Credit Cards. At times, it seems like we can’t live with them and we can’t live without them. It is a classic case of a love-hate relationship. We need the credit cards to help build our all-important credit history and subsidize our expenses when we just don’t have the cash. But people deeply resent the high interest rates and the traps lurking in the fine print. On that note, let’s start with the negatives.
7 Reasons to Hate Your Credit Card
By setting aside our emotions, we can identify and possibly avoid those disadvantages that cause us to hate our credit cards.
1. “YOU WANT ME TO PAY HOW MUCH IN INTEREST?!?!”
I have friends who’ve received credit card offers in the mail that have a starting interest rate of 35%. Even Shylock, the ruthless moneylender from Shakespeare’s Merchant of Venice, would think that was excessive. Never forget that credit card companies are a business not a charity. They exist to make money and their business model is based entirely upon the interest rates they charge. It has been reported that some internal communications from credit card companies sarcastically call customers who pay off their principal in short order as “deadbeats.” The longer the customer takes to pay off their credit card debt, the more interest they pay, the more money the company makes.
2. “DID YOU NOT READ THE FINE PRINT?”
Ever notice that the bank’s credit card offers are in BIG BOLD letters. “GO ON VACATION,” “WRITE YOURSELF A CHECK,” “BUY A NEW WARDROBE,” and the like. You are so focused on the headlines that you don’t read the rest of the story. You may have to use an electron microscope to read it but at the bottom of the page are terms, conditions, restrictions and fees written in legal jargon that is all but incomprehensible to most people. Consumer advocate Elizabeth Warren colorfully refers to it as “word barf” and if you sign such an agreement, you may be giving the company license to raise your rate, charge you fees, sue you and perhaps take your first-born child.
3. “THIS ISN’T WHAT I PAID FOR”
You know those pre-approved credit offers you receive in the mail nearly everyday? Well, per reason # 2, the fine print often shows they are pre-approved in name only. The banks and credit card companies employ armies of lawyers and lobbyists to create loopholes that enable them to not give you the card you think you’re signing up for. The offer may say, “0% for six months, then 9.9% fixed, with no annual fee, and $5,000 credit limit.” Then you get the card and it’s “6.9% for 3 months, 29.99% variable, $50 annual fee and $400 credit limit.” Reading what you are signing and consulting reference materials to understand what you are agreeing to is the key to being “debt smart.”
4. “WHAT HAPPENED TO MY GREAT RATE?”
Credit cards and banks reserve the right to raise your rates for many reasons. One of my readers at DebtSmart.com told me that her bank raised her rate to 23% because she was late paying her bill. They are just waiting for any misstep and then, BAM, your best rate becomes your worst. After all, you agreed to it when you signed the contract with all that fine print.
5. “I CAN JUST DECLARE BANKRUPTCY AND SORT IT ALL OUT”
Here’s another good one. The banks have successfully lobbied Washington to change bankruptcy laws to make it more difficult to dissolve debts in bankruptcy. They want the consumer to be more responsible for repaying their debt! The banks want to have their cake and eat it, too. Who gave the consumer making $10,000 per year a $50,000 credit line? This is why the lobbyists pounce on even the most modest credit reform proposals.
5. “LIES AND DECEIT!”
You think you’ve done due diligence by reading the fine print and doing the math at your kitchen table. But months later, you get whacked with a penalty that you knew nothing about. You call the customer service line and the person at the call center pulls up your account and spits back jargon to imply that you’re an idiot with no common sense. Their company sends you credit offers that say, “you can use all your available credit” and when you do they charge you a penalty. Late fees, over limit fees, annual fees, service fees—they are always coming up with new ways to separate you from your money. And the fees always to seem to increase, never decrease. A $35 flat late fee. It does not cost the bank $35 when you are late. You may not have been late at all. The bank may have just credited your account late and charged you anyway. Banks make 47% of their revenue from fees! Don’t ever let a fee go. Call the bank and make them waive that fee, and if they don’t, punish them by taking your business elsewhere.
6. “YOU CAN’T STOP ME FROM GETTING A JOB OR HOME”
Yes, they can. If you have a problem with your credit card bank, they automatically report it on your credit history. Everyone looks at your credit history. Landlords review it to determine if they will rent to you, insurance companies look at it to decide what policy you will get and, in some cases, prospective employers use it to determine whether you will get the job you want.
What happens when the creditors make a clerical mistake that adversely impacts your credit report? A mistake that makes you appear terrible to potential employers and landlords? Not their problem. It’s your responsibility to find and correct their error.
