How does the credit card industry make record profits when the rest of Wall St. struggles?
A brief Introduction of how this information came to be…
Many years ago in my senior English class, I remember a seventeen year old student boasting about receiving a credit card application in the mail to fill out on their eighteenth birthday. I remember the student was a good kid, quickly becoming an adult, but on further questioning, they had no clue how to use a credit card. I asked the rest of the class to explain the dangers of having a credit, but all I got were blank faces and a few angry curses from students whose families had been hurt by the use of them. I was teaching Shakespeare’s Hamlet at the time and realized Hamlet wasn’t going to save these kids from a future bankruptcy. So, after looking at the Oregon standards, common core standards now, I saw students were required to be able to read and decipher technical language. So, my next unit after Hamlet was how to read the fine print in a credit card contract. From that day forward from my senior English class to my Economics class now, the students and I research the hidden dangers of credit cards and discuss how to use them without getting burned.
Much of the information we have gleaned as a class comes from the contracts students read and present to class, but also a wealth of information comes from Frontline’s 2004 broadcast of the Secret History of the Credit Card, which I linked here and recommend everyone to watch several times.
Without much further ado…The Hidden Dangers of Credit Cards
First: How a credit card company makes money even when they lose money.
A possible Scenario:
From the perception of the customer / credit card user.
A person opens up a credit card and makes purchases. They make the minimum payments until the credit card interest and minimum payments become too high to make consistently. First, late fees are applied and an immediate increase in the APR (Interest rate). Fees and penalties are rapidly applied until the payment requires the win of the lottery to absolve the person from his or her debt. The credit card company then threatens and begins the legal process to seize savings accounts and/or garnish wages. They threaten to report the person to a debt collection agency and tell them their credit will be ruined for life. They take every dollar they can from the person until there is nothing left and then they put a black mark on their credit score making their FICO score drop. The person is dropped as a customer, banned for life, and a debt collection agency takes over the account.
From the perspective of the Credit Card company
Credit card is issued to a customer. The credit card encourages the customer to make purchases to earn points for some small insignificant trinket such as money, gas, trips, you name it. The credit card company then applies a revolving fee of $2.00 per month for the person to make minimum payments. Each time the customer uses the card, the company creates digital money that didn’t exist before for the person to borrow. The credit card company does not need to pay interest or the interest is so insignificant on this money; be aware, they have been approved to stimulate the economy in this way by our government. The customer makes payments, but must also face the high interest rates of over 20%. The credit card company quickly makes the money back for the original purchase, but is now collecting interest on interest free money they encouraged the customer to create for them. Once the person is in default, the credit card company begins to increase fees and interest to sky rocket the bill to the highest, legally possible amount. Don’t forget the company has already received the money that usually equals the initial purchase; they haven’t lost a penny. The company then legally seizes money from the person in default from their accounts to either cover the initial cost or achieve some of the fees or interest on top of the originally borrowed amount. The company then sells the person’s debt to a debt collection agency for 10-40 cents on the dollar depending on the risk as a customer. The debt collection agency promises to repair the person’s credit score if they pay the full amount, which is profit to them because they purchased it at 10 – 40% of the actual value. Then the credit card company does one last incredible thing. They right off the losses of their fees and penalties on their taxes from selling the person’s debt to a debt collection agency which could be a tax right off of 90%-60% of the inflated bill created after they received the money for the original purchase.
The credit card division of banks is the highest profit making department for them.
Secondly, Remember these key things…
A person who possess a credit card has signed and agreed to all the conditions set by that credit card company. If a person does not agree to the conditions set by the company, they would not have signed their name and set up an account with the company. By the way, the credit card company can change the conditions of their contract even after a person signs and agrees to a previous contract. The ability to change the agreement is in the fine print of the original contract.
Some credit card companies have been known to hold a check payment and not cash it until it accrues a late fee. This is illegal, but where’s your proof? They have the envelop with the postmark on it that has conveniently been discarded. If a person has reason to not trust their credit card company’s ethics, then send all payments through USPS with a tracking number and a signature required upon arrival. It costs more than a stamp, but it eliminates their games and gives you the evidence you need to file a complaint with the Better Business Bureau.
Credit card companies make enormous amounts of interest and money off the money a person borrows by using their card. Why, because the company pays very little interest, if any at all, for the money you borrow into existence for them.
Paying your bill off each month on time is the only way to use a credit card without facing serious interest payments, penalties or fees. If you can’t pay your credit card at the end of the month in full, don’t use it for purchases at all.
Credit card companies have lobbyists that have designed this current system in which they don’t lose a penny and gains them excessive profits even when you declare bankruptcy.
Credit card companies actually make money when you declare bankruptcy; this is why their customer service doesn’t really matter to them when you are in a possible default situation. You going bankrupt and not paying does not hurt them; it gives them more of a tax right off and the legal right to seize your accounts and garnish your wages to get more money. Here is a link to a website that confirms credit card companies have the ability to seize your bank accounts.
A few years ago a student found a clause in a contract that said the signer was indeed responsible to pay their bill even if God returns or an apocalyptic event happens. I found this humorous because the company is trying to create a legal contract that supersedes the end of the world, which sadly shows this one particular company indeed has a god complex.
Remember in most cases credit card companies make money when you end up in a default situation, so their fees, penalties, and interest rate increases should not surprise you. Some companies have been known to raise interest rates once they notice a main income winner for the home has lost a job. The reason for the APR change is because the home has less income meaning they are a riskier customer to extend credit too because they may not be able to carry the debt load. Remember the company makes money when people default. Credit card companies will actually “kick” you when you are financially down. Expect no mercy.
Once a bankruptcy occurs, credit card companies who may have threatened you will over a short period of time solicit you to another credit card with a higher interest rate, knowing you have to wait seven years to declare bankruptcy again. Seven years is a long time to accrue interest and late fees as well as have wages garnish or bank accounts seized by them.
What about the points I earn on my credit card? If I earn points and pay my bill in full at the end of each month, I am making them pay, right? Wrong! Every time you use a credit card at a restaurant, store, or gas station, the company takes between 1% & 2% away from the merchant for providing the service for you to charge at their store. If you crunch the numbers, the frequent flyer miles or cash returns are below the percentage taken from the merchants, making the credit card company more money for using their card. If you really like a store and the patrons, you should write a check or pay cash, no penalty is taken from the money the merchant earned from you when you pay them in this manner. Unfortunately, if you use a check/debit card the percentage rate is even higher than 2%, so by doing this, you are hurting the merchant/store or restaurant even more.
Decided enough is enough and you don’t want a credit card anymore? Be aware that some credit cards have a closing an account fee. After you ask to make your final payment, the company is not obligated to tell you about this fee since it is in the fine print of the contract you agreed with. Make sure when talking to the company to determine your final payment you ask if there is any fee attached to closing your account and make the payment including this amount. It will save you the hassle of dealing with a 5 -15 dollar fee accruing late fees and interest until they notify you they are taking you to collections months later for an amazing amount of money. I call it the “kiss off tip,” over pay about $20.00 to get rid of them forever.
Credit card companies are like casinos, they rarely lose, and if they do, someone else is paying for it.