Credit Cards

[cwericb]

I received my Visa Infinite statement today.

 

This month I owe $6,295.96 and I always pay the full balance.

 

My minimum payment is $132.00 per month.

 

In the fine print (recently legislated in Canada) it says: "If you only make the minimum payment every month it will take approximately 62 years to pay the entire balance shown on this statement"

 

That is: $132 x 12 months x 62 years = $98,208.00 to pay the $6,295 balance.

 

BUT $132 x 48 months = $6,336

 

So it takes less than 4 years to pay the debt

AND

58 years to pay the INTEREST.

 

And this is at a rate of 20%.

 

Now here is the scarey part. I have worked in various areas of the credit industry for over forty years and many times I have had couples sit in front of me and proudly announce that they are making all their minimum payments and still have some money left over to take on some new debt.

 

This is just an example of why I have always felt that a short course on credit should be mandatory before anyone graduates from junior high school.

 

Of course, on the plus side of all this, I do appreciate the fact that Visa has so much faith in my longevity.

[stahleyp]

geez, man. that's about what I spend in a year! you're a balla!

[Alekbaylee]

I do appreciate the fact that Visa has so much faith in my longevity

LOL! That's true!

 

This is just an example of why I have always felt that a short course on credit should be mandatory before anyone graduates from junior high school.

Yeah, could be titled "how to avoid shark loan companies 101"  ;D

 

[Kraven]

Alexbaylee, you bring up an interesting point.  No offense, but why are the credit card companies loan shark companies?  I mean, no one forced anyone to charge things.  While the credit card companies could be clearer about their rates and so forth, at the very least everyone knows that when they charge something there will be interest that needs to be paid on that.  At a macro level, whether it's 10%, 15% or 20%, it's a lot of money.  So when the piper calls, why is the credit card company the bad guy? 

[Alekbaylee]

I mean, no one forced anyone to charge things

That's right. But 20% is damn high!

 

So maybe "How to avoid sky high loan companies 101" then...  It's more PC ;)

[cwericb]

"No offense, but why are the credit card companies loan shark companies?"

 

Perhaps because they take advantage of people who do not have the knowledge or skills to know what they are getting into? Perhaps because they had to be legislated to inform people that the minimum payments were unrealistic? Do you think that it is ethical to tell customers that it is okay to make a minimum payment that would take 60 or 70 years to pay off? Until recently they did not inform their customers of this fact. And this is just for starters.

 

Several years ago one of my sons did not pay his Bank Card bill of $500. It was eventually placed for collection. After about three years I paid it off for him. Within two months they issued him with a new card with a $5,000 limit.

 

I could go on.

 

"That's right. But 20% is damn high!"

 

There are others that are higher.

[Kraven]

If you believe that they take advantage of people who don't have knowledge or skills, and the implication is that they do this on purpose, then there isn't a lot to discuss.  At the end of the day we are all responsible for the choices we make.  I completely agree that things shouldn't be hidden and more disclosure is absolutely the right thing to do.  But let's be real, more disclosure won't matter a bit in many cases.  Should McDonald's not sell fast food?  Should cars be "fixed" to only drive the maximum speed limit?  Should bubble gum be sold since it can rot your teeth?  Look at all the people that smoke.  There are warnings up the wazoo and people still decide to kill themselves.  People are going to do what they are going to do.  Doesn't mean that they are being taken advantage of.

[cwericb]

"If you believe that they take advantage of people who don't have knowledge or skills, and the implication is that they do this on purpose, then there isn't a lot to discuss."

 

The point is that these companies have not provided the information that consumers need to make sound financial decisions thereby contributing to some consumers getting in over their heads in debt. When that becomes as widespread as it is today then it begins to effect our economy.  If you were aware that it would take 62 years to pay off $6,300 @ $132/mo than I would suggest that you would be among the minority. The problem I have is that this information was not provided until forced by legislation. There are a lot of people out there who think they are paying down debt by making minimum payments when, in fact, the pay down is infinitesimal.

 

I agree with your other examples, however we are not talking about quite the same thing. Eg, I am not for a moment suggesting that fast foods, bubble gum or bank cards be outlawed. Perhaps it is common knowledge that bubble gum will rot your teeth intricacies of credit card interest charges are not so simple. And yes, I am suggesting that banks intentionally withhold information that consumers can use make informed decisions because it is in their own interests, ie, the above example. I have come across many people who have been under the impression that "minimum payments" for bank cards are like a mortgage payment or car loan payments that have fixed amortization periods. They are not and there are people who do not understand this.