7. “LET ME SPEAK TO YOUR SUPERVISOR”
People are busy going to work, shuttling their kids to and from school and doing household chores. We don’t always have time check in on our account or call the company if we have a question or concern. When we do, it takes forever to speak to a human. You have to navigate through a menu and key in your account information. Numbers, letters, symbols—all so that you can talk to one of their drones who start by asking you for all that information again. I typically get around this by hitting “0” then the “#” keys. I get a reply, “We cannot recognize your account number so please be tortured again by reentering it now.” I keep hitting the “0” and “#” keys until the automated recording system gives up and says, “Please hold while we transfer you to one of our new hires who probably cannot help you anyway.” It almost seems like they would rather not talk to me. But I thought my call and business was important to them.
Credit card companies and banks are sharks. They care about one thing and one thing only—and that is attracting paying customers. The only way to fight back is to use the naturally existing competition amongst the banks to your advantage. They need our business so we need to reward the banks that are good to us and punish the ones that take advantage of us. Banks are a business like any other. Their job is to service you and me. If we don’t like the way they treat us, then it’s time to do business with another bank. This is not Coca-Cola. Don’t ever be “brand loyal” unless that bank has been “customer loyal”—meaning that they’ve always given you their best rates and service.
Whenever I do public speaking engagements, I can see the audience raise its collective eyebrows when I tell them that credit cards themselves are not bad. As with most aspects of finance—and life, for that matter—there are advantages and disadvantages. Here are some of those advantages that we often forget when we talk about the plastic friends in our wallets.
7 Reasons to Love Your Credit Card
1. SAVING TIME AND MONEY
Credit card companies want you to continue using their product. Businesses, particularly small businesses, prefer it when you use a credit card because it is more secure and less of a hassle for them. Very often both credit card companies and businesses will provide rewards and incentives to encourage you to keep swiping your card at the register. These rewards do add up. Right now, I have $300 in Regal Cinema gift cards in my wallet because I used my credit card to pay regular bills like my cell phone. That’s about ten trips to the theater for two with popcorn and a drink.
2. PROTECTION FROM RIP-OFFS BY MERCHANTS
When you buy something with your credit card, whether it is a magazine subscription or a home entertainment center, you are very protected. For example, if a merchant won’t give you a refund for a return, you can always contact your credit card provider or bank and dispute the charge. The bank will most likely decide in your favor and chargeback the merchant. The merchant would have to take you to court to fight further. If you paid cash instead of using your credit, the burden would shift to you and you would have to pursue the matter in court with the merchant, which takes time and money.
3. BUILD YOUR POSITIVE CREDIT HISTORY
A good credit history is not only advantageous, but essential to achieving financial success in today’s world. Banks, insurance companies, landlords and even prospective employers can and will look at your credit report and make a judgment about you and your character. It is vital that you do everything you can to make sure that judgment is a positive one. Having a credit card and using it wisely is the key to building a positive credit history. It will get you a positive history in less time and for less money than other forms of debt like student loans and home mortgages.
4. EMERGENCY MONEY
If your car breaks down late at night, you may not be able to get an ATM machine or your personal bank. However, by having a credit card you have instant access to the money you need in emergency situations. Even if you have some time to address your financial problems, credit cards are infinitely better than hawking your possessions, emergency mortgages, payday lenders or loan sharks. Though sometimes I have trouble telling those last two apart.
5. THEY ARE LOOKING TO MAKE YOU A DEAL
You can use the laws of supply and demand to your advantage here. There are a plethora of banks and credit lenders, but there are only a relatively few good customers for them to fight over. They are fighting with each other every day for our business, for your business. You will likely get better rates from your credit card bank than from a personal loan or auto loan. Right now I have four, count ’em, four banks that are offering me 0% until near the end of this year. I will share in future posts exactly what I did to get there.
6. SECURITY & WARRANTY
If someone steals your debit card information they may be able to steal money from your accounts. If that happens, your checks will bounce and you’ll have to deal with each place you wrote a check to, plus the overdraft fees from your bank. You’ll have to fight to get your money back. If someone steals your credit card, then you call the credit card bank and tell them cancel the account and you wouldn’t be responsible for the charges that you didn’t make. The banks write it off as the cost of doing their business. They make allowance for it in their bottom line. Some credit cards will even extend the warranty of an item purchased with that card. It is becoming an increasingly common service they provide. Before you shell out to Dell or Gateway for a pricey warranty extension, contact your credit card companies to learn about these benefits so you know which card to use when you make the purchase
7. CUSTOMER SERVICE 24/7
Most credit card banks have representatives on call 24 hours a day, 7 days a week. You can deal with them at your convenience. If you pay your bills at 5 in the morning before you go to work and you have a question, you can talk to someone. Granted you may have to navigate a voice menu and endure elevator music for a few minutes before you speak to a human, but you will eventually speak to one.
So, there you have it: credit cards are not themselves inherently evil. Though there are definite disadvantages to having them, and recognizing—and navigating—them is key to becoming “debt smart.”
Image: 401K, via Flickr.com