Wednesday, January 25, 2012

Interest Rates

The prime interest rate, or prime rate, is the interest rate for debt that has a high potential for payback and is low risk to the lender. Based on your credit history and employment, a lender or credit card institution will decide where you fall into the interest rate hierarchy. Banks, credit card companies, and lenders will demand a higher interest rate if your credit history indicates you as a "subprime" borrower with higher risk, simple enough.

These rates and practices are an important part of the vicious cycle that many credit card victims fall into. As debtors get stretched thinner, many are tempted to take out more credit cards and pay off bills with other credit cards, etc. This creates a magnification of the debt, essentially transferring payments to higher and higher interest rates as the individual's credit rating deteriorates. Scrambling to take out another credit card while already struggling creates an impending disaster as the terms become more restricting. People in this cycle are often hit with fees (addressed by CARD Act) and it is important to be aware that interest is not the only thing you need to worry about.

An additional layer of danger is added by adjustable interest rates. These variable interest rates will surge when payments are missed, effectively locking a credit card customer into debt. These type of rates were addressed by the CARD Act, and have been restricted since they were so destructive.

It is critical to be wary of this debt cycle and the dangers of deferring payments for perceived convenience. Understanding the true consequences of falling into this trap will hopefully serve as a strong deterrent from irresponsible spending. 

Friday, January 20, 2012

Retailers and Businesses

Companies that sell on credit understand that they will not receive every payment in full. Bad debts are estimated during the accounting term and are a part of the reality of credit cards for businesses. However, a retailer is not going to waste their resources on chasing down every individual person who is in debt and hammer them to recover some of the debt. They will do this to an extent, but after some time, it is far easier to hand pass the debt on. They can just as easily sell the payments that they are owed. Credit collection agencies are the notorious companies that harass debtors into payments, bombarding them with mailings and phone calls. By selling these debts at a percentage of what can be recovered and paying a premium, after accumulating what they can, retailers and businesses no longer need to worry about the credit.

While I do believe that debtors should be held to some degree of responsibility for their actions, these agencies take it to another level. The are no standards and no exceptions (

This is the next step in understanding how the credit card system operates. If the retailers were suffering losses and hemorrhaging money, credit card restrictions would be much tighter and strict. However, since an entire system of companies exists to purchase and remove this debt from the retailers, the retailers are no longer the safety valve on who can have a credit card. As far as they are concerned, if you have a valid credit card, you have potential. The debt collectors are efficient enough to turn a substantial profit on the bad debts purchased from the retailers, and the amount paid to the retailers is profitable enough for them to not care who is making purchases with credit cards. All the while, interest is piling up.

Apply this to yourself. You will be sold things you can't afford. If you can pay, great. If you can't, there is an entire finance system developed to squeeze every possible cent out of you while lumping on high interest and fees. Either way, they win. With this system in place, why have tight restrictions on who can have credit cards? They don't have to, which is why they would love to give you one.

Minumum Payments

Credit card bills will offer a minimum monthly payment on the bill. The trap that many people fall into is not realizing that repeated use of the minimum is designed to create an elongated, interest filled payment plan. While new legislation like the CARD Act ( requires that credit card bills show the payment length and amount of interest that will be paid by using these payments, many credit card users do not understand the implications. The interest payments are astronomical. Compare what the minimum payment total will come out to based on what you originally purchased. Then realize that you are still going to need to purchase things, and likely add to the balance due. Don't just think about how much of your wage/salary will go towards paying down that balance for the things you purchased, think about of how much of your hard earned money is being thrown away at interest payments because you purchased when you shouldn't have. If you had just waited until payday, saved for a month, etc., you may have been able to avoid the accumulation of debt.

While some expenses must be placed on credit since a payment must be made (i.e. food or essentials) regardless of convenience, I recommend taking a close look at how they became necessitated by credit payments. While many people cannot afford these things when they need them and are compelled to buy them on credit because of poor wages, think about yourself specifically. If I hadn't purchased XYZ or spent XYZ at the bar, would I be putting my food on credit and carrying a balance?

Credit cards offer a false sense of security. They place the reality of purchases out of sight and out of mind. Minimum payments lull you into a false state of being afloat, while in reality you are in way over your head. The fact of the matter is that there is an elaborate financial system behind the scenes that serves as the backbone to these payment policies.

This is a quick introduction to my intentions with this blog. I hope to show you how the system operates behind the scenes to the point where no one cares if you are just making minimum payments even if the purchase was substantial. How are they making money if I haven't paid for my purchases? Easily. By understanding the framework of the system, you can better understand your interactions and decisions when dealing with credit beyond that of how much money is due when, and understand when you are being gamed.