Well, duh. Everyone knows how evil credit card companies (and cards) are. I have a few. I have surprisingly decent credit, although I probably couldn't even get a Target card again if I wanted to. This economic crisis is rough for everyone, especially for those of us that are barely getting by in the first place. We can't cut down any more than we do. I mean, I could save $50 a month by skipping my meds, but I like my life.
I have had one credit card since I turned 18. The card is targeted to college freshman hoping they'll go crazy and the 'rents will pay off the balance. I didn't do that. It looks great on my credit report, holding a card so long in good standing. I had to cancel it yesterday. Well, not cancel it completely, but opt out of a new APR agreement.
I currently have an APR fixed at 11.96%. That's the lowest this company goes, or so they told me when I called all my creditors and asked for a lower rate. I got a letter in the mail yesterday saying that the new terms of my agreement would raise my APR to 18.99%. Seriously. I can only imagine what the 18-year-olds' rates are right now. I doubt they will even consider the opt-out option. Hell, I didn't know exactly what that meant.
I called the number on the back of my card. I was outraged at first, but I calmed down to really pissed off when I called. The guy was actually nice. I ranted for a few minutes about how the very beginning of our economic crisis was caused by interest rates on mortgages skyrocketing, how most people are using plastic right now out of necessity, how the banks (including the one backing this card) had gotten a bailout to prevent this from happening, how this was only going to make matters that much worse, and how I could file for bankruptcy and [the bank] would have to wait 10 years for my money without interest.
He told me I was preaching to the choir. I calmed down. I asked what options I had. He explained that opting out meant that I could use my card at my current rate until the expiration date, but I wouldn't get a new card. I hate that my best reference on my credit report will be gone in a year, but I'm not paying that much interest.
I have other options. In case of an emergency after that card expires, I have 2 more I can use. Most people don't have that luxury. How bad will it get? Will half of America be filing for bankruptcy with these outrageous interest rate hikes on credit? I was raised to be frugal, and to only use so much of the credit available to me. I have been pretty responsible with it, but I know so many people, including my own dad, that are clueless when it comes to finance and budgeting. It's always darkest before the dawn, right?
Having a card "in good standing" for a long time is good for your credit score. Having more than 2 cards, and if I read correctly, you have three is not so good for your credit score. You may have improved your credit score by opting out of this change to your card.
I have to applaud you for actually reading the new agreement and noticing that your rates went up. I think most people get these things and just let themselves get screwed without paying any attention.
The best thing you can do for your credit score and for your personal finances is to keep your credit cards payed down to zero. Then the interest rate is a non-issue. It is really the only way you can be truly free. If you run balances you are just an economic slave that works your tail off so that you can pay your credit card bill. It is just a return to the bad ol days of the coal company's company store.
I do have debt, and it's not so simple that I can pay it off right away. Things happen unexpectedly. This week, the battery and starter went out on my car. Luckily, my partner didn't mind the cold and snow and fixed it, but parts and manual alone cost over $350. I don't have that kind of money laying around. Last month, Sean tooth was so infected that I was worried about it spreading. We had to go to get the tooth pulled and get antibiotics, and the total was over $600. Life happens, and that is what the cards are used for.
You're right, having a balance on anything is a negative on my account. The more cards I have, the worse it looks. That is why any cards I had from stores that gave me 10% off at the register have been canceled and never reissued.
I'm working on paying off the cards, but there is no telling how long it'll be until something unexpected happens.
-Sonja :)
"I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!" ~ Peter Finch as Howard Beale, 1976, "Network"
As one who's been in the same boat with the whole "life happened" in regards to the credit cards, I think you're doing a lot better than most people our age. Like you mentioned, most teens go out and spend and spend and expect mommy and daddy to pay off the cards. It seems you, however, have been a lot more responsible about it, and it will show on your credit score (even if you do have three cards).
In regards to credit scores, the act of taking out any kind of loan (credit card, car loan, house loan, etc) is going to lower your credit score temporarily. However, keeping the loans in good standing, paying more than the minimum payment (which can also save you a ton on interest), and (especially in the case of credit cards and other smaller loans) paying them off quickly will go a long way to raising your score in (and for) the long run.
