*10 Things To Understand About Credit Cards

10. It’s not free money.  It may seem obvious to some people, but it’s worth saying.  Every time you use your card, you are basically taking out a very expensive loan.  Well, it’s actually a FREE loan if you can pay back what you “borrowed” in time (=ALL of it, usually within a month).  But statistically, credit card companies know that most people (56% on average) do not or cannot pay it all, so that’s when the expensive interest payments come in.  If your card charges 18% per year (pretty standard), then every $100 that you owe that year, you have to pay $18 as interest / penalty for being late.  A regular loan from a bank is about 4% per year.  And if you think you can just run away from paying, credit card companies are more organized than the mob and will getchu and destroy your ability to start a business, buy a car etc. in the future (=bad credit).  Furthermore, if you carry this debt for years, you will start seeing the effects of compound interest, where you are charged interest on top of the interest that you didn’t pay off in that first year.  Thus begins the spiral of debt.

9. Making the minimum payments doesn’t help in the long run.  Usually credit card companies say that if you at least make a minimum payment (let’s say, 10% of what you actually owe for the month), you will be charged less interest.  But, don’t kid yourself–going from 18% to 15% or even to 12% is still ridiculously high.  It’s a false sense of control.  That’s a killer profit margin credit card companies are making on you!  (On a good year, airlines barely make 2% profit off their operations!)

8. Having many credit cards can affect being able to get a good loan in the future.  At shopping malls and universities, many credit card companies will offer some one-time silly gift or bonus for signing up with them.  And many people think that at most, it is a silly piece of plastic they can cut up later–and go for the free gift.  But, unless you go through the trouble of properly cancelling a credit card, your record will show that you have a “line of credit” with these companies / “banks”, essentially.  So, later in life, you might apply for a cheap 4%, $200,000 loan at a bank to buy a house, and they will say to you, “well with your salary etc. you ARE eligible for $200K, but since “bank X (Y and Z)” are already giving you a line of credit worth $50,000, we can only give you $150K.”  Result: you can’t buy the house.

7. Most people don’t realize they consent to ever-increasing interest rates.  Well, this has been true in the US, at least.  93% of people were unaware that interest rates on their cards changed (usually by increasing) and that they actually consented to this upon signing up (in the fine print).  This “predatory practice” is currently  being addressed by  the Obama administration’s set-up of the Consumer Financial Protection Bureau.  (Do you know what your credit card’s interest is?)

6. Don’t use a credit card if you know your income is not stable.  Like I said, it is a crazy expensive loan–whose expensiveness kicks in especially when you are unable to pay it off.  If you foresee your income dropping off, then consider getting a line of credit from a bank or credit union or your mom, with much lower interest.  Then, if you are the type to buy groceries using credit / on loan, at least it isn’t costing you 4x more than it should.

5.  Friends don’t let friends use their credit cards.  Unless it is somehow an officially joint card, it’s a crime anyway.  But, I’ve known people in the past, in order to help their friend out of a pinch, have signed up for a credit card using their credit history for their friend to use.  And wouldn’t you know it, the friend ran up $15,000 within a month and didn’t pay it off–leaving the “credit card holder” holding the bag.  Credit history is the one thing that will stay with you throughout your whole life, like a cloud of perfume or a cloud of locusts, as you participate in the economy.  Once you ruin your credit history, you have effectively raised all future fees for yourself to ever get another loan again (because you are high risk now)–costing you hundreds of thousands over a lifetime.  (Incidentally, that’s why you should immediately report stolen cards too).  People can see that cloud of locusts comin’ from 5 blocks fat!

4. Young people need to practice paying credit cards off right away.  When university students get their first credit card, for some, it is like an exhilarating windfall of mozilla!!  Cash money falling from the sky!!  But, with a rude awakening at the end of that first month.  The truth is, credit cards should BORINGLY just be another way of paying, period.  Their convenience is in not carrying around hundred of dollars for big purchases, only.  The month “leeway” that you have to pay your balance shouldn’t be regarded as any safe breathing room.  So, don’t kid yourself and make sure you learn that that balance needs to be paid off in full right when you encounter your first little plastic rectangle of convenience / doom.

3.  People tend to spend more when they are paying with a credit card.  Studies have shown that when people use cash, they are a lot more conservative about shelling out as much because seeing the bills slip away into someone else’s hand is a very educational situation.  Credit cards remove this visual impact and change the reality of what we are willing to pay.  Cash-oriented societies in Asia and Germany tend to have a lot lower consumer debt.  So, you might want to consider that on your next “wild night out” (though carrying around tons of cash, drunk can’t be a hot idea either…).

2. Keep a clear record of your credit card purchases.  Every credit card receipt you get, put it in a box when you get home.  Write the amount down on a list, also in the box.  When your statement comes, you will know exactly what’s going on when you see those items.  Also, if you are aware of this amount that happens every month, it helps in your financial understanding of your income vs. expenses.

1. Credit card companies profit off your ignorance / procrastination and Financial Illiteracy.  (Just in case it wasn’t clear by now).  They make no money off “good customers” who pay on time, except for annual fees if any.  That’s their business model.

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