All one has to do is watch 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, Fannie Mae and Freddie Mac, two solid rocks of the financial world had to be rescued, and banks large and small are folding. Congress debated and did not pass a possible $700 billion dollar bailout plan. The stock market has gone up and down plummeting the most in it’s history by over 700 points, home foreclosures are happening at an alarming rate, unemployment is high, and oil prices are skyrocketing again. Amidst all of this, is the average consumer trying to figure out how to survive. Worrying how will they pay for groceries, for gas in their cars, hold onto their homes, whether they will have a job, and wondering how they can keep their kids in college. They want to have a good quality of life for their family. Becoming harder and harder to survive on their expendable income, 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 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.
Credit card companies are trying harder to get consumer business. It’s not uncommon to receive 4 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, and the list goes on. Discover Card applications can be found in the local Sunday paper. Credit card companies are also targeting a younger audience, college and high school students, who are new to the responsibilities that come with having a credit card.
Credit card companies are making it easier and more attractive for people to sign up for their services. The average cardholder in the United States has seven credit cards and two debit cards. Given that scenario it is easy to see how people get tempted and spend beyond their means. Add the option to “Buy now, pay later”, or “No interest for one year”, and the spending increases. Watch in the checkout 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 debt. Thus the cycle begins.
Many people charge a credit card to its limit, and then apply and get approval for another card so that they can use that cards limit, and so on. Keeping up with payments is difficult, and many cardholders make only the minimum payment to keep their card open. Credit card companies often entice a cardholder by offering 0% interest on balance transfers. The cardholder will have an opportunity to transfer debt from their higher interest card, to one with 0% interest. Or they can call and request a higher limit. Credit card companies are more than happy to increase the limit, especially if the cardholder has made payments on time. Consider someone who wants to increase the limit on their card by $500-$1000, multiply that by multiple cards, and the spending limit is endless. Think of high school or college students just starting out in life having access to this “money”. It is easy to see how a person can get sucked into this cycle. On factor may be that many consumers believe the more cards they have, the better their credit rating will be, which is not necessarily true.
While it is true that having a credit card or multiple cards will reflect a person’s credit worthiness, lenders look at other factors as well. Job history (stability), on-time payment ratio, how low their debt ratio is, and how many cards and at what rate they have been closed. Big factors are if a person pays on time, whether they pay the minimum or more, and if they are current on all their cards. If a person makes a late payment, the credit card company typically increases the interest rate, charging a fee that can often make the cardholder over their limit, plus add another fee for going over their limit. Once someone has a history of late payments, their credit rating will drop, and their normal lenders may not be willing to issue credit or loans to them. If they are willing to pay exorbitant interest rates and fees, there is always someone willing to issue credit or a loan. The cycle continues. Why is there a housing crisis, and why mortgage companies going under? Because they leant money to people whom 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 someone to pay back their loans, and credit cards, and 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 this out after trying to rent a car and hotel room. Told they had to have a credit card, they applied and were approved for an American Express card. They proudly 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; American Express was not considered a “credit card” because they paid it off every month, which meant it was not reflected on their credit rating. Thus the cycle begins.
It is unfortunate that credit cards have become a necessary evil. A good portion of our countries current financial crisis can be associated with credit being issued to those considered high risk. Add the fact that more and more young adults, who don’t fully understand the risks of the credit game, are becoming a part of the cycle. Without a credit card, hotels and car rentals cannot be booked, airline tickets cannot be reserved, and most importantly a credit rating cannot be established. It is true that if used carefully and paid properly credit cards can make it easier when times are tough. What needs to be emphatically pointed out and remembered by a cardholder is this: Credit cards are NOT supplemental income, and must be paid somehow, so use them judiciously.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment