It was really interesting reading the comments in my Why You Should Never Live on Cash post. Many of you understood what I was talking about. Just as many disagreed with me for one reason or another. Many are still stuck in the credit cards are evil mindset.
When it comes down to it, it’s not the credit card that is bad, it’s the person using the credit card. If you’re financially irresponsible, then it doesn’t matter if you live on cash or credit. You’re going to be a mess either way. You need to stop blaming the credit cards and look in the mirror.
While credit cards may not be evil, the same can not be said for the credit card companies. In many cases, they’re more evil than me and some of the tricks they do to trap people into spiraling debt are extremely sneaky. It is partly because of these tactics that gave credit cards a bad rap. However, a financially responsible person would learn the tricks and learn how to avoid them.
Do Not Pay Until 2010
This one is a classic. You’re offered a credit card with a free interest period – charge whatever you want interest free for six month to a year. Just make the minimum payment each month and the bank will be happy.
The problem comes when the free interest period is over. If you do not pay off the entire balance at that time, interest not only gets charged, it becomes retroactive to the day you got the card. In other words, all that free interest wasn’t free.
The way to avoid this track is to pay off the full balance. However, the bank is hoping that by now you’ve rack up a balance close to the credit limit and won’t have the funds to pay it off. You’ve just become a cash cow.
The 0% Balance Transfer
This is another bank favorite. Are you trapped by a high interest credit card? Transfer your balance to our card and get 0% interest for a year! It sounds like the bank is being a nice guy and losing money on this deal but they make a mint from it. The bank only lose money to people who actually know how to take advantage of a 0% balance transfer deal.
While the Credit Card balance may indeed be transferred at 0% interest, many banks charge a fee for doing the transfer. The average fee is 3% of the amount of each balance transfer with a $5 minimum. Want to transfer $10,000 from the high interest card? It will cost you $300 right off the top.
The next thing the banks will do is try to get you to charge new purchases on your card after you’ve done the 0% transfer. The reason they want you to make new purchases on the card is so they can charge their standard super high interest on those purchases.
Here’s the kicker. The payments you make every month will go to pay down the 0% balance transfer first. The new purchases will keep accruing interest at 18.9% (or whatever the current rate is). So, if you made a $10,000 transfer and then make the mistake of charging a $150 dinner for two on the card, interest will be charge on that $150 and will continue to be charged until the $10,000 is paid off.
This is why there are so many 0% offers around holiday time. The banks are hoping you use the card to make those last minute purchases. It is also very common for the banks to raise your credit limit right after you’ve made a transfer. They want you to use the card. Once you do, you become a cash cow.
The Credit Protection Insurance Scam
This one is my personal favorite. Credit protection insurance is by far the biggest rip off banks pull on unsuspecting consumers. Banks love calling up their customers to offer them credit protection. For an average fee of $0.89 per $100 balance, this insurance will make your monthly minimum payment in the event of involuntary unemployment or disability. In the case of a critical illness or death, the insurance will pay off your balance as long it’s not more than $10,000. The banks sell this by saying if you have zero balance, it doesn’t cost anything, so let us sign you up.
Anyone who looks at this offer closely will see how big of a scam credit insurance is. If you have a $10,000 average balance, it will cost you $89 per month for insurance that will make your minimum payment should you get laid off or become disable. Most credit cards have a minimum payment of $10 or 2%, which ever is greater. So, the minimum payment on $10,000 would be $200. However, if you pay $89 per month for this insurance, you can feel safe in knowing that should you become unemployed or disable, this insurance will pay that $200 for you! Wow! What a deal! If you can pay $89 per month for insurance, then surely you can find away to come up with $200. But hey, some people like being a cash cow.
Are You a Cash Cow or a Smart Credit Card User?
Half of all credit card users do not pay off their balance every month. Those are the cash cows. They pay all the interest so the other half, the smart credit card users, get all the benefits like cash back, trip rewards, gifts, etc.
Evil marketing from banks aside, at the end of the day, it’s the credit card user who must take the blame. I see advocates blaming banks all the time for offering cards to people who shouldn’t get cards. When was it a bank’s job to protect people from themselves?
People get into financial mess because they refuse to accept responsibility for their actions. A credit card is a tool and like any tool, it can be good or bad depending on how you use it. Used smartly, it can help you achieve many financial goals. Use irresponsibly, it will make you a cash cow.