Friday, July 14, 2006

Credit Cards

Cash? Who uses cash? Today, it's all about the plastic! Let's face it, credit cards are convenient, in most cases more secure, and you probably wouldn't be able to rent a car or get a hotel room without one. Plus, it can help to establish a positive credit history if you ever intend to finance a car or a house. The average U.S. household carries between $7,500 and $8,000 of credit card debt (PBS). According to one web site, "The credit card industry is the most profitable one in the United States with annual earnings in the $30 billion range. Many people might be surprised to learn that a single credit card issuer -- MBNA -- earned 1.5 times more profit than McDonalds in 2004. Citibank, another major credit card issuer, earns more profit than both Microsoft and Walmart." (BCS Alliance)

You may have seen the following scenario before in a math story problem in school. I was curious, and not in the mood to solve a story problem, so I went out to's credit card calculator to see how long it would take to pay off a theoretical credit card debt of $1,000. If I only pay the minimum monthly amount (2% or $20, which is the minimum monthly amount on many credit cards) it would take 19.3 years to pay off and I would end up paying $1,931.33 in interest, assuming an 18% interest rate. Credit card companies earn most of their profits from consumers who only pay the minimum monthly payment. These folks are known as "revolvers". If you pay off your balance every month, then you never pay any interest, even though the credit card company still earns a percentage from each transaction which is charged to the merchant. You will then be called a "deadbeat" by the credit card company (PBS). It may also be alarming that if you are late paying on any other card agreement or debt, even with a different institution, the credit card company may raise the interest rate. Joe Lombardo, a high school economics teacher from New York commented, "credit is a tool that can make lives easier if used sensibly, or a nightmare if you get sucked into the "tender traps" the Companies use to lure you into their web." (PBS)

PBS's Frontline program Secret History of the Credit Card is an interesting look at the credit card industry, its affects on consumers, and raises some interesting questions on regulations and proposed legislation related to the credit card industry. After watching the program, which you can view or read online, you may think twice before pulling out the plastic. (Sources:, BCS Alliance, PBS)

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