The Evil Strategies of Credit Card Companies

Easy Credit

If you have ever found yourself in debt with credit card companies, then you fully understand the title of this article. Here's a typical account of how someone finds themselves in trouble with credit.

Imagine Joe, a recent college graduate, walks to his mailbox one day and is thrilled to find an offer for a credit card. He notes that the starting interest rate is low, and since he'd never applied for or had credit before, he is amazed that this great company was kind enough to extend him credit. He quickly accepts the offer, and soon finds himself the proud owner of a credit card.

Then the trouble begins. It starts with small things, a lunch charged here, a shirt there, but soon, pulling out his credit card becomes habit to Joe, and he finds himself charging things like groceries and everyday items. When his first bill comes. Joe almost dies when he opens it - he simply hadn't realized that he's been so free with his card. No problem, he thinks, I'll just pay the minimum payment and let the rest ride. And that is the start of Joe's credit downfall.

Many people don't think of credit cards as cash, but in fact, that's exactly what they are. If Joe had to hand over $30 for that sweater instead of a credit card, do you think he would have been so eager to purchase it? Probably not.

Credit card companies do everything in their power to make easy for anyone to get a credit card. In the past, the credit card issuers only tried to get the business of the good payers, but soon realized that it is the people with a tendency to overextend that will be their best customers down the road.

Free Incentives

Sometimes it seems like anywhere you go there are booths offering something for free if you sign up for a credit card. They might offer free credit in a store, a cool hat, an entry in a contest for a free trip to Disneyland, or a 6-pack of soda. There are several reasons to steer clear of booths like these unless you are looking for your first and only credit card to use for the sole purpose of building credit, and here they are:

If you are the average American adult, you don't need another credit card, you have too many already
Even if you cut the card up later, the application for credit will ding your credit rating
If you sign up knowing you are going to be denied for the card, you not only get dings for applying for credit, you get dinged for being rejected as well.

Does that free Shrek II DVD look like such a good idea now? It's usually better to sell out a few bucks for the "free" incentive, rather than risk a lower credit rating.

Raising Rates Without Notice

You may have gotten your card at a decent interest rate, but that rate is likely to rise without any notice whatsoever. If you read the fine print on your credit card contract, you will find that there are a number of reasons a company can start hiking your interest:

The interest rate offered was available for only a limited time
You made a late payment on the card
Your credit score dropped for late payments on another card

This rising interest is especially damaging after you have gotten comfortable using your card for everyday purposes. Even if you plan on paying off your credit card at the end of each month, an unannounced rise in interest can put you in an uncomfortable position if you are unable to for a month or two.

Yearly Fees

Most credit cards build in fees and penalties that you may not be aware of. For instance, many cards have a yearly fee. Many times these cards offer some kind of special benefit such as the accumulation of frequent flyer miles, or 1% off your total purchase amount. Sometimes they can even offer a lower interest rate. Before hopping on the bandwagon, however, do some careful calculations about whether you are likely to benefit from the arrangement. For instance, if you pay $100 a year for a card and get 1% off of every purchase, you will need to spend $10,000 a year with that particular credit card to cover the yearly fee.

If you're buying down an interest rate, you will need to gauge just how much debt you think you will have on the card at any given time and see if the amount you would be paying towards the extra interest throughout the year covers the cost of the yearly fee.

Late Fees

If you are late on a payment to your credit card company, you will most likely be charged a late fee, even if it's only been a day or two. Fees can be upwards of $30 and won't usually show up as a charge until your following statement. Some important things to know about late fees:

Even if a payment is sent before it's due, if it is received after the due date, you will most likely receive a charge
While you should pay off your entire credit card debt each month, you only absolutely need to send in the minimum due, which is often 2% of the total amount.
If you use an automatic billing system through your bank to pay bills, make sure to allow a full 7-day week for delivery of the payment.

Summary

Credit card companies make it easy for anyone to get credit; don't accept an offer in the mail because it makes you feel special
"Free" incentives are a lure, don't get hooked
Look carefully at yearly fees and weather they're worth it. You may find a better deal in a no-fee card.
Credit card companies can raise your rates without notice
Late fees are a killer, so send off your payment at least a week before it's due

Next, take a look at our how-to guide on getting your finances in order, Organizing Your Finances.