There is something you should know. Credit, is Satan’s favorite tool. And many of the things credit card issuers do, in my opinion, are immoral and should be illegal. Giving an 18 year old with a 12 hour a week job and no credit a credit card is irresponsible. Giving them 2 is crazy. The fact that the more debt they accumulate the more credit is given to them is even crazier than that! The fact that they want to get us hooked on a cycle of payment and repayment for life is just sad. Sad but true. A few statistics…
· The average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008.. (Source: Nilson Report, April 2009)
· Young Americans now have the second highest rate of bankruptcy, just after those aged 35 to 44. The rate among 25- to 34-year-olds increased between 1991 and 2001, indicating that this generation is more likely to file bankruptcy as young adults than were young boomers at the same age. (Source: "Generation Broke: Growth of Debt Among Young Americans")
· One in six families with credit cards pays only the minimum due every month. (Source: Experian national score index study, February 2007)
I have some bad news for you sunshine… If you pay the minimum every month, you will die in debt. There is no way to win by paying the minimums. Many people live in a sad, sad cycle of paying endless interest, looking at a principal amount that goes down pennies, if even. In some sad cases, you may just be mounting more and more debt on there.
Let’s take a look at a scenario. Mike Jones is a college student who is studying physics but has a love for massive wheels. He decides he wants to put 26 inch rims on his late model Geo Metro but does not have the money for it. Mike, however, has a nice new credit card issued to him by the bank with a $5,000 limit on it. Mike knows deep inside that this is wrong, but he never learned the simple lessons of finance and fell into the great American trap, Mike’s minimum payment was Interest owed +1% of his balance, that’s NOTHING he says! Of course Mike, being a student, doesn’t get the best rates out there. This one card though, gives him 15% APR, which wouldn’t be bad for a student with no credit history Mike’s new wheels are going to run him $4500 mounted and balanced, he goes home and like Gollum from the Lord of the Rings, creeps into his drawer and pulls out his preciousssss. The dark eye of Sauron awakens and mike goes and gets himself some new rims. Mike’s minimum payment is 100 a month, like the idiot that he is, he figured interest won’t be a big deal and according to his calculations… ($4500 x 15% = $675, plus the original $4500 gives us… $5175, divide that by 100 dollars and we get 51.75!) Mike thinks it’s going to take him 52 months to get out of the hole. Mike, is fucked.
Here is the reality. By paying the minimum amount, Mike’s rims are going to end up costing him nearly $1000 more than the rims themselves! He will have paid, by the time he is done, $5,164.89 in interest. His rims, will have cost him $9664. Want to know how long it’s going to take Mike to pay those rims off? TWENTY ONE AND A HALF YEARS. The worst thing is that my calculation is the best case scenario, Mike buys the rims and never uses the card again, if he kept revolving things on it the cycle would never end. I’ve seen people make mistakes like these for years, made a few myself… But my time in banking has shown me that your average person is incredibly irresponsible with their personal credit.
THIS is a sample of a Credit Card Disclosure/Terms and Conditions. The first thing that should stick out at you are the myriad fees these cocksuckers want to charge you, but for most people the first thing that sticks out is that 0% at the top. All credit card rates are variable, and are usually tied to the prime rate, so right off the bat you can see that we’ve got some room for trouble, because the difference between 7.24% and 16.24% is rather large. But that’s not the worst part. See that 27.24% delinquency rate? That isn’t the percentage of people you know who are delinquents, it means that if you are late, even one day, with a payment and sometimes not even that, they can set your rate to 27.24% If we thought Mike had it tough paying 15% for 21 years, imagine what will happen if his rate switches to the default rate. Statistics show it is likely he will at some point.
That being said, I pay for ab-so-lutely everything with a credit card. I usually don’t carry cash, and I want my points damn it! But I do not leave anything to chance. I, of course, use billpay for everything that I can (And you should too) and the Credit Cards I do manually. American Express is due the 8th of the month, the American Airlines card is due at the end of the month. And I pay every dime of those fuckers. An American Express Green card is a great card, the annual fee is $75.00, but it is a card worth having as it forces you (by default) to pay the entire balance off, thereby generating no interest payments. Sadly, Amex has recently lifted this policy and now give you the option of revolving your balances, a sad day indeed… The only interest I pay is on Margin (more on that in the chapter on investment) Credit Card companies hate people like me… they have a name for us “Deadbeats”. Why? Because they don’t make any income off of us. You can be a deadbeat too, wouldn’t you like to be hated by one of the most hated industries out there? It’s an honor and a privilege.
It is so important to pay your credit card on time. In fact, it is so important that you ought to view it as mandatory. Being late is a bad, bad, thing indeed when you look at these default rates and late payment fees, not to mention the fact that your credit gets screwed when you are late with your payment. The worse your credit score is the higher you are going to pay for important things like a house or a car. As we discussed before, the prime rate is the rate that banks offer their best clients! The sky’s the limit on the worst case… When I bought my car back in 2005, I was fucked. I needed a car, but the dealer saw I had a bankruptcy a few years earlier. They took the opportunity to nail me in the ass as any good finance manager does. I walked out of there with my bright, shiny, new 14.95% interest rate loan. Last year I refinanced with EFFCU (As previously stated) and they knocked my rate down more than half of what it was, the difference was huge. The lesson there, is that as my credit improved, and I walked in with a copy of my credit report which was squeaky clean even though it still reflects a bankruptcy, and got a much lower rate. TAKE CARE OF YOUR CREDIT GODDAMNIT! It should be the most important thing in your life next to Jesus.
Taking care of your credit also means viewing your credit report from the 3 agencies EVERY YEAR. By US law, you get one free credit report per year, take advantage of it. In today’s time you never know what sort of identity theft could have gone on, you may have a bunch of credit cards you don’t even know about. It happened to my stepfather. The scumbag guilty of the crime? His own 40 year old daughter who took out several credit cards under his name and of course never paid them. As months passed, late fees and default interest kept piling up, and he ended up with $16,000 in debt. She used her address so he never got the late notices. It wasn’t until collectors started leaving messages on MY answering machine that he found out all about this. You never know who you can trust out there, it’s important enough to do once a year. The alternative might be very painful indeed.
Well, enough good news for one Sunday afternoon! Tomorrow we will discuss loans and lines and the dirty process that is getting a mortgage. Bring your barf bag.
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