The Dark side of Credit Cards

A look at the crippling effects of Credit Card Debts

Highly addictive , Highly destructive, and difficult to stop using. No, it’s not cocaine , it’s a piece of plastic called the CREDIT CARD.

If there is one thing that terrifies me , much like an encounter with a viscous bear in the jungle, it’s Credit Cards. The difference is I might survive the bear.

Credit cards can be useful, most of us have one, some of us have a few. But if not managed with extreme care, they are a ticking time bomb that can weigh you down tremendously in your quest for financial independence. But why are they so dangerous? This can be summed up in the quote below:

The credit card is one of the most profitable products in the banking industry with average margins of around 18%. This means that if you only pay the minimum payment on your credit card (which is usually 3% of the balance), the bank will charge you between between 16 and 24% in interest on the remaining amount.

If you miss a payment, you’ll get penalty charges and trigger the highest interest rate possible (~32%), then the interest is calculated including those penalty charges as well.

The product is setup in a way that makes it very difficult to climb out of the credit card debt hole once your in it. The objective is to keep you in an ever growing, never ending, constant cycle of soul consuming debt.

Illustrating this with numbers:

Lilly bought $10,000 worth of furniture on her credit card, and only pays the minimum payment that shows up on her statement, which is $300 in the first month.

If Lilly make no other transactions, and continues to only pay the minimum payment (3% ), she would require over 30 years to pay off her initial $10k credit card debt at a rate of 18%. In total , she would have paid $20k over the 30 years, on her $10k transaction. That’s $10k in interest.

Had she missed a few payments, she would have incurred penalty charges, and the interest would have been 24% after the first two payment, with the interest skyrocketing to 32% if she continues missing payments.

Continuing with the example, if Lilly makes no payments towards her initial $10k credit card transaction, after the first year, she would owe $15,720. After 2 years, this amount would be ~ $24k. Lilly would have to pay more than double ($14k more to be exact) for her furniture which she bought for just $10k two years ago.

Of course, the example just involved Lilly using here credit card once to buy furniture , but that’s not how the majority of the people use their credit cards. They use it, pay the the minimum payment , continue using it, and continue paying the minimum payment.

The dance ends when they have exhausted the entire credit card limit. Now they’re stuck with the minimum payment which would have ballooned to a sizeable amount depending on their credit card limit.

Unable to support the lifestyle that they are now accustomed to, here is where most people go and get themselves another credit card! They then repeat the cycle until they can no longer get anymore debt ; Now they can no longer support the minimum payments together with their ongoing living expenses. They start missing payments which further increases the outstanding balance and consequently increasing the minimum payments, eventually they can’t stop getting calls from collection agencies;

For the credit card debt victim that has reached this stage, the objective isn’t to pay off his debt, its to survive for one more month.

The loan sharks and payday loans come in at this point. The credit card victim scrambles for cash and takes any offers, even at ridiculous interest rates, from not so reputable individuals and companies.

For the credit card victim, this is an absolutely disastrous outcome. But for the bank or credit card company, this is exactly what they hope for and dream about.

A good customer for them is someone who is struggling to pay his credit card debt, whereas someone who pays their full credit card balance on time is a lousy customer.

As you can see , this product has the potential to inflict upon someone a lifetime of debt, stress, and anxiety. Instead of building wealth , it destroys it. It cripples, it prevents progress. It is the cocaine of the financial industry. Addictive and dangerous.

Most people know this, yet sometimes get lured in with marketing gimmicks:

"Sign up for our credit card and enjoy Zero Interest” Have you heard that one before?

With this card you’ll be able to spend away on your credit card without incurring interest for a certain period of time (often 6 months), then they’ll switch your zero rate with a much higher one.

“Buy now, pay later” The most destructive four words in the finance industry. With a credit card, you can just about buy anything on an instalment plan usually for little to no interest. TV’s , furniture, the latest phones, game consoles. While this sounds like a good deal, but get sucked into this habit of buying stuff on instalments and before you realize it , your income gets drained, your credit card debt becomes harder to track, and credit card debt inevitably balloons.

As a general rule with few exceptions, the only purchases that should be financed are your house, and your car.

For those that don’t use credit cards, Good on you, you have managed to stay away from one of life’s greatest financial traps.

But what if you are already in the viscous credit card debt cycle and can’t seem to pay it down. How do you get out?

How to get out of credit card debt:

Step 1) list down all your cards , their interest rates and the outstanding balances in google sheets or excel.

Step 2) Dave Ramsey’s snowball method is effective and simple:

“List your debts from smallest to largest regardless of interest rate.

• Make minimum payments on all your debts except the smallest.

• Pay as much as possible on your smallest debt.

• When the smallest debt is paid, roll that payment over to the next smallest

• Repeat until each debt is paid in full. ”

Alternatively, If you have access to personal loan, check how much you can borrow to pay down your card balances.

The sooner and quicker you can may off your credit card debt , the better.

If you do get a personal loan, make sure the entire amount goes towards paying off your credit card debt, not towards more spending.

With a personal loan, your monthly payments may be larger than what you were paying as the credit card minimum payment, so some sacrifices will need to be made in your lifestyle, but it would limit the interest you would otherwise need to pay, and within 4 to 5 years , you would hopefully be credit card debt free.

Whichever method you choose to get out of credit card debt, create a budget , formulate a plan, limit your spending, cut down on entertainment, eating out, sell stuff you don’t need. Use the savings and the proceeds to pay down the debt using the Dave Ramsey snowball method.

You’ll be glad you did it.

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How to use a credit card and benefit from it:

I thought about not including this last section in the article because it kind of contradicts my entire theme of DONT USE CREDIT CARDS. But as long as you’re aware of the risks, there are benefits to using a credit card responsibly.

I have been using credit card for around 15 years and I’ve made between $150 to $200 per month just by using my credit card to pay all of my bills, groceries, entertainment, and more, through credit card cash back schemes and points reward systems. (That’s $2.5k a year, and around $37k over 15 years) just from cash back and point schemes. However, I use it with caution, knowing well the risks that come with it.

Most credit cards offer either cash back or a points rewards system and give you discounts in certain stores, Buy 1 Get 1 free offers, free movie tickets, airport lounge access and a variety of other benefits which can save you money.

But remember, Banks and Credit card company’s are not charities. The reason that all these benefits are offered is to entice you to use it , and once you use it, they hope that you’re going to struggle to pay it back, that you’re going to make only the minimum payment, or better yet, miss a payment.

As long as you have the self discipline and organization to pay off your credit card spending in full every single month ( I do it every 2 to 3 weeks just in case), then there are some benefits that can be extracted from using this nasty piece of plastic.

If you can’t use it responsibly and with extreme caution then its best to just stay away.

Till next time.

Mr. Notes