I am treated as evil by people who claim that they are being oppressed because they are not allowed to force me to practice what they do. ~D. Dale Gulledge
Actually, as far as I know (and I don't think things have changed from three or four years ago) keeping your credit card balance at "0" every month and never paying any interest is just as detrimental to your credit score as having more than two cards or making a few late payments.
Credit card companies are in business to make money. If you're paying it all off every month, they're not making any money, and they don't like that. So your score will be a little lower than if you kept a low balance on your card and paid a little above the minimum payment. Paying more than the minimum payment is important, but not necessarily paying your card to zero.
You maybe right about the credit score thing.
But credit card companies make money on every transaction that a customer charges. They charge the merchant a fee of 1% to 4% of the sale. So credit card companies make plenty of money from customers who pay off their balances.
Very true. I didn't think about that.
It's still not nearly what they get from interest, though.
Let's see....1%-4% of a transaction or 12%-25% (or more) of a balance every month...
I am treated as evil by people who claim that they are being oppressed because they are not allowed to force me to practice what they do. ~D. Dale Gulledge
I disagree, The biggest mistake in your analysis is that you are thinking that the 12% to 25% (lets call it 18% for this discussion) is a monthly rate when in fact it is an annual rate. Using 18%, the monthly rate is 1.5% per month on the outstanding balance.
Also remember that they have costs associated with that balance that people are carrying on their cards. The balance is money that they lend to the card carrier and have already payed out of their pocket and given to the merchant. That money came from somewhere and most likely they borrowed it and are paying interest on it. So you have to subtract the interest that they pay (prime at perhaps 7% annual rate) from the interest they earn of 18%. That leaves them with an 11% profit. And that 11% profit is an annual rate. That is a very handsome profit.
But the transaction fees are even better! The 1% to 4% transaction fee (lets call it 2% for this discussion) is earned on a transaction that is on average outstanding for 15 days. IT IS NOT AN ANNUAL RATE. It assumes a card carrier who pays off his balance monthly and spreads his charges fairly evenly over the 30 day period so on average in any given month his balance at the end of the month was on loan to him for 15 days which if he pays off monthly he gets as a zero interest 15 day loan.. The credit card companies give this zero interest loan because they want to incentivize their customers to use their cards frequently AMD TO PAY THEM OFF MONTHLY. They can afford to do it because they are earning such a fat profit from the transaction fee.
If you annualize 2% earnings in a 15 day period it works out to about 48% annually. There are 24 15-day periods in a year so you multiply by 24. Again you have to subtract the 7% cost of borrowing leaving a profit at an annualized rate of 41%. That makes the transaction fees look like the vastly more profitable part of the business. And the transaction only costs them a couple of seconds of modem time and a fraction of a second of computer time to validate, authorize and record.
And they get this transaction fee from merchants ON TOP of the interest they earn from customers who carry balances and also from customers who pay off their cards monthly. The credit card business is very lucrative right up until the point when large numbers of their customers stop paying and start stiffing them. We are going to see lots of that in the months ahead.
When you think about credit card company profits you have to account for the risk of not being paid back. When a credit card company gets stiffed by a borrower that obviously cuts into their profits or may even cause losses. Which kind of borrower is the lower risk? A card carrier who carries a balance or a card carrier who pays off monthly. I'm guessing they seldom get stiffed by the people who habitually pay their cards off monthly.
18% interest is great but it is not that great if you are dealing with a deadbeat that you have to flog to collect your money. I'd rather earn 41% with very little risk. American Express has always pursued that business model and left the deadbeats to Visa and Mastercard. You are not allowed to carry balances with American Express cards. Discover earns so much from transaction fees that they actually pay their cardholders a cash incentive to use their cards frequently. The big profits are in the transaction fees. Merchants take a beating for the privilege of accepting credit cards.
Xo
You're right, I forgot the interest rate is annual.
Question though, how would finance charges play into that, since those are applied to the monthly balance? Would it make holders with a balance lucrative enough to compete better with no-balance holders (assuming the balance holders are paying their payments regularly)?
I am treated as evil by people who claim that they are being oppressed because they are not allowed to force me to practice what they do. ~D. Dale Gulledge
The "finance charges" are the 12 -25% we are talking about. They are quite profitable so long as the customer keeps on paying. They rapidly get less profitable of the customer stiffs the credit card company by not paying.
