Rough Draft Essay #1

All one has to do is see and listen to the news to understand that our country is in a financial mess and crisis. The Federal Government is bailing out some of the biggest financial companies, the solid rock of the financial world had to be rescued-Fannie Mae and Freddie Mac, banks large and small are folding, Congress is debating how to manage a possible $700 billion dollar bailout plan, the stock market is going up and down, home foreclosures are happening at an alarming rate, unemployment is high, and oil prices having leveled off are skyrocketing again. Amidst all of this is the average consumer who has to try and figure out how to survive; how to put food on their tables, gas in their cars, hold onto their homes, wondering if they will have a job, if they can keep their kids in college. All they want is to have a good quality of life. Being able to survive on their expendable income is becoming harder and harder. More and more this is when credit cards come to the rescue-or do they?

Although credit cards have become a staple in most people’s lives, credit cards are not necessarily good because a credit card makes it too easy to buy something the holder can’t afford, higher spending limits are too easy to obtain, and late payments can ruin a card holder’s credit rating.

How is this possible? Credit card companies are trying harder to get the consumers business. Check the mailbox lately? It’s not uncommon to receive 4-6 or more credit card applications in the mail each day. Each one is promising something better; a better interest rate, 0% on balance transfers, no yearly fees, airline miles, no payments for a year-the list goes on. Even local Sunday paper has Discover Card applications. The credit card companies are also targeting a younger audience; college and high school students.

The credit card companies are making it easier and more attractive for people to sign up for their services. In the United States the average cardholder has seven credit cards and two debit cards, according to www.cardtrak.com,[1] which provides consumer information about credit cards. Given that scenario it is easy to see how people can get tempted and spend beyond their means. Add to that the option to “Buy now, pay later” or “No interest for one year” and the spending increases. Take a look in the check-out line next time and see how many people pay for their items with a credit card. One of the biggest and scariest problems is that people forget that a credit card is not supplemental income. They are going to have to pay for their purchases in one way or another. The more cards a person carries the more opportunities to spend and rack up their debt. Thus the cycle begins.

Many people charge a credit card to its limit, and then apply and get approval for another card, use that cards limit and so on. Keeping up with the payments is difficult and many make just the minimum payment to keep the card open. Or they can call their credit card companies and request a higher limit. Credit card companies are more than happy to increase the limit, especially if they have made their payments on time. Consider someone who wants to increase their card by $500-$1000; multiply that by 2-3-4 cards and the spending limit is endless. Think of the high school or college just starting out in life having access to this “money”. It is easy to see how a person can get sucked into the cycle. Part of this may be because many consumers think that the more cards they have, the better their credit rating will be. That is not necessarily true.

While it is true that having a credit card or cards can reflect a person’s credit worthiness, lenders look at other factors as well such as job history (stability), on-time payment ratios, how low their debt ratio is, how many cards have been closed and at what rate. A big factor is if a person pays on time, how much they pay, and if they are current on all their cards. If a person makes a late payment, the credit card companies typically increase the interest rate; charge a fee which can often make the card holder over their limit because they charged their card to the max. This will will add another fee for going over the limit. Once a person has a history of late payments, their credit rating will drop and lenders will not be as willing to issue credit or loans to them. This continues the cycle because there is always someone willing to issue credit or a loan if the person is willing to pay the exorbitant interest rates. Think of the housing crisis and the mortgage companies going under. They leant money to people who either did not have a credit rating, or had a questionable rating. It is hard to break the cycle and it will take years for the person to pay back their loans and credit cards to bring their credit rating back up. Some may not be able to pay and will default.

It’s a catch-22. Cash is out and credit cards are in. To have a credit rating the consumer must have a credit card. A young couple who paid cash for everything found that out after trying to rent a car and hotel room. They were told they had to have a credit card. They applied and were approved for an American Express card. Proudly they used the card and religiously paid it off every month. If they couldn’t afford something, they didn’t buy it. Later they wanted to buy furniture from a department store that did not accept American Express. They applied for the stores card, but were turned down because American Express was not considered a “credit card” and was not reflected on their credit rating because they paid it off every month. The cycle begins.

Credit cards if used carefully and paid properly, can enhance a person’s life and make it easier when times are tough. Without a credit card hotels and cars cannot be booked, airline tickets cannot be reserved, and most importantly a credit rating cannot be established. Just remember what is most important: Credit cards are not supplemental income; use them judiciously.
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