Credit Cards are Dangerous in the Hands of the Majority

Credit Cards are Dangerous

Credit Cards Are Dangerous in the Hands of the Majority

Hello folks! Credit card debt and bad credit is challenge many folks face. Today I wanted to go into this issue and offer resources for help and assistance.

Consumers get convenience and credit card companies make profit from the interest they charge. The vast majority of their income would not be created if credit card users simply accepted that convenience and paid off their statement balances in full at the end of the month. The card companies are delighted that the vast majority of credit card holders don’t do that! Therein lies the danger of credit cards. Holders are not required to pay off their bills in full; there is a minimum payment to be made printed on the statement. It allows consumers to buy things that they have insufficient cash to purchase by taking credit. It allows them to overspend in their daily lives to supplement their monthly income. The interest that card users pay for the privilege is high, some would say penal, and credit card debt is a major problem wherever cards are available and that includes every state of the USA.

The average level of debt among those Americans who do not pay off their balances in full at the end of every month is in excess of $15,000. The best interest rate that card holders can expect to have applied to those balances at the end of each month is around 15%. If you have a card and a poor credit score it is likely to be closer to 20% and that credit score is unlikely to improve any time soon if you are approaching your credit limit and finding yourself getting into increasing trouble with your debt level.

The True Reality

Balances do not disappear if you simply ignore it. While you are still within your credit limit you may not understand the seriousness of the situation because you will not be pursued by any debt collectors. You are not marked down as such in your credit history as long as you make the appropriate monthly payment on time. It is all too easy to ignore the fact that your balance hardly falls after paying that minimum before the next interest is added. Take for example the situation if you have a balance of $1,500 and the card company wants a minimum payment of 2% of that total; $30 at the end of the month. If the rate charged is 15% that minimum payment addresses such a small amount of the principal owed that it will take 16 years to clear the balance in full and the interest charges you will have paid is a few hundred dollars more than that current balance. That presupposes that you do not use the card again. Can you think of a bigger waste of money?

Credit Score

As you get towards your credit limit on a card your credit debt ratio will begin to harm your credit score and should you begin to default on your minimum payments because you no longer have any credit left to support your ‘’overspending lifestyle’’ then the position worsens and the debt collectors will start to call.

Many people refer to your credit score. It can be everyone from your insurance company when deciding on premiums to a company to whom you have applied for employment. The secret to using a card is to pretend that it is cash that you actually have elsewhere and will hand over later; in this case when the statement comes in. Take no long term credit and a card is extremely convenient.

What this does not address is the problem of a balance that you already have. In recent years a new breed of lender has emerged online that operate in a different way from traditional financial institutions. They still want to make profit of course but they are inclined to look at whether an applicant has the regular income in order to approve a loan rather than the applicant’s previous history. The process of application is simple and quick. Lenders will look at the application immediately and transfer the money within a working day. Where that loan amount is used to pay off credit card balances in full the process of repairing personal finances begins. The interest rate charged on personal loans, even for those with bad credit is much lower than the card companies use.

Avoiding Personal Loan Scams

Unfortunately, there are folks out there looking to scam you with loan offers that are just too good to be true. There are a number of things you can do to protect yourself though, and the Federal Trade Commission (FTC) and other consumer-rights groups regularly issue warnings about loan scams. If you are looking for a personal loan, you should:

  • Be suspicious of unsolicited loan offers. Be careful when you receive phone calls or mail offers that you did not request.
  • If a lender is not interested in your credit history, than that is a red flag. Legitimate lenders would definitely be interested in your credit.
  • Do not send money upfront to a lender until you are sure you’ve received loan funds or they have successfully paid off your previous credit card balance.
  • Always verify the actual lender when going through a loan broker. Research and investigate the institution, its physical locations, etc.

Be extra cautious if you have bad credit or are seeking a personal loan. But know that there are good and legitimate lenders out there to help those in need. Additionally, look to your State which will provide free assistance and resources to those looking to improve their credit.

Thoughts?

Have you had credit issues in the past or going through any right now? Feel free to leave a comment as to what has helped or worked for your. Thanks!

Thanks for taking a look!

The Green Swan

Work Harder, Work Smarter, Retire Earlier and Find Your Beach

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50 Comments on "Credit Cards are Dangerous in the Hands of the Majority"

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Vicki@Make Smarter Decisions
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We haven’t ever had credit issues but yesterday we received three 0% offers in the mail on our credit cards. These allow you to transfer balances and even move money into your checking account to use – basically like a loan. One was with a 3% fee and the other two had 2% fees. We use these strategically to pay down mortgages at times, but these can totally get people screwed up too. The fee is pretty low but people forget that taking a big amount hurts your credit score (which we aren’t concerned about) and at the end of the terms, you still generally have a very big balance since they make the payments so low. We are doing this now with $22K that… Read more »
Amanda @centsiblyrich
Guest

Vicki, that never would have occurred to me! I agree with JW that one must be careful with it. But it’s a really interesting strategy that could be used successfully with small mortgages in real estate investing. As long as you are certain you can pay off the balance, of course.