 

[Tim Eriksen]

Your math is wrong in terms of total cost.  It is not $132  x 12 months x 62 years.  The balance will continue to decline and so would your minimum payment requirement, which is typically 2 to 3% of the balance.  At $132 per month the balance would be paid off in about 95.5 months, or $12,610 of total cost.  If you made just the minimum payment forever it would end up around $30,000. 

 

 

[oec2000]

If you believe that they take advantage of people who don't have knowledge or skills, and the implication is that they do this on purpose, then there isn't a lot to discuss.  At the end of the day we are all responsible for the choices we make.  I completely agree that things shouldn't be hidden and more disclosure is absolutely the right thing to do.  But let's be real, more disclosure won't matter a bit in many cases.  Should McDonald's not sell fast food?  Should cars be "fixed" to only drive the maximum speed limit?  Should bubble gum be sold since it can rot your teeth?  Look at all the people that smoke.  There are warnings up the wazoo and people still decide to kill themselves.  People are going to do what they are going to do.  Doesn't mean that they are being taken advantage of.

 

Would you be opposed to credit card companies being forced to show (prominently) the amount of interest that a customer would pay if he just made minimum payments? This way, no one can accuse the banks of being evil.

 

I tend to agree with you that people should take responsibility for their actions and we get nowhere by namecalling banks. All businesses will maximise their margins if given the opportunity; banks are no different. People tend not make the same accusations of luxury goods companies like Hermes who make more obscene margins.

[Kraven]

"Would you be opposed to credit card companies being forced to show (prominently) the amount of interest that a customer would pay if he just made minimum payments? This way, no one can accuse the banks of being evil."

 

I think it would be great for them to do that.  Believe me, I am all in favor of more and better disclosure.  That's what I did in a past life.  My honest opinion though is that in this kind of case it doesn't matter.  I want to go back to an earlier point I made.  At 10,000 feet it doesn't matter whether the person is paying 10% or 30% interest.  Don't get me wrong.  I KNOW it matters.  My point is that for the average joe to read that their big dinner out will cost them not the $200 they spent but $500 or $1000 down the line, what does it matter?  Will it stop them from spending?  Everything is down the road.  Smoke now and in 50 years you may die of lung cancer.  Actually, no, not 50 years, but 45.9 years.  Does the person say, damn, 50 years was ok, but I'm not cool with 45.9 years.  Same here. 

 

I hope more and better disclosure does cause people to live within their means.  I fear it won't happen though.

[ubuy2wron]

I have an interesting credit card story to relate. many years ago when my son was 12 we went to the car show in our home town. A credit card co. was offering a free tee shirt with a cool picture of some hot car if you would sign up for the credit card my son wanted the shirt so what was the downside. I filled out the application my son got the t shirt and a few weeks later I received a card in the mail with an initial line of credit of 3000.00 which I promptly stuck in a drawer and forgot about it. Once every few months or so I would get a call from the card company call centre asking me if I wanted credit they were always offering me low introductory rates for fixed periods of time. I had a mortgage at the time which was at a floating rate and sometimes the rates they offered me were at rates below my mortgage rate. So I began to take them up on their offers and just pay down my mortgage then when my low introductory rate expired I would pay off my credit card. This went on for quite some time and they were constantly increasing my credit limits because I always paid on time.  I consequently sold my home and moved however I still had this credit card with no balance and a 32000 by now limit. I received an offer in the mail for 2.5% for the life of the loan. I called the card company and queried them yes thats there terms 2.5% for the life of the loan as long as I was current. I realized that with minimum payments it would take me 30 plus years to pay this off. So I wrote a check for my entire limit and paid down my mortgage and I know have a 30 year 2.5% mortgage on my home in effect. Of course the credit card co considers me to be a dead beat because I am always current if I am late my rate would immediately increase to 28% or some silly usurious rate. I took advantage of this over  3 years ago. The credit card co by the way was Capital one I believe.

[cwericb]

Tim - You are probably right but the 62 years is quoted directly from my Visa statement. For the record I’ll be 129 when I hobble in to make that final payment.

