Wednesday, July 21, 2010

Credit Cards Can Be Evil

Normally, the U.S. Government's modus operandi is to take a good idea, shove it through the meat grinder that is known as politics, and out comes a terrible idea.  However, in the case of the changes that they mandated to the humble credit card statement, I think they got it right.  My favorite feature is the little box that shows you the effect of paying the minimum balance each month.  I think for a lot of people, this section is going to prove illuminating to say the least.

As an example, here are the statistics from one of my recent credit card bills:

Balance:  $802.49
Minimum Payment Due:  $15.00
Time to Pay Off Balance Making the Minimum Payment:  7 years
Total Amount Paid Making the Minimum Payment:  $1237.07

So basically if I only made the minimum payment, it would take me 7 years to pay off my credit card, and I'd end up paying 50% more than what I charged! 

What I hope will happen is that people wake up and realize that by not paying off their balances from month to month, they will realize how much it is costing them in real money.  It's crazy to be throwing money away like this. 

What is even crazier is that banks are able to borrow money at near zero interest rates, charge double digit interest to credit card holders (not to mention all of the other associated fees and penalties), and yet these same banks required a bailout from the taxpayers!  Anyone with half a brain can make money borrowing at zero interest and lending at 15% interest.  I guess the bankers only have a quarter of a brain (although that might be an insult to people who actually have a quarter of a brain!).

Now you might ask why I use a credit card if they are so evil.  As with all things of power, they can be harnessed for good as well as evil.  The credit cards that I use have rewards that come with using them.  I always get back 2% or more on all my charges.

Here is my simple formula for using credit cards:

1. Get a card with no annual fee.
2. Keep track of your spending so that you don't spend more than your budget allows.
3. Pay off your entire balance every month.

If you don't follow these rules religiously, the amount you will end up paying in fees and interest will kill off any profit that you are making from rewards.  If you cannot follow these rules, you are better off paying cash.

In a future post, I'll lay out my whole credit card rewards strategy.  It may not work for everybody, but it works for me and my spending patterns.

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