit limit, which in most cases is very low on a store card..
- Credit Cards come in the Unsecured and Secured variety.
- An unsecured credit card requires no collateral and is the preferred card. They’re generally issued to students in college just starting out in the credit card world who are over the age of 21 and have proof of income, but without an established credit history (over 50 million people do not have a credit score) all the way up to established consumers with stellar credit scores. Credit lines start out low, but eventually increase upwards over time. Interest rates are relatively low to moderate depending on household income and other considerations.
- A secured credit card should be avoided. They’re issued to consumers with a troubled credit history resulting in a poor credit score. It takes about one year to qualify for a secured credit card and the issuers require an up-front cash deposit or application fee. The credit line is low (about $500) and the interest rate is always at the upper limit. And as with store credit cards, it is very easy to spend and exceed 30 percent of the $500 credit limit.
Credit Card companies have created another profit stream by charging an assortment of fees, such as:
- Over-the-limit fees
- Late fees, over-draft fees
- Returned check fees
- Inactivity fees
- Transactions over the phone fees
- Transactions over the internet fees
Add to that penalties and finance charges, and all the little trickerations set for you and as a consumer you don’t stand a chance. You will fall prey to them and your credit score will suffer. Next they’ll figure out how to add a surcharge to your monthly bill.
Your credit score will lower if you cancel a major credit card.
However, your credit score will not lower if a credit card company cancels a credit card sent to you (unsolicited) that you have not yet activated, with one caveat. That is that you have not exceeded 30 percent of the credit limit on the total of all your current cards. If you have, your credit score will lower, unless activating the new unsolicited credit card will put you below 30 percent of all available credit. I would recommend that if this is the case, you would be better off reducing your debt load rather than increasing your credit limit by activating any new credit cards.
Most consumers want instant gratification rather than delayed gratification.
But the average consumer can’t have it both ways. Keep this in mind; the road to personal financial success is not a sprint, but rather a marathon.
For example, Jimmy is single, earns 25 dollars an hour and owns very few assets. He’s living high on the hog—like there’s no tomorrow—and is swamped in debt to the gills. He pays out about $15,000 in pure interest for a mortgage loan, personal loans, credit card debt, a couple of car loans, and on and on each year. That $15,000 Jimmy pays out every year equates to $7.21 an hour, times 2080 hours, a typical work year, which, in turn is roughly equivalent to 29 percent in reduced wages. Again, this is just interest, very little goes to principal.
If Jimmy eliminates his debt and avoids paying out thousands of dollars in interest each year, it would be as though he really was earning 25 dollars an hour in wages because he would be paying dollar for dollar for all his goods and services without paying all that wasted interest. Paying out good hard-earned money in interest does absolutely nothing good for anyone except lenders and credit card companies. Each time you’re able to pay a dollar for a dollar’s worth of goods or services while avoiding interest payments, you truly get “a bang for your buck.” If, on the other hand you pay out 3, 4, or 5 dollars in interest for a dollar’s worth of goods and services, the creditor(s) truly receive a much bigger bang for your buck.
If you can’t pay cash for things other than home, you don’t need those things.
Pay your credit cards off as soon as possible, and don’t use them again. But remember, it’s not just credit cards that create problems for us; it’s other debt, too (e.g., personal loans, car loans, equity loans, consolidation loans and so on). Pay them all off, as soon as possible, and never look back.
If a person gets his attitude toward money straight, it will help straighten out almost every other area in his life. – Billy Graham
In 2009, Obama signed the credit cardholders “Bill of Rights”.
The credit cardholders “Bill of Rights Act” of 2009 (H.R. 627) which amended the Truth in Lending Act, was signed by the president and is now the “law of the land” as of February 2010. Congress wanted, and got, rule changes to address “unfair billing practices” applied to credit cards, while at the same time adding more consumer protection rights.
However, this law did not go far enough to protect credit cardholders on either count. For example, count one: credit card issuers can still charge all the interest they want. They’re also allowed to continue to charge outrageous fees.
And, the credit card’s cousin the “Debit Card” received absolutely no attention in congress even though this is also an area plagued by many of the same abuses and billing practices. For example: banks will not deny your purchase at the point of sale even though there is not enough money in your account to cover the 50 cent candy bar that you want to buy. The merchant and the bank will almost always allow the sale to take place. The bank will then charge you an over the limit or overdraft fee which generally ranges from $25 to $39 plus the 50 cents for the candy bar.
Here’s another debit card ‘trick’ on you, and ‘treat’ for the banks.
Banks tend to process your spending activities according to the highest amount of each transaction you made first, and then down to the next highest and so on until they reach the lowest transaction. As a result the bank empties out your account faster thereby increasing the chance of overdraft fees on many smaller purchases as opposed to charging one fee on one large purchase. If you exceed your account balance by purchasing 10 separate small inexpensive items, at say, $33 a pop overdraft fee, that’s a cost to you of $330 in total fees, if, on the other hand, you do the same thing on just one large purchase it will cost you only $33 one time. The banks will process your transactions in a way that benefits only them.
As for consumer protection rights; until Congress creates a Consumer Protection Agency, to monitor and regulate the credit and debit card industry and all other pertinent financial institutions, consumers will still have no one in the federal government to turn to as lenders devise new insidious tactics and methods to gouge consumers at every turn.
In passing the credit cardholders “Bill of Rights Act” Congress merely removed table salt from a festering wound and replaced it with a supposedly less potent sea salt. The document is a mere 52-pages, but you can save some time by examining the summary here.
There are so many of those people around right now, that it’s not just their problem anymore. The American taxpayer is going to pay now because the federal government is bailing out individuals who over spent and over borrowed. It’s been nothing but a spendingpalooza for decades; advanced primarily by easy credit, and now we all will pay the price.
Think about this: Back in antiquity, the history of money began with bartering. We actively traded goods and services for goods and services, or put more simply: traded this for that—even-steven, (one this and one that being equal) and everyone was happy. Imagine if we still used the bartering system in today’s world—how would credit and interest work? Both might work something like this: I want ‘this’, and I’ll give you three ‘thats’ later for ‘this’ now. You worked hard to get ‘this’ in the first place, but it always seems as though you always give ‘this’ up for three or four ‘that’s’, because you can never catch up.
Enough about this and that, you get the picture, it will be the hard working middle class consumers and taxpayers that will ultimately have to pay for uncontrolled easy access to credit.
Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with goods and services.
– Albert Jay Nock, Memoirs of a superfluous Man, 1943