As soon as a customer starts being an "exception" which requires human intervention profitability starts going down the tubes. Things like approving transactions and issuing bills are entirely automated and therefore cheap. Postage is probably the biggest cost. Things like receiving payments and applying them to the bill and putting them in the bank are mostly automated and a clerical worker only spends seconds per payment. But as soon as things get turned over to the collections department and humans have to start making phone calls and listening to sob stories and then making follow up calls and then processing writeoffs, that stuff is expensive and not very productive.
Are you talking about "late charges"? They are enormously profitable. But a customer who habitually pays late is starting to look a lot like a customer who might eventually default. The bigger profits are offset by bigger risks. If I was a credit card company I would freeze or lower the credit limit and send a ltter indicating that I was raising rates. You then either get higher profits to offset the risk or you drive a bad high risk customer away and give them to a competitor. With any luck this competitor rolls the outstanding balance off of your books and onto theirs.
A Finance Charge, at least in the United States, can include interest, but is not just interest.
No, I'm not talking about late charges. If I was talking about late charges, I would have said that.
I am treated as evil by people who claim that they are being oppressed because they are not allowed to force me to practice what they do. ~D. Dale Gulledge
-Late fees, in my experience, has been between $19-$49.
-Over-limit fees. I haven't actually gotten one of these, but I've read that they will let you charge stuff, even if it goes over your limit. I guess it would be more than the late fee.
-BALANCE TRANSFER FEES... I have done this a couple of times. You pay X% up to $Y to have a balance transferred to a special rate, often up until a certain date. They make big money here because most people don't read the fine print. If you're late at all, it goes to an even higher rate than your regular rate.
-Cash advance. These are usually at a higher rate, often around 5% more than sales rates.
-Annual fees. I don't bother with those.
-If you have different rates on different purchases, the lowest rate is paid down first, so the higher interest rate purchases keep growing.
-Sonja :)
"I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!" ~ Peter Finch as Howard Beale, 1976, "Network"
As long as you keep an account in good standing, it's good for your credit score. Paying the balance off every month leaves the account in good standing. People that pay their balances off every month tend to be good credit risks.
They make their money mostly on the people that keep balances (and currently I am one of them). When I pay my monthly bill, I am paying for the stuff I charged most recently, and the rest accrues interest.
Another point- even if you pay $1 more than the minimum, it still goes on the record as having paid more than the minimum. I do pay just $1 over if thing are really tight that month, like this one.
-Sonja :)
"I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!" ~ Peter Finch as Howard Beale, 1976, "Network"
I got one of those credit cards with a low credit limit when I started college in an effort to up my credit score (since I wasn't getting any loans or anything). It started with a credit limit of $1000, and I applied to get a credit limit increase, and they increased it to all of $1300. And apparently they've now eliminated the application for an increase; they just do it automatically now based on some formula that they've come up with. Which basically means I'm never going to get an increase.
My APR is great, though. It's variable at Prime + 3.9%, which makes it 7.9% right now. Plus, I get something like 0.5% of my purchases back at the end of the year, which has amounted to $25 so far this year, thanks to all the things I had to buy this year.
~C
Check out the latest entry in the Between The Lines column!
Want the highest rated list to change? RATE those blogs, then!
You might still be able to ask for a credit increase. Most of the companies I've worked with are pretty good about that if you've kept up with your payments.
Either way, limits over $1000 are reported to credit bureaus, so if nothing else, you're building credit.
I am treated as evil by people who claim that they are being oppressed because they are not allowed to force me to practice what they do. ~D. Dale Gulledge
I needed to buy a laptop for school. I was planning on getting it online from one of the companies Discover rewards 5% cashback. My limit was only $500 at first, but at 6 months, it was $1000. I used it often and paid it off every month. (And all my cards have had a 30 day no interest period)
I called and asked them to raise my limit. They raised it to $5000. And the computer got paid off that month. I actually had the cash first- it's all about showing responsibility.
-Sonja :)
"I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!" ~ Peter Finch as Howard Beale, 1976, "Network"
I should point out that my credit card is through my bank, and it's not a regular bank... it's specifically designed for military personnel and their immediate family. If I marry, my husband will not qualify for an account, nor will any of my children.
~C
Check out the latest entry in the Between The Lines column!
Want the highest rated list to change? RATE those blogs, then!