Paying a minimum balance on you card will just keep you in debt.
All credit card companies give you the option to pay off your balance with small, minimum monthly payments. Although this option can give you some financial relief, it is really designed to keep you forever in debt, especially when your balance approaches the max-out amount.
The ability to pay off your balance is often punted as a perk for using their credit card, but this is not so much a customer benefit as it is a business model, designed to collect interest on your revolving balance. This is the real way credit card companies make their money.
Way back in the 70’s, card companies across the board required a minimum monthly payment of 5% of the outstanding balance. However a bright-spark financial services consultant came along, and convinced a number of card issuers to reduce the amount to 2%. It quickly went viral when others saw how profitable it could be.
In the early 2000’s, a 2% minimum payment was the new benchmark. Today some have it as low as 1%.
How you may get lured into having a credit card.
Credit cards are part of the American culture, and many folk have at least one, and some may have as many as three cards. Before you open a new card and plan to use it to carry a balance, be warned – there are financial pitfalls that you could land in.
Here are a few of the dangers to watch out for.
- They make it easy for you to spend money. Just because you have a certain limit does not mean you should go on a spending spree, and buy whatever you want.
- When you spend, the thought of how you are going to pay for it may never enter your head. The bill will arrive, and reckless spending could leave you with a paying problem.
- Credit cards are often thought of as an extension to one’s income, and used as such until payments have to be made and not enough money is available to pay.
- You may use your card until it is maxed-out, and then the only amount you will be able to spend is the amount you pay in, less interest and charges of course.
How to protect yourself against getting into card debt.
- If you are a spender by nature, take note of the fact. Having access to a high-limit credit card could lead you head-first into a financial disaster. Evaluate the way you handle money, and if you have been in trouble before, or don’t manage your finances well, it may not be smart for you to have a credit card.
- Struggling to pay off the minimum balance on a high-end credit card, could keep you battling unsuccessfully to keep your head above water.
- If you realize your spending habits are not that kosher, don’t get caught up in the hype of a fantastic credit card deal that looks as if the high limit will make your life easier.
- Consider using a debit card linked to you check account. In this way you will not be spending money that you do not have. This may put you on a budget which is challenging, but at least you will not be drowning in everlasting debt. You may even be able to build some wealth and save for the future.
- If you have a debit card, leave your credit card at home when you go shopping. This will help you not to give in to the temptation of buying what you do not really need, and also avoid adding charges and interest to your credit card.
The way credit card companies use your debt to cover their costs.
Businesses need to make money, and credit card companies prefer customers who have a revolving balance account with its associated charges, rather than customers who settle their card accounts in full every month. They do, of course, get commission charges from businesses and stores who provide a card facility for customers, but it is very little compared to what they gain from client charges on revolving balance accounts.
The charges from clients help to cover card company overheads such as salaries, building rentals, telephone accounts, motor vehicle expenses, electricity accounts, and a myriad of other expenses. Your money from accrued charges also provides a very healthy profit for the lenders.
Therefore their profits are made mainly by lending, and the charges incurred by lending money in the form of a credit card, to folk like you and millions of others. It is in the interest of the companies to make attractive offers with easy monthly minimum payments, which may trap you into an everlasting cycle of debt.
A credit card can be useful.
There are benefits to having a credit card, especially if you are able to pay off your balance every month. And if you have good money management skills, a payment on a minimum balance can help you in times of financial stress. It can also help if an emergency comes up that requires an unbudgeted-for payment.
Always aim to catch up and pay more than the required minimum amount if you have had to use that facility to relieve some financial stress. You will save big on extra charges and interest.
The bottom line is that you that you must read the fine print before signing up for a credit card. Some of the offers they make to get your business are very tempting, but if you don’t read the fine print or ask questions, these so-called great offers may come back to bite you!
Not a money scheme!
Credit card companies are not financial schemes offering you the world for nothing, and cards often come with a range of useful services, but there are costs involved. Remember that they make their money by lending, and the charges and interest that go with it.
It may seem like a quick answer to money problems, but you could be paying it off for years.
Talk to your credit card company about the charges involved, and most important, read the fine print on the agreement, and discuss anything which is not clear to you.