We pay off our credit cards in full each month and have for the last 20 years. Though we’ve had consumer debt in the past, I’m thankful we never had credit card debt.

Luke@dollarwise
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Credit cards are bad news unless you pay them off in full every month. If you can’t do that, you shouldn’t have one. The old adage, only spend what you can afford rings true.

Mr. SSC
Guest
I totally used credit cards to supplement my lack of higher income. That and poor spending habits. I had about 3 cards and I remember when I got a Target card, I was going to only use it for emergencies and pay down the others, but 3 months later it gets pulled out at dinner and then it turned into an everyday card too. When I got out of grad school I was close to $16 or $18k in debt with just credit cards. Fortunately, I was in a position to get them paid down relatively quickly, but that type of credit/debt ratio along with my student loans, and poor credit score kept me off of our home mortgage so I wouldn’t jack up the… Read more »
Jim @ Route To Retire
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I was one of those guys that got sucked into credit cards back in college… but man, was I the life of the party! Round of drinks – on me! Dinner with friends – I’ll get that! I was really stupid! I racked up about $30k in credit card debt. I didn’t realize just how deep I was until I found Quicken a little over 15 years ago and loaded it all up. I stared at the screen and went “Huh… well, this sucks!” I did crush it on getting out of the debt, but I had a big distrust for credit cards for a long time. I now use them, but pay them off every 2 weeks on payday rather than waiting for the… Read more »
Fervent Finance
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I got my first credit card when I was 18 and headed off to college. Luckily my Mom told me YOU HAVE IT PAY IT OFF EVERY MONTH. Quickly I learned how to take advantage of credit cards. This was the time you could get those 0% for 12 month offers. So basically I would put all my expenses on a credit card for the year and pay maybe 50 or 100 bucks a month. I had cash in a checking and savings account but I figured I’d let that sit there in case of an emergency. Then once summer came I would pay it off with my first few summer job paychecks and whatever cash I had at that point. I never ran into… Read more »
earlyretirementnow
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Very true. Credit card interest is insidious. It starts small but then it grows and it’s hard to get out of. But even for folks who pay off their balances every week and use CCs to get points/cash back, there is the danger of over-spending. If someone is getting 2% cash back but overspends by 10%, the rewards program is still not worth it. I hope and think that we’re responsible enough, though. But I have considered going on a cash-only diet for a while to find out. 🙂

Matt @ Optimize Your Life
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I’m always torn when discussing credit cards. When used responsibly, they can be a great tool. They automatically track your spending and give you a record of everything you’ve purchased. They provide additional insurance on some products and services. They help protect against fraud relative to debit cards. They can also provide value in the form of cash back or other rewards. On the other hand, people that don’t pay their bills in full every month are really hurting themselves, and society has regularly said that this is a-okay. This can easily lead to people developing really bad habits that can be extremely tough to break without quitting credit cards altogether. I didn’t have credit card issues because I preferred using cash (for reasons that… Read more »
Mrs. Picky Pincher
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When Mr. Picky Pincher and I got married we had $14,000 in credit card debt. We managed to pay it off within a year while changing our lifestyle dramatically. We now know how to use credit cards as a tool to our advantage. In fact, we put all of our monthly expenses on a rewards credit card, pay it off in full at the end of the month, and reap the rewards. That said, I agree that credit cards are NOT for everyone. You need to be quite financially stable to use these little guys without getting into trouble. The balances must be paid off each month. Otherwise you’ll end up in a big, heaping mess! As far as avoiding credit card debt in the… Read more »
Kelsey @ Tealmama
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I’ve used credit cards since college and absolutely overspent because of it. Luckily I didn’t damage my credit score, it actually helped it because of longevity of credit accounts, paying on time, etc. And now we’ll put everything we can on our credit card for the rewards and ease of tracking spending, but pay the balance monthly.

But I absolutely understand how people get into major trouble. And it’s more than credits cards – its so easy to finance vehicles, boats, rvs, motorcycles, atvs. And many people focus on the monthly payment vs. the overall cost when you’re said and done. Great food for thought, thanks for sharing. 🙂

Financial Panther
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I’ve always been super careful with my credit card and luckily, have never had consumer loan debt. Like someone else above mentioned, I have a similar story. Got my first credit card my freshman year of college. Had no idea how cards work, but my mom said, use the credit card but you have to pay it all off every month. Been doing that ever since. The great thing about doing that is that my credit history is pretty good. I’ve consistently had an 800+ credit score simply because the average age of my credit is pretty good. I still use my credit card for every purchase I make since I want the points and find it makes it easier to track my purchases.
Mr. PIE
Guest

Good read this.

It is unfortunate that lack of self discipline does not allow more folks to reap the benefit of credit cards. They can offer much in terms of free experiences if used correctly. We put as many of our regular expenses on cards as we can. And we have built a few hundred thousand points in 1 year with mainly the free points plus our added expense items. Free travel and hotel stays can be quite straightforward.

