My Credit Card Company says I'm a Deadbeat

http://blog.debteye.com/debt-articles/im-such-a-deadbeat/

by kyu • 15 years ago

23 8 15 years ago

blog.debteye.com

melvinram• 15 years ago

For those not able to go to the site, here is the Google cache version:

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There are over 600 million credit cards in circulation that accounts for 1.5 Trillion dollars in consumer spending. An estimated 115 million card holders carry a balance on their credit cards every month, also known as “the revolvers”. These cardholders are the “sweet spot” for the banking industry that generate over $30 billion dollars a year in interest and fees. - Source

If you’re like me and pay off your credit cards every month, we are known as the “deadbeats” to the credit card companies. Deadbeats are consumers who avoid interest and fees by paying off their balances in full every month, rather than paying the minimum payment and carrying a balance. Why it Pays to be a Deadbeat

Credit card companies can automatically increase your interest rate if they have any reason to believe that the risk of being repaid by the customer has increased. This means that if you’re accumulating too much debt on your credit card or if you fell behind on any other obligations such as a mortgage or a car, this is enough reason for them to increase your rate. This practice is called the “universal default”.

Let’s say for example you have a Chase credit card at a 6.9% interest rate and a Citi credit card at 11%. It was the holiday season and you went out to buy gifts for friends and family. You charged all the gifts on your Citi credit card and went near the high credit limit that was available. As a financially responsible cardholder, you promptly paid off the balance in full the next month. A few days later, you receive a letter in the mail from Chase stating that your interest rate is being increased from 6.9% to 19.9%. It doesn’t make sense does it? Banks are allowed to increase your interest rate at any hint that you may be a high risk customer.

Usury laws were designed to help protect consumers from lenders who charge high interest rates. However, major credit card issuers are based in states without usury laws. Let’s take the example from above. If you have a Citibank credit card, take a look at where they’re located. South Dakota. If you have a Chase credit card, you’ll notice that they’re located in Delaware. So what do these two states have in common? These two states have no caps on the interest rate they can charge consumers! Why Creditors Love “Revolvers”

Besides the obvious that “revolvers” pay only the minimum payment and generate huge profits for credit card companies, creditors understand that it’s difficult for someone to change their spending habit. A consumer who recently filed for bankruptcy is a prime target.

“Nearly all debtors stated that they had received offers for credit in the first months following their bankruptcy” -Source

Frequency of Credit Offers Per Month in First Year after Bankruptcy – Source

Average 14.56 Median 10 Standard Deviation 29.35 Respondents 339

So why are families fresh out of bankruptcy such an ideal target? It’s hard to imagine someone to dramatically increase their income in the first few years out of bankruptcy. Just because someone filed for bankruptcy doesn’t necessarily mean that they’re more financially responsible. People in financial distress are more likely to carry balances, exceed their credit limit, and use cash advances (which carry higher interest rates). So what now? New bankruptcy laws prohibit consumers filing for bankruptcy within 8 years; this means 8 years of minimum payments to the creditors! The banks have just hit their “Sweet Spot!”

How to go from a “Revolver” to a “Deadbeat”

By now, who wouldn’t want to be a “deadbeat”? I can write an entire article on how to save money and pay off your debts. Off the top of my head, the single biggest advice I can give you is to live within your means and start a budget. I know it sounds lame, but I challenge you to create a monthly budget and stick with it for at least 3 months! Anyone who is overwhelmed with debt and on the verge of default, there are realistically only a few options: credit counseling, debt settlement, and bankruptcy (if you haven’t already filed within 8 years). You can go to Debteye to get a free debt analysis if you feel you’ve dug a hole too deep.

I’ll end it on this note: Congratulations to all the deadbeats out there!

corin_• 15 years ago

After pointing out that people who pay off their entire balance each month (or don't use credit at all) avoid interest and fees, I don't see why he then had to go on and on about "Why it Pays to be a Deadbeat". Surely it's pretty obvious, even without all the other nonsense tricks, even if they were lovely people who would never change your interest rate, etc etc.... it would still obviously be better not to be paying any interest at all.

jacobr• 15 years ago

Could someone explain to a non-US resident why basically everything seems to be running on credit in the US?

You basically have money on a bank account (hopefully), but still lend with interest to consume?

The only credit card I own is from my employer for expenses, everything else is on debit. I only spend money I have. Quite a few people in Sweden, where I live, have some credit on their debit cards, but I think most people only use the credit for emergencies.

the_gws• 15 years ago

Half cheek in tongue answer: The difference is that in the US people believe that they will be making more and more every year while in Sweden you don't. So they think they will own tomorrow the money to pay back what they spend today.

Are they right? Well, from 1970 to 2010 US economy has grown at an average of 2,9% per year, while Sweden by 2,1% (1). This is a huge difference, almost 50% more. So yes, they are both right :)

(1) Figures are GDP growth at market prices, source: OECD

sbalea• 15 years ago

In the US it makes sense to use a credit card for everything you can. Federal laws grant you a lot of protections from fraud and bad transactions when using a credit card. Plus many cards come with side benefits such as cash back, airline miles, extended warranties, travel accident insurance, etc etc. The trick is to pay off your balance every month in order to not start accruing interest. Unfortunately, many people don't do that and end up in financial distress

bryanlarsen• 15 years ago

There's a big flaw in the article though. Credit card companies get 2-3% of each transaction, whether you're a "deadbeat" or a "revolver". So while they may prefer "revolvers", they're also pretty happy to keep "deadbeat"'s around.

My wife & I together run about $3K a month through our credit card. We get 1% cash back, so that means the bank is keeping 1-3% or $30-$90 every month. If we were paying that on our bank account we'd be screaming about it and looking for a new bank account. Instead, we pay it indirectly through higher prices and don't notice.

gte910h• 15 years ago

Lots of people contend people who pay through means other than credit cards actually pay it through higher prices, where you get part of it back.

infinite8s• 15 years ago

This is why I think "cash-back" cards are basically in an arms-race with alternative forms of payment. The cash you get back ultimately comes from higher transaction fees, which translates to higher prices, and so people who don't use cash-back cards end up getting charged higher. The only rational thing to do is use cash back cards for all your purchases, which in the large scale makes just escalates the process.

My Credit Card Company says I'm a Deadbeat

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