How credit cards get you
Ever wonder why you get so many credit card applications in the mail? How do these companies know so much about you and your spending habits?
Every time you take out a credit product, whether it’s a mortgage, a loan, a credit card or a cell phone contract, this information is added to your credit history. Credit bureaus then take this information and compile a credit report. The report includes things like your payment history, credit applications, court judgments and bankruptcy filings.
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A credit report is long and complex. To make it simpler, all of that information is plugged into a complex mathematical formula that results in a three-digit credit score. Your credit score determines whether or not you get offered credit and at what terms.
The best credit card customers
Consumers with the highest
credit scores
are considered to be low-risk. They are more likely to be offered
credit at a low interest rate. However, these people are not
necessarily the ideal customers for a credit card company.
The credit card industry makes most of its money by charging customers interest on their credit card balances. People who pay off their bills in full each month may have a high credit score, but they do not earn the credit card companies money. The ideal customers are the “revolvers”. These are people who regularly carry a balance on their credit cards. The average American family owes more than $8,000 on credit cards.
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The small print
Every credit card comes with a long and complicated contract. The contract is printed in tiny text to discourage the customer from reading it. You would have to be an expert in contract law to decipher all of the financial and legal jargon that makes up the terms and conditions of the contract. Even if you do read the small print, the credit card company can change the terms and conditions at anytime with only 15 days’ notice. That means that the interest that you pay on that card can double or triple with little warning or explanation from the company. This can happen if you miss even a single payment on an unrelated debt.
Tricks of the trade
The last thing the credit card industry wants you to do is to pay off all of your debts. If you’re not carrying a balance on your cards, they do not make money. Because of this, the industry uses a number of deceptive tactics to keep you in debt.
Say you get a new credit card with a tempting introductory offer, such as 0% APR for 12 months. The offer of seemingly-free credit is appealing, but read the small print. If you are late on a payment, the low introductory rate disappears and you’re stuck with a much higher interest rate on whatever balance you have on that card. In addition to the interest on your debt, there are exorbitant late fees. Even if you’re only a day late, you can end up paying as much as $50. The fees started out as an incentive for customers to pay their bills on time, but are now a major profit stream for the credit card industry.
Another way that the
credit card
companies keep you in debt is with low minimum monthly payments.
Consumers who are able to pay the minimum feel like they are being
financially prudent, when the exact opposite is true. What the
companies don’t tell you is that by only paying the minimum, you can
have that debt hanging over you for decades to come.
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