Paying off our credit cards on monthly basis has both our scores >800 and that is nearly 20 years strong with that habit.

Self discipline, self discipline…..

Financial Slacker
Guest
We use credit cards to pay for almost everything, but we also pay off the bill in full every month. We’ve been doing this for as long as I can remember. That said, I know quite a few people who have gotten into real trouble by charging up credit cards to pay for stuff they couldn’t afford. Then they would use one card to pay another. Next thing, they are so far in debt, there aren’t many options. And it all started at an early age. At least when I was in college, they were handing out credit card applications everywhere. It was too easy to get a card. And for the most part, we didn’t even have an income stream as we were still… Read more »
Jacq
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Jacq
I didn’t get my own credit card until I had my first salaried /real job. In college my dad gave me a card for gas, which I used for… gas, to get home from college on weekends. (Back when I could fill up the tank for $10!). The big push for me to get a credit card was EZ pass, due to the tolls on my commute. I pay it in full every month. The one time I couldn’t, I called the credit card company, completely stressed out, and I’m sure the person on the other end of the phone was rolling their eyes. I was working a job in Ithaca, for a company that knew they were moving. They put us up in a… Read more »
Doctor in Debt
Guest

I used to be surprised that the credit card companies still offered these great rewards to people with great credit scores and a high propensity to pay it off each month. It would almost seem to me that the rewards would cost them more that the merchant fee’s.

I can say that although I am still over $1,000,000 in debt, none of it is credit card debt. Doesn’t make paying it off any easier but at least the interest rates are better.

Mustard Seed Money
Guest

I love my credit card. I use it to pay for everything now. Since I pay it off each month it’s a great way for me to get cash back and track all my expenses via personal finance. I have two credit cards. One for international travel and one every day expenses.

It works well for me but I have friends that have no business using credit cards because of all the debt that they have. It’s like any good tool. It’s only as useful as the users.

Finance Solver
Guest

I’ve been seeing a product that’s coming up in 2017 that there will be a 3% cash back on a DEBIT card. I was surprisingly shocked and may even stop using credit cards altogether for the 3% cash back debit card. I haven’t researched enough to see the downside of using them though, so I will do further due diligence down the road.

Maybe this is the product that lowers some of the consumer debt that’s plaguing Americans!

Joe Freedom
Guest

Mustard Seed Money hit the nail on the head: credit cards are tools, and if you know how to use them responsibly they can produce great results. If you use them incorrectly they can cause great damage. When used as a convenience payment mechanism simply to avoid carrying cash, to track expenses, and to accrue cash back or travel rewards, the user is the clear winner. But when they are used as a finance mechanism to buy stuff that you can’t currently afford, they are incredibly dangerous.

PatientWealthBuilder
Guest

I use Discover for the reward points and it seems to work out. I pay it off every month though. I also have it set up with a $35 monthly minimum payment which it automatically takes out of my bank account if I forget to pay. This way I never pay late fees.

Dividends Down Under
Guest

Hey JW. I completely agree with the premise of your article, the benefits of credit cards for the wise are paid for by the unwise actions of most others. We don’t have a credit card and probably never well – it works for us. It definitely makes us want to spend as little as we can.

Tristan

Ten Factorial Rocks
Guest

Credit cards, like other financial tools, can be used for both good and bad. Credit is a key fuel for the economy and industries thrive on it – they know how to manage it but average consumer may not. Smart FIREd folks use it for rewards or for short term emergency spending need, which is the right way to use credit in my view.

Josh @MoneyBuffalo
Guest

My wife & I pay ours off in full each month. We review our purchases once a week to make sure we are not overbudget. We had talked about tearing it up and only using debit & cash, but, we have never missed a payment in the 10 years either of us has had a card.

Plus we have a hotel rewards card, so we get one free anniversary night each year, plus any accumulated points. And, alothugh we do not plan to have anymore loans once our mortgage is paid off, as I’m only 30, having an active credit profile is still a good idea just in case we need to get a car loan, etc.

Your First Million
Guest

It’s is interesting how credit cards are heavily marketed to the masses. There are so many people in society that do not understand money or how to manage their personal finances. It is also interesting to me that credit cards often have higher interest rates than any other form of borrowing money. From my view, it seems that wall street purposely targets these people to get their into their debt trap, where they can collect huge interest and fees to the point where these people have a hard time getting out. It really is too bad. We need more financial education in the school system.

Latoya Femme Frugality
Guest

Youre right and I regard unsolicited credit card offers thr same. Rarely are credit card offers that come in the mail are the best. Always seek out your own loans or credit.

Debt Hater
Guest
I’ve never had any issues with paying off my credit card in full each month, and that’s how my parents taught me to use it – like a debit card. The only difference was that your money is taken away later in the month rather than right away. I also hate the thought of having to pay interest on something that I’ve already purchased. I can see how people easily fall into the trap of accumulating more and more credit card debt though. You make one mistake, then it all starts to pile up, and you either try to forget about it or assume that there’s no way to recover at that point. When you owe a lot of money it’s definitely not a pleasant… Read more »
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