There’s a loaded question for you: Are credit card companies evil? Judging by the comments I’ve heard from many different people in my bankruptcy office over the last few weeks, the answer from many Canadians would be “yes” Why are people making these comments? A few years ago everyone loved their credit card. Today, as credit card interest rates go up, and as we owe more on our credit cards, our love affair with credit cards may be turning sour. Canadians are gradually realizing that it’s not a credit card (credit is a good thing, like giving someone “credit” for a job well done); it’s actually a debt card; the more you spend, the more debt you have, and debt is generally not considered to be good.
I’ve heard the same story from many people: They are good customers, they always pay their minimum balance, and they just got a notice from their credit card company that their interest rate is increasing. The typical story involves someone who had a card with a low interest rate, say 11%, and now the rate is going up to 19%. For cash advances, the rate is going up even higher, to perhaps 23%.
When I ask questions, I discover that most of these people owe money on other credit cards as well. They owe $15,000 on Card A, and another $30,000 on Cards B, C and D. Card A has presumably done a credit check and discovered how much they owe in total, and they are getting worried, so they have decided to increase the interest rate in the hopes that you will pay off the credit card now, while you still have decent credit.
The credit card company sees that your debt level has increased. You are still making payments; you are not on the verge of default, yet, but they see your situation getting worse, so they are doing a “preemptive strike”. They assume that if they are the first card to increase your interest rate, you can use your still good credit to take cash advances from your other credit cards and pay them off. That way, if your situation does get worse, they have already received all of their money, so they don’t suffer a loss.
Does that make credit card companies evil? Is it wrong to give Canadians access to easy credit when times are good, and then as the recession deepens and people start losing their jobs to all of a sudden start increasing interest rates to get rid of customers on the verge of financial trouble?
Many would argue that credit card companies made a lot of money when times were good, so they should give their loyal customers a break when times get bad. That’s not a bad argument, and it may even be good business.
I met with a man recently who owed money on three credit cards. One of the credit card companies was willing to work with him. They agreed to lower his interest rate for the next six months, provided he stopped making new purchases on the card and he paid more than the minimum balance each month. He agreed, and is satisfied with the arrangement. His other two cards won’t work with him; they have raised his interest rates, so now he can’t afford the minimum monthly payments, so he has simply stopped paying them.
Which credit card company has the correct approach? Obviously he was sitting in my office because he can’t pay his debts, so it’s likely he will be filing either a consumer proposal or a personal bankruptcy at some point in the next few weeks, so the credit card companies will not get all of the money they are owed. If they had all worked with him, he would not have come in to see me. In the end, the credit card companies will lose money because they were not willing to work with this person.
So what do I think? Do I think credit card companies are evil?
A credit card is a piece of plastic. It is an inanimate object. It is neither good nor evil, and the companies that issue credit cards are not good or evil; they are businesses that, like all business, exist to make a profit.
Is fire evil? No, but fire can be used wisely, or used poorly. On a cold winter’s night, a warm fire in the fireplace is a welcome addition to any home. A runaway fire that burns down your house is a tragedy. In either case, it’s still fire.
Credit cards are the same. Carrying a credit card is often much safer than carrying cash. Credit cards are also convenient; it’s nice to be able to fill up