 

I think we all agree with the theory that we are all responsible for our own actions. But there are a lot of people who simply do not understand compound interest. While it is fine to say ‘Well that’s their problem”,  the simple truth is that it isn’t. When Joe Blow gets into financial problems it effects a lot of people and the end result is that we pay for his losses either through higher prices or interest rates. Printing payout times and interest totals would definitely be a wake up call for a lot of people. Sure people still smoke dispite the warnings, but only a fraction as many people smoke today as when those anti-smoking programs started. Same applies to junk food, people are much more aware today. We just need more disclosure in the credit card industry.

 

As far as the banks or credit card companies making money, I have no problem at all with that which is why I own shares in them.

 

And by the way.....

 

ubuy2wron : 1     Capital One : 0 

[FFHWatcher]

Not sure if it is relevant but I believe the banks that issue the credit cards (ie. Visa and Mastercard) are responsible for and take the credit risk, as well as collect the interest as well as take the losses when consumers don't pay.  The credit companies generate revenue via transaction fees they charge retailers that accept the cards.  Therefore, it is generally the banks that are the loan sharks charging the 20% interest rates, not the credit card companies.

[bookie71]

I believe that the 20% is a discounted rate, most of the cards I see charge in the area of 29+ percent.

[SharperDingaan]

 

There are 2 Cdn Banks that like to offer 6 month 'visa account balance transfers' at 0.99% or less, provided you make the minimum payments. With a little shuffling you can use the banks own cash to buy its shares, & earn a dividend well above that 0.99% 

 

The other bank likes to offer 1 air-mile for every $ of interest paid on a LOC (mortgage, margin, etc.) A little shuffling to borrow to buy the banks higher yielding pref share, & you've got +ve carry & a free retun flight to Europe every other year

 

And in both cases ..... the bank considers you an excellent customer  ;D

 

SD

 

 

[cwericb]

Bookie you are quite correct in that 29%+

 

Another thing that differs from most retail credit is that if you charged $2500 this month and pay only $2000 before the due date, than you will be charged interest on the $500 remaining. But with a credit card you may pay interest on all the charges that make up the full $2500 from the day you charged them until the end of the month of the charges. (unless policies have changed in the past few years)

 

I also find it surprising that a lot of people do not realize that most retailers are charged approximately 2-5% of every charge processed by a bank charge card. However, the real cost to the retailer is actually higher because the charge includes 15% or sales tax. The retailer must submit 100% of the sales tax to government even though they only receive 95-98% of that money from the bank. One place where this all gets very substantial is in the building supply industry where people run up six figure accounts and then demand to pay with their credit card. One swipe of the card can cost the retailer several thousand dollars.

[oec2000]

"Would you be opposed to credit card companies being forced to show (prominently) the amount of interest that a customer would pay if he just made minimum payments? This way, no one can accuse the banks of being evil."

 

I think it would be great for them to do that.  Believe me, I am all in favor of more and better disclosure.  That's what I did in a past life.  My honest opinion though is that in this kind of case it doesn't matter.  I want to go back to an earlier point I made.  At 10,000 feet it doesn't matter whether the person is paying 10% or 30% interest.  Don't get me wrong.  I KNOW it matters.  My point is that for the average joe to read that their big dinner out will cost them not the $200 they spent but $500 or $1000 down the line, what does it matter?  Will it stop them from spending?  Everything is down the road.  Smoke now and in 50 years you may die of lung cancer.  Actually, no, not 50 years, but 45.9 years.  Does the person say, damn, 50 years was ok, but I'm not cool with 45.9 years.  Same here. 

 

I hope more and better disclosure does cause people to live within their means.  I fear it won't happen though.

 

While I agree that there are some reckless people who will never heed warnings, there are also those who do change their behaviour when made to understand the risks. Consider smoking - wouldn't you agree that less people smoke now because they are more aware of the risks? Some segment of the population will benefit from credit warnings imo.

 

In fact, we should make mutual fund companies and financial advisers give warnings to the effect that studies show that most active managers underperform their benchmarks and that unless they (the mutual fund companies, etc) can provide proof of long term outperformance, clients should assume that they too, will underperform.

[Kraven]

"Would you be opposed to credit card companies being forced to show (prominently) the amount of interest that a customer would pay if he just made minimum payments? This way, no one can accuse the banks of being evil."

 

I think it would be great for them to do that.  Believe me, I am all in favor of more and better disclosure.  That's what I did in a past life.  My honest opinion though is that in this kind of case it doesn't matter.  I want to go back to an earlier point I made.  At 10,000 feet it doesn't matter whether the person is paying 10% or 30% interest.  Don't get me wrong.  I KNOW it matters.  My point is that for the average joe to read that their big dinner out will cost them not the $200 they spent but $500 or $1000 down the line, what does it matter?  Will it stop them from spending?  Everything is down the road.  Smoke now and in 50 years you may die of lung cancer.  Actually, no, not 50 years, but 45.9 years.  Does the person say, damn, 50 years was ok, but I'm not cool with 45.9 years.  Same here. 

 

I hope more and better disclosure does cause people to live within their means.  I fear it won't happen though.

 

While I agree that there are some reckless people who will never heed warnings, there are also those who do change their behaviour when made to understand the risks. Consider smoking - wouldn't you agree that less people smoke now because they are more aware of the risks? Some segment of the population will benefit from credit warnings imo.

 

In fact, we should make mutual fund companies and financial advisers give warnings to the effect that studies show that most active managers underperform their benchmarks and that unless they (the mutual fund companies, etc) can provide proof of long term outperformance, clients should assume that they too, will underperform.

 

 

I am in agreement.  As I mentioned before, I hope that more and better disclosure is done and that it causes people to live within their means.  I agree with a prior comment as well that when people default it isn't just their problem, that it puts costs on all of us.  But my original comment is that it doesn't make the credit card company a loan shark just because we all share in the pain.  I understand that point has been modified.

 

What can you say?  Americans at least love to spend.  After all that's how we are getting ourselves out of the financial crisis, by spending more.  It's a fantastic idea to fix a debt crisis by adding on more debt.  Other countries should enact their austerity plans, but so long as Americans can buy another IPad, stream movies on Netflix any time they want, buy crap on Amazon and have a single cup of Green Mountain coffee, all is good.

[vinod1]

I have an interesting credit card story to relate. many years ago when my son was 12 we went to the car show in our home town. A credit card co. was offering a free tee shirt with a cool picture of some hot car if you would sign up for the credit card my son wanted the shirt so what was the downside. I filled out the application my son got the t shirt and a few weeks later I received a card in the mail with an initial line of credit of 3000.00 which I promptly stuck in a drawer and forgot about it. Once every few months or so I would get a call from the card company call centre asking me if I wanted credit they were always offering me low introductory rates for fixed periods of time. I had a mortgage at the time which was at a floating rate and sometimes the rates they offered me were at rates below my mortgage rate. So I began to take them up on their offers and just pay down my mortgage then when my low introductory rate expired I would pay off my credit card. This went on for quite some time and they were constantly increasing my credit limits because I always paid on time.  I consequently sold my home and moved however I still had this credit card with no balance and a 32000 by now limit. I received an offer in the mail for 2.5% for the life of the loan. I called the card company and queried them yes thats there terms 2.5% for the life of the loan as long as I was current. I realized that with minimum payments it would take me 30 plus years to pay this off. So I wrote a check for my entire limit and paid down my mortgage and I know have a 30 year 2.5% mortgage on my home in effect. Of course the credit card co considers me to be a dead beat because I am always current if I am late my rate would immediately increase to 28% or some silly usurious rate. I took advantage of this over  3 years ago. The credit card co by the way was Capital one I believe.

 

Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you. This however is a good statistical bet for the company across the broader population. What proportion of the people would pay on time say 36 consecutive times (just in the first three years)? I would bet a decent chunk of people would end up paying high rates.

 

Vinod

[cwericb]

"I would bet a decent chunk of people would end up paying high rates. "

 

It's like the "6 months interest free" or "12 month interest free" gimmicks you see promoted by retailers. If you are a day late or a dollar short, you pay the full interest calculated from the day you purchased the goods, usually at 29%. So the poor slob who can't quite come up with his total payment on the final day now owes 15 or 30% more than he did the day before.

 

"Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you."

 

I use Aerogold Visa and acquire Aeroplan points with it and put almost everything through it. All regular purchases, my heating bill, car and house insurance, vehicle registrations and sales taxes on vehicles, etc, etc. I get all my bills on one statement and the card gets paid in full at the end of every month. I have flown with family from the East Coast to California, Arizona, Hawaii and multiple times over the years on the accumulated points. Most recently business/first class to Hawaii.

 

However Aeroplan recently announced that they are raising the points requirements by as much as 30% so I am in the process of re-thinking this card.

[JSArbitrage]

 

There are 2 Cdn Banks that like to offer 6 month 'visa account balance transfers' at 0.99% or less, provided you make the minimum payments. With a little shuffling you can use the banks own cash to buy its shares, & earn a dividend well above that 0.99% 

 

The other bank likes to offer 1 air-mile for every $ of interest paid on a LOC (mortgage, margin, etc.) A little shuffling to borrow to buy the banks higher yielding pref share, & you've got +ve carry & a free retun flight to Europe every other year

 

And in both cases ..... the bank considers you an excellent customer  ;D

 

SD

 

 

Ah, yes.  The games I have played.  Credit card companies are gifts that keep on giving if you are young and in need of capital.  In the US at least, credit card companies give the craziest offers.  I've used credit cards that give you free round trip airlines tickets to spend more than $X amount in 60 days.  So you simply buy dollar coins from the US Mint and then pay off the balance.  Or give it to your parents (who presumably have more expenses than you) and have them pay it off every month. Free tickets.

 

Or they give discounted gift certificates for reward points.  So basically you can buy major brand gift certificates for like 50% off with rewards and then put those gift certificates on craigslist/ebay. They usually go for about 90% of face.

 

There are 100 different ways to work the system and that doesn't even include 0-4% loans. Way too many to write about.

 

It's amazing and so fun.  It was a hobby of mine in my younger days.  But when you get older, the amounts are no longer worth the time. 

 

P.S. In my experience, Wells is the worst for these deals (they are tight with terms) and CitiCards is the best.  Heck, with citi cards, you can balance transfer a cash EFT into your bank account.  Basically a cash advance but falls under balance transfer terms (so you get 0-4% cash loans for 1-3 years.) 

 

 

 

[cwericb]

"There are 100 different ways to work the system"

 

At one time Visa sent me out 5 "Visa Cheques" that worked similar to cash advances. However as opposed to cash advances, they allowed one Aeroplan (Air Canada) point for each dollar amount of the cheques. I had just sold a property and was in the process of transferring $35,000. However, I first wrote out 5 - $7,000 cheques to my wife and collected 35,000 points. To put this in perspective 25,000 points will get a return ticket anywhere in North America. And that was not the first time I had done that with similar cheque offers, I haven't received any of those offers since.

[ubuy2wron]

"I would bet a decent chunk of people would end up paying high rates. "

 

It's like the "6 months interest free" or "12 month interest free" gimmicks you see promoted by retailers. If you are a day late or a dollar short, you pay the full interest calculated from the day you purchased the goods, usually at 29%. So the poor slob who can't quite come up with his total payment on the final day now owes 15 or 30% more than he did the day before.

 

"Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you."

 

I use Aerogold Visa and acquire Aeroplan points with it and put almost everything through it. All regular purchases, my heating bill, car and house insurance, vehicle registrations and sales taxes on vehicles, etc, etc. I get all my bills on one statement and the card gets paid in full at the end of every month. I have flown with family from the East Coast to California, Arizona, Hawaii and multiple times over the years on the accumulated points. Most recently business/first class to Hawaii.

 

However Aeroplan recently announced that they are raising the points requirements by as much as 30% so I am in the process of re-thinking this card.

Aeroplan has a great biz. It is really like the savings stamp co that Warren bought every one hates Aeroplan and Air Canada but they collect the points anyway they can dilute the currency at any time and 30% of points are never cashed and expire. I currently do not own any aeroplan but I have in the past and will likely again in the future.

[Guest VAL9000]

Credit card companies business model does not work on the subset of people who are very knowledgeable in finance and are disciplined like you. This however is a good statistical bet for the company across the broader population. What proportion of the people would pay on time say 36 consecutive times (just in the first three years)? I would bet a decent chunk of people would end up paying high rates.

This isn't quite true; it depends on the facet of the credit card business that you looking at.  Visa and Mastercard make their revenues based on transactions, not based on balances. 

 

It's primarily banks and retail locations (think The Home Depot Card or The Macy's Card) that make their big bucks off of those who don't have a strong understanding of compound interest.  Pure-play credit card businesses such as Capital One and American Express are also directly exposed to this segment of borrowers.

 

Regardless, all players take a cut of transactions executed.  So even if their customers get wise (as they should), they will still make very nice revenues on the transactions side.  Not as amazing as the retail loans business, but still nice.