Professional hustlers and credit-card companies live by a similar credo: “It’s immoral to let a sucker keep his money.”* The profitability, and therefore the popularity, of preying on people’s weaknesses and misfortunes is timeless — computers and campaign contributions have made it a near-science.
Executives at Big Tobacco must admire the political might of their credit-card peers and a “captain of industry” like Tony Soprano might childishly wonder why his loan-sharking operations are considered despicable while purveyors of plastic are permitted to charge interest rates that can exceed 50 percent with the blessing of Congress.
Credit cards are a fact of life, but the debts that follow them don’t have to be a part of yours. The low-interest “teaser” rates offered by credit-card companies should be treated more as a caution than an inducement, much like the free packs of cigarettes handed out on the street.
No credit card will charge you interest if you pay within 30 days but the debt barons are counting on you to only pay a fraction of what you owe, and pay interest on the rest. A charge card such as the American Express card, by contrast, won’t allow you to extend your payments — embrace this “tough love” approach, if you can.
In the real world, however, almost all of us have credit-card debt. Accordingly, your first priority should be to get rid of it as soon as practical: paying off this debt is usually the best investment you can make, far better over time than stocks or bonds or real estate. Until the debt is paid off, the trick is to recognize the minefields:
• If you miss a monthly payment, there will be a fee, usually $29-$35; If your balance exceeds the credit limit, even if this is due to an incorrect charge to your account, you will be charged a fee.
• If you miss two payments in a six-month period, the low introductory interest rate which you were offered will skyrocket, sometimes to more than 20 percent.
• Even if you make all the required payments, your introductory rate is likely to be temporary and will automatically rise at some point, often after several months. The new rate will probably exceed 10 percent a year and might approach 20 percent;
• Even if your rate is fixed, but your credit rating slips, the credit-card company can try to stick you with a higher rate. You will receive a detailed document which, among the fine print, mentions new (and more expensive!) terms — it will be your responsibility to write them and tell them you don’t want the new deal. If you don’t, the interest rate you pay will rise even though you thought your rate was fixed for the life of the loans. (And even if you do write them, they might raise your rate anyway, leaving it to you to catch their mistake and argue it out with them.)
• Oh, and you might not even receive an option to reject the new terms — the tireless computers of your credit-card company may just go ahead and change the rate unilaterally (“open the pod-bay doors, Hal”). As long as the news is added to your statement, however discretely, they’re off the hook and you’re on it.
• Sometimes, in the month when your rate rises, the new, higher rate will be applied retroactively — some or most of the previous month’s balance will be charged the more expensive rate.
• You might be charged an annual fee just for having the credit card — this fee might be hidden in small print in the application and not specified in the agreement you receive with your card.
• You might even be charged a fee if you pay off what you owe and close the account!
Credit cards are big business, and big business knows how to play under the Big Tent. In the last election cycle (1999-2000), the commercial banking, miscellaneous finance and finance/credit industries donated almost $19 million to Congress, with 58 percent going to Republicans and 42 percent to Democrats (Source: Center for Responsive Politics).
In my home state of New York, both Senators (both liberal Democrats, in fact) voted in favor of the bankruptcy reform bill supported by the credit-card companies. Oddly enough, as first lady, Hillary Clinton had vehemently opposed bankruptcy-reform legislation — according to an article by David Broder in May 1999, when bankruptcy legislation passed the House, “…the first lady sounded the alarm inside the White House and a veto threat from the president stopped it cold.”
My other Senator, Chuck Schumer, was the single largest senatorial recipient of contributions from the commercial banks in the 2000 election cycle — and he wasn’t even running for office! As a liberal Democrat, his appeal to this industry might seem unusual, but true love doesn’t discriminate, certainly not against members of the Senate Banking Committee.
Capitalist democracy is fairly efficient, but it’s not particularly fair — and it doesn’t need you to finance it on the fringes. Steer clear of credit-card debts if you can, pay them off when you can and keep your eyes open when you can’t.
(*quote at top attributed to Canada Bill Jones in the movie, “Rounders”.)