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CREDIT
CARDS - YOU CANNOT WIN THIS GAME
By
Carlos De Paula
A look
at most people’s postal boxes these days would give impression that banks are
giving away money. If you have good to fair credit, you get tons of credit card
offers. If have a crummy credit rating, you are still getting offers, many with
life saving low APR balance transfers. Even if you have just filed for
bankruptcy, you will still get less savory offers, but they will be there.
It is
very easy to have enough credit corresponding a few times your annual salary.
These offers are often quite appealing, with zero to 3.9% APRs, great offers on
balance transfers, and often banks raise your credit limit within 6 months, if
you pay your credit cards on time.
Sounds
good, after all, at zero percent you cannot go wrong. It is money given away!
Not so
fast. When you sign a credit card application, you normally believe you have a
contract set in stone. Just like any other contract, you believe, any changes
would need to be agreed by both parties, in advance, and should be negotiable.
Guess what, credit card companies, as a normal course of business, amend the contracts unilaterally, without asking
your permission and without negotiation. If you use the card again, you are
agreeing with the change!
These
changes normally have to do with the appealing APRs that first prompted you to
get the card and instruments whereby banks can increase them punitively. Back in
the old days, if you were late on credit card payments you would get a nice
call, the day after the payment was due. And a nastier one 10 days after. I
suppose banks eventually figured that most people were normally late due to an
honest oversight, sooner or later, and thus the rules of the game were changed.
Initially, banks began charging late fees, which often amount to more than 30
dollars, every month you are late. You would no longer get a call, just a $30.00
bill on the next statement.
Adding
insult to injury, if you do have quite a few bills to pay, eventually you might
be late a couple of times a year. So the banks perceived, I guess. Now, if you
are late at least twice in the course of a consecutive 12-month period, the bank
can increase your APR, on the ground that you have just become a little bit of a
higher risk. So, your appealing zero percent credit card, suddenly becomes a 12
%, then an 18%, until becoming a ridiculous 30% APR credit card.
By that
point, you might be trying to shift credit card balances to new offers, and thus
try to manage your APR crisis. Guess what. A lot of credit card companies have a
policy of obtaining your credit report every once in a while, and you might have
an immaculate record with them, never been late a single time in 20 years, but
the fact that you goofed with bank “X”, which is in no way affiliated with
them, gives them ground to hike up your APR. All of a sudden you are no longer
one of the their best clients: it does not matter that you shifted a $5,500.00
balance to their appealing 6.7% APR last month. Your new APR is now 18%, more
than the 16.7% of the card you shifted from!
And the
story goes on, and on. By the time you are through with them (which might be
never in most cases), you have an unmanageable debt, all done lawfully.
You
might ask, why do banks lend out such huge mounds of money to people they know
will not ever pay the full balance, because they are incapable of sustaining
such high debt load? And why do so with unsecured credit, in other words, based
on a promise to pay, without any collateral? We might instinctively believe that
the amount of deposits a bank holds gives it “value”. Our instincts are
wrong. The reality is that in accounting, the deposits are considered a
liability. Why so? Because the bank has to pay the deposit back. So what gives a
bank real “value”, is put it simply, operations that will generate money for
it, among them, loans.
Although
secure loans are safe, they generate a little spread (the different between the
cost of money to the bank, and the interest paid by the borrower). The real
bucks are in unsecured credit, such as credit cards. Additionally, not only are
there big bucks in unsecured credit, but also “big fat”.
In this
day and age of mega bank mergers, banks have to prove there are good prospective
partners by the sheer volume of loans on their portfolios - the fat. Not only
that, it does not matter for a bank that you are only paying the minimum due
every month. If you that, you are giving them profit, which is what they need to
build fat for potential mergers, and build value in their balance sheets,
wherefrom big year-end bonus will come for management. Really, a 65 year old
bank president cares less if you are still going to be paying your credit card
20 years from then, he wants his bonus now! So, in a nutshell, the “system”
serves them well, even if they know an “x” number of people will eventually
file for bankruptcy or simply stop paying the bills.
Some
folks have taken the position that bankruptcy might be a good way to “get back
at the system”, essentially becoming professional Chapter 7’s. However, the
bankruptcy laws have been changed, and the general opinion is that the new law
will not make life easier for debtors. Using bankruptcy “to get back at the
system” is indeed a thing of the past.
So, my
advice to you is, keep the number of credit cards you have to a minimum. If you
can, pay off your entire balance at the end of the month. If you can’t, never
pay only the minimum due. If at all possible, don’t get any store credit
cards, which always have high APRs from the start, and which are generally more
aggressive collectors. Use the old system of saving money to make major
purchases and never exceed a year’s income in credit card debt. Don’t let
the situation get out of hand: consolidating your debt might be a good idea, and
always do it sooner, rather than later.
YOU
CANNOT WIN THE CREDIT CARD ROULETTE. DON’T TRY IT.
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