I believe that this 'system' was built to keep us in debt and it patiently but intuitively waits to capitalise on either our insane vanity for things, our belief that the system will play fair or those personal plights that will land us in some financial predicament. Take a look at the following insights:
There was a time when the only bill I worried about was my rent and monthly food expense. Everything else was pretty much my disposable income. This meant that I could travel multiple times a year, save a lot, partake in the occasional healthy dose of retail therapy and still not worry about going into my overdraft. I was living 'la vida loca'. One day I was offered to take out a store credit card after spending a whopping £500. The store attendant was giddy with excitement and I was flattered. The relevant checks were run by the credit card company which ultimately declined my application on grounds that were never really made clear to me. I was naturally shocked since I've never been declared bankrupt or defaulted on any loans (I stayed clear of these) and have always paid for every single item I've bought, up-front and in full. Then someone told me – the fact that I didn't have a credit history was just as bad as having a history of missed payments or bad debts because the companies were unable to determine how reliable I would be with their money. That's when I considered 'But why do I need a credit card to prove that I'm trustworthy with money?' ' Why do I need to acquire a debt just to prove that I can pay my way out of it?' As a result, I shrugged off the notion of getting a credit card, saying it was all a well-devised trap. However, I thought seriously about it again, late last year, once I discovered that you would need some form of credit history to even be considered for a mortgage. Now here are some things you should know about credit cards:
It's About Making Profit
The companies providing credit cards don't do it out of the goodness of their hearts. Like everything else, the ultimate goal is to make money. Credit card companies are counting on the fact that you will never have enough disposable income to cover all your expenses or that you have a tendency to live above your means or that you will some day run into financial difficulty. That way, you will be liable to pay the interest on the amount borrowed which is how they make their profit. Even from the very popular website – Money Saving Expert – the following was acknowledged:
Credit card companies may reject you for always repaying cards in full.
You might feel like a dream punter, but for credit card companies you're a nightmare. If they spot this trend, you could be rejected. The most profitable customers are those perpetually in debt, never defaulting, but always meeting the minimum repayment.
Pay off in full every month, don't use your cards enough, or always shift debt to 0% cards, and if they can spot you (it isn't always that easy), a few may reject you.
Furthermore, there are several ways that credit card companies lure you into the trap of overspending. It usually provides you with a credit limit that is often greater than your actual debit account balance and some come loaded with certain incentives which can only be accessed through more spending. However, most importantly, have you ever noticed how the minimum payment is always automatically set at an amount that usually doesn't allow you to pay off the balance owing within the interest free period granted? I have seen someone put £2000 worth of expenditure on their card, be automatically assigned the minimum payment of £45 each month while being granted an interest free period of up to two years. Two years seem like a long time and £45 is a drop in the bucket. However, with £45 per month, it will take more than 3 years to pay off this debt. This means, after two years, you will be paying the remainder of this debt plus the interest (and that doesn't include any other additional expenditure on the card since then). As a result the credit card companies capitalise on our complacency and ignorance and reap significant rewards in the process (http://www.investinganswers.com/personal-finance/debt-bankruptcy/ugly-truth-about-credit-card-debt-4039).
Note also how credit card companies have taken an active interest in students. When I did an online search on student credit cards, there were endless pages of options to choose from. Now on the surface, it would seem decent that these companies are extending credit to students given the fact that they are most likely to run out of funds before the semester is through. Therefore, a little credit to keep them afloat is only fair, right? However, the more financially astute among us know that students through their naive, carefree and generally irresponsible nature represent the perfect market for profit generation since they are more likely to just make minimum payments and rack up ongoing, high interests. This leads me to my next point….
Look out for the second part of this discussion. Share your views, leave some feedback and don't be afraid to share!