Tricky Ways That Credit Card Companies Use to Keep You in Debt!

ElitePersonalFinance
Last Update: February 6, 2021 Credit Cards Save Money

Paying a minimum balance on your card will keep you in debt for a long time!

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. It is a well-known and profitable business model designed to collect interests on your revolving accounts. This is the real way credit card companies make their money.

Way back in the 70s, card companies across the board required minimum monthly payment of 5% of the outstanding balance. However, a bright-spark financial services consultant came along and convinced many card issuers to reduce the amount to 2%. It quickly went viral when others saw how profitable it could be.

In the early 2000s, a 2% minimum payment was the new benchmark. Today some have it as low as 1%.

How People Get Lured into Having a Credit Card?

Credit cards are part of the American culture, and many folks have at least one. The average number of credit cards in 2021 is 3.

Before you open a new account – be careful! There are financial pitfalls that you could land in.

Here Are a Few Dangers to Watch Out

  • Credit card issuers make it easy for you to spend “your” money. Just because you have a certain limit, it doesn’t mean you should go on spending and buy whatever you want.
  • When you spend “your” money, 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 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.

How to Protect Yourself Against Credit 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 your money, and if you have been in trouble or aren’t sure can you manage your finances well, it may not be smart for you to have a credit card at all.
  • 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 your check account. That way, you won’t spend money that you do not have. This may put you on a budget, 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 give in to the temptation of buying what you do not really need and avoid adding charges and interest to your credit card.

How Credit Card Companies Use Your Debt to Cover Their Costs

Businesses are here to make money.  Credit card companies prefer customers with often open revolving balance accounts. This makes them more money than customers who settle their card accounts in full every month. Of course, they get commission charges from businesses and stores that provide a card facility for customers, but it is very little compared to what they gain from client charges on revolving balance accounts.

And they use one easy strategy to get clients for this. They give their clients money. Initially, it looks like free money that people can use anytime, but one day this money will cost them a lot.

As a result, in 2021, the average credit card debt is $5,315 per month. This number means a huge loss for many Americans.

Therefore their profits are made mainly by lending, and the charges incurred by lending money in the form of a credit card to folks like you and millions of others. It is in the companies’ interest 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 can pay off your balance every month. And if you have good money management skills, a minimum balance payment 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 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 importantly, read the fine print on the agreement, and discuss anything which is not clear to you.

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ElitePersonalFinance

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