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Does your credit card company want you to stay in debt?

Debt Image Gallery As using a credit card becomes easier, are the credit card companies conning us into digging into deep debt? See more debt pictures.
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If credit card companies want us to stay debt-free, they have a pretty odd way of showing it. With what some people consider suspicious tactics, banks milk cardholders of extra dollars at every turn and often without warning. Annual fees, late fees, over-the-limit fees, international exchange fees and more have been compared to anvils tied to the necks of consumers' finances. Consumer advocates blame these questionable policies for the average American household's credit card debt, which has skyrocketed to $7,430 [source: Consumer Federation of America].

However, other people say it's our own fault. We tie our own nooses by entering contracts that we don't take the time to understand. Of course, a credit card company has a vested interest in making sure customers keep at least some balance. Using a combination of interest rates and minimum monthly payments, a bank can make a large profit.

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­But it seems a bit counterintuitive. If you get deep enough in debt, you'll be unable to pay the credit card company at all. At this point, companies are often willing to negotiate. For instance, they may agree to you paying a lump sum in exchange for forgiveness of the remainder of the debt. So the answer is yes and no. Yes -- they want you to keep an outstanding balance and be in debt to them. And no -- they don't want you to be completely without funds to pay them at all.

Credit cards are popular because they play perfectly into the human desire for instant gratification. They're easy and allow us to spend money we don't have, but they can be used responsibly. With a little discipline and by knowing its tactics, you can beat a credit card company at its own game.

Reading the next page could save you from falling into a pit of debt.

 

 

 

If you read the details of your credit card contract, you might be unpleasantly surprised by what it holds.
If you read the details of your credit card contract, you might be unpleasantly surprised by what it holds.
©iStockPhoto/Graça Victoria

Avoiding the traps set by credit card companies can help you stop debt from ballooning. To understand how these companies operate, let's take a stroll in their shoes.

A company's best customer is one who brings in the most profit. For credit card companies, this is the revolver -- the customer who pays off debt incrementally while watching his balance steadily grow. The companies actually make little profit from the responsible customer, who quickly and fully pays off balances. The longer you let a balance sit, the longer interest rates will compound, and you'll end up with a large debt. So why do people fall into this trap?

Credit card companies successfully breed the best customers with a simple trick of psychology using the minimum monthly payment. This minimum payment is so tantalizingly low -- often about 4 percent -- that it encourages people to pay just that and put off the rest. Let's say you have a $5,000 balance, but only $200 is required right now. If you're struggling this month, but suspect your ship is just around the corner -- in the form of a raise, an inheritance or whatever -- you'll put off paying more than you have to until then. But paying only the minimum means your large balance will grow even more with interest charges, and it will be even harder to pay more than the minimum next month. For this reason, it's wise to pay off as much of your balance as possible -- preferably your entire balance every month.

Beware of cards bearing low-interest gifts. Credit card companies, like any business trying to sell you something, will use gimmicks to hook you. One of the most popular is a low introductory rate. With this plan, you'll be able to sit on a balance for a few months with only minimal growth. However, just as you get comfortable, the company will switch your nice, low rate with a much higher one. Some people play the game of switching debt to a new card with a low introductory rate every few months -- but this takes work, and so many credit inquiries could do a number on your credit score.

In addition, credit card companies bury hidden fees and rules in confusing, fine-print language. Some point out, however, that heavy federal regulations require this technical language [source: Frontline]. Regardless, it's important for a consumer to understand the terms. For instance, if you exceed your credit limit, you'll get an over-the-limit fee. Even if you're just one day late, you get a bonus -- a late fee. And, despite years of punctual payments, if you slip up one time and pay your bill late, you'll probably have to kiss your low interest rate goodbye.

Another tactic people object to is universal default. Let's say you're a responsible credit card user who never misses a payment and never goes over your limit. You get a letter in the mail telling you that due to a change in your credit score, the interest rate on your credit card is going up. Apparently, the bank told the credit card company you forgot about a car loan payment a few months back. "But, that has nothing to do with my credit card," you argue. However, according to the contract you entered, it does. If you are more than 30 days late with any payment, the credit card company has the right to increase your interest rate [source: Burt].

Find out more about credit and debt with the great links on the next page.

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Sources

  • CFA. "Push To End Unfair Credit Card Interest Rate Hikes and Fees Gains Momentum." Consumer Federation of America. Press Release. Feb. 14, 2008. (Aug. 1, 2008) http://www.consumerfed.org/pdfs/Push_to_End_Unfair_Credit_Card_Interest_ Rate_Hikes_Gain_Momentum.pdf
  • Frontline. "Secret History of the Credit Card." Frontline. Public Broadcasting Station. Nov. 23, 2004. (Aug. 1, 2007) http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/
  • Burt, Bill. "'Universal Default' rules explained." Bankrate.com Updated Jan. 25, 2007. (Aug. 1, 2007) http://www.bankrate.com/brm/news/credit-management/20040120a2.asp

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