Wealth Mgmnt

Watch Out For the Credit Card Trap

You may have noticed that the interest – and in some cases, the fees – on credit cards are increasing. 

That is in response to the Federal Reserve Bank increasing the credit rates.

In this environment, the credit card trap is easy to fall into but extremely hard to get out of.  There are two current trends that will put millions of Americans into the credit trap if they are not careful – inflation and increased interest rates.

The credit trap is when – after paying the bare essentials – you only have enough to pay the minimum monthly payment.  On the monthly statement, it should show how long it will take to pay off the balance if you pay only the minimum – and the amount of interest you will pay.  It will take an impossibly long time and with an extraordinary amount of interest paid.  And that is ONLY if you do not add any purchases to the card – or continue your spending on another card.  That should scare the hell out of you.

The problem we see today is that those rising inflationary costs may cause greater use of the credit cards – and the higher interest rates being charged by the credit card companies is likely to cause a person to see an increasing balance each month.  If that is happening, you are most assuredly heading into the credit trap.  If you are not already in it.

I know of what I speak.  Back in the days of easy credit and limited income, my wife and I fell into the credit card trap.  We were compensating for a period of low income by using more and more of our available credit.  Eventually, we could hardly pay the minimum due.

Year after year, we were carrying a large credit card debt — and it was not shrinking.  It is almost impossible to get out of the credit card trap unless you get a significant increase in income – and continue to restrict your spending.  Even then it takes a long time.    The other option is to sell off an asset if you have one.  We did.  It was our second home in Michigan.

It was a lesson learned.  

So, how does one avoid falling into the credit card trap?  Rely on a debit card for your routine purchases as much as possible. 

I currently operate with a debit card and a savings account.  I do have a credit card, but only use it if the debit account is a little short.

Secondly, I always pay off the full amount of any expenditures on the credit card each month.  I maintain a very low credit limit on my credit card — never max-ing it out even at that.  I also reject those frequent offers to increase my credit maximum.

Many companies will offer to give you a lower interest loan to pay off your credit cards – suggesting that you will save money on the interest.  That only works if you destroy the credit cards you pay off – and do not use other ones.  If you do not, it is very likely that you will be paying off the loan AND all the new purchases on your credit card.

Why is credit card interest so damn high?  One of the problems with the credit card is that the interest is extraordinarily high – very high.

Prior to the great inflation of the 1970s, credit card interest was fairly low – a bit higher than bank loan interest on mortgages.  When inflation rose to 14 … 15… 18 percent, the credit card rates rose to over 20 percent – as high as 28 percent.

Those rates violated usuary laws – but the laws had to be changed because of the high inflation rate.

When interest rates started dropping, however, the credit card rates did not follow the trend.

Think about it.  Up until the recent inflation, mortgage rates were as low as 3 percent.  The interest you received on you saving account was close to zero.  But even then, credit card interest was 20 percent or higher – depending on your credit rating.  Now that mortgage rates have doubled to 6 percent, the credit card companies are moving rates up into the mid-20 percentile.

In my lobbing days, I had made several attempts to have members of Congress address the high rates on credit cards.  I offered my own proposed legislation for consideration.  I sadly discovered that there was no interest in dealing with credit card interest rates – not by Democrats or Republicans … liberals or conservatives.

Even now, as credit cards are again increasing their rates, there is no protest from our political leaders.

So, there ‘tis.

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