Cash or Credit?
Everyday, millions of Americans reach for that familiar piece of plastic in their wallets. Approximately 78% of all U.S. households have a credit card account, and there are over 641 million credit cards. It is clear that credit carries a central role in most Americans lives. However, what is less well-known is the rise and prevalence of debt.
About 44% of American families carry a balance on their credit card. This means that almost half of our country is in debt to the credit card industry. If there is any place to focus our efforts on becoming debt-free, it’s to break our addiction to plastic. In 2007, the average credit card debt was $7,300, reaching a grand total of $963 billion in January 2009. Let me repeat that for effect: there is $963,000,000,000 of credit card debt in this country, and delinquency rates continue to rise.
How does this affect us? Well, as we get set to become the new American consumers, it is clear that we need to be informed and careful with our purchase decisions. However, we rarely think about informing ourselves on how we make those decisions. Everyday, we are presented with brand-new opportunities for amazing new products. Unfortunately, we cannot always afford those products. Microloans are not a novel concept. Lending to people with high-default risk is not a recent problem, either. Credit card companies have been swimming in profits from those exact tenets for years.
In fact, the industry nightmare is consumers who pay their bills on time. Card companies derive their profits by seeking out customers that would normally be an outlandish proposition for most lending institutions. Although, the penalty fee appears small on a monthly basis, it annualizes (on average) to over 20%. For those of you who have not yet taken Intro to Finance yet, this means that the average $7,300 of debt would take you around eight years to pay off, at the minimum monthly requirement.
Besides debt alone, however, there are a few important facts to keep in mind about credit cards in general. First, even if you pay your credit card bill on time, the company can raise your interest rate if you miss a payment elsewhere. Second, there is currently no federal limit to how much a credit card company can charge you in penalty fees. Furthermore, penalty fees can be raised for any reason under the sun, as long as the company gives you 15 days notice. There is also no legal limit on how much a company can charge in interest fees. Just a few things to keep these things in mind before charging that new Porsche to your credit card.
Jay Gupta
Business News