By The Money Hawk
This is a guest post by Kevin Geary at The Money Hawk. You can subscribe free to The Money Hawk via RSS or Email.
No matter how many late night infomercials or Kiyosaki books you read, leveraging debt to build wealth is not a winning strategy. It is for some people, but not for you. For most of us, it’s stupid. And that’s not just my opinion; the millions of people in this country who are deeply in debt, filing for bankruptcy, working through foreclosure, closing businesses, and struggling to feed their families can attest to it. And thanks to these millions of people, it’s about to get more ridiculous.
Americans have approximately $968 billion in outstanding credit card debt, and now, with the economy slumping, they are struggling to pay their bills. That’s bad news for companies that issue credit cards. The number of accounts that are 30 days or more past due is higher than it has been since the first quarter of 2002. At many banks that issue credit cards, the charge-off rate — the balances that a credit card company writes off as uncollectible — is near a three-year high. American Express is feeling the pinch of the weak economy; its second-quarter profit fell 37% compared with the same period last year.
There you have it. Now they’re angry and they’re fighting back. Do you know what that’s going to look like?
Higher interest rates
Did you know that credit card companies can hike your interest rate at any time for any reason? It’s called “Universal Default“. And Universal Default doesn’t actually have to be a default at another institution. Credit card companies are pushing the envelope so far that they are starting to scan retail chains to figure out where the highest risk people shop and raising the rates of those who shop there!
On Tuesday, msnbc.com reported on a new policy at American Express that allows the firm to penalize consumers based on where they shop and which bank holds their mortgage.
Does that make any sense to you? I didn’t think so. But you still have a card in your wallet so we’ll continue…
Lowering your limits
If you have a $3000 limit, how would you like to see it fall to $1500? Credit Card companies know they can limit their exposure to risk by limiting your exposure to plasma TVs.
Experts say consumers also should expect their credit limits to be lowered for what might seem like arbitrary reasons and their balance transfer fees to climb.
Yes, you signed an agreement detailing a specific limit and an interest rate, but none of that matters because credit card companies have the ability to do pretty much whatever they want, aside from closing your account and demanding full payment. It’s the only industry that gets away with changing the terms of an agreement without the consent of the other party.
Because of card agreements, credit card issuers cannot simply close accounts and demand full payment. But they can do the next best thing: Raise the cardholder’s interest rate. They can also lower credit limits repeatedly to prevent a consumer from making any new purchases. That’s effectively the same thing as closing the account.
And you still want to be a part of this scam?
But you can’t blame them
You can’t completely blame the credit card companies for this. If you boil it down, they exist to make a profit just like every other company. To that effect, they work to maximize their profit. This current “fight back” behavior is a side-effect of poor personal money management on the part of the consumer.
In the first quarter of 2008, banks charged off 4.7 percent of credit card loans, a 33 percent increase from the first quarter of 2006, according to the Center for American Progress. That timing is no coincidence; that’s when easy credit for home equity loans dried up. In 2009, according to consulting firm Innovest StrategicValue Advisors, banks will charge off nearly $96 billion in credit card debt, double the projected 2008 losses.
Yes, the credit card companies were stupid not to limit their exposure sooner and stupid to issue credit cards to dead people, dogs, and the irrational masses, but the consumer is at the heart of the problem. If the average consumer was responsible, you wouldn’t see this happening. So stop using already. Put the needles down. You don’t have to live addicted to debt anymore. In fact, you don’t even have to touch the cards! There’s no reason to. That’s old school. The new school of debt free living is the road to massive wealth. Stop subjecting yourself to further abuse from these companies.
But what about emergencies?
What’s the difference between paying cash for emergencies and using a credit card? Yes, you have to build up an emergency fund with plenty of cash in it, but that’s what personal responsibility is all about. If you use credit cards for emergencies, you’re going to clean up one emergency while creating another one. That’s stupid.
But what about my points/miles/free stuff?
Nobody builds wealth with airline miles. You’ll win in the long run if you stay away from the sharks. Points, miles, and giveaways are marketing tools to get you to buy more stuff with money you don’t have.
But what about…
STOP. Close your eyes and imagine not owing anyone money, not having to make any payments. What would you have if you didn’t have a car payment, credit cards, and personal loans? MONEY!
Do you realize how much you can save and invest when you don’t have payments? Do you realize that credit cards amount to nothing more than bondage to a greedy, corrupt company? Imagine again how it would feel to not have any payments…
There is no valid reason to use credit cards, especially in this hostile climate. It’s time to get out of debt, save an emergency fund, invest for your retirement, and build mountains of wealth. Stop being “that consumer” who is adding to the crisis and killing their own future.
If you choose bondage, you won’t get any sympathy from me.
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