Credit Card Revolving Credit: The Banks Need Us to Continue in Debt Forever
Credit Card Revolving Credit: The Banks Need Us to Continue in Debt Forever
Despite the economy being what it is, a good portion of people still own credit cards. In fact, a lot of them are using their credit cards to help them pay for household expenses until they are able to get back on their feet. Although this is considered to be a bad financial move for the consumer, it is a financial boon for the banks. Interest rates have consistently increased particularly since the economic downfall. But the banks only make money when a person uses their card and carries a balance each month. Therefore they do everything they can to make sure the customers are using their credit cards.
The most responsible way to use a credit card is to use the card only for emergency reasons and to pay the balance off each month. However, banks don’t like this because they don’t make any money. It’s hard to charge interest on a zero balance. So they use incentives to get people to keep a balance on their credit card. This includes increasing a person’s credit limit because they know that the person may be tempted to spend more than they can pay off in a month requiring them to carry that balance over and be charged the interest fee.
They also make it difficult to pay off the balance in full. They purposely make the minimum payments low so that it takes years, sometimes decades, to pay the balance in full just making the monthly payments. For example, it will take a person 113 months (9 years) to pay off a credit card balance of $1,000 paying 18% interest. In that time period, they will have paid a little over $932 in interest. That’s almost 100% of the balance of the loan. In addition to that, banks also make millions from late fees, over the limit fees, and annual membership fees.
Recent credit card reform has tried to address these issues and make is easier for consumers to use credit properly. Namely, credit card companies have to put the terms in plain language that the average consumer can understand. Interest rate increases are restricted to the first year. Afterwards, consumers must be notified of an increase in the interest rate and given the option of opting out. Additionally, payments sent to the company must be applied sensibly to the credit card balance. Already, however, banks are finding ways around the new legislation. It is up to the consumer to learn how to use their credit cards the right way to prevent themselves from being in debt for the rest of their lives.
Oscar E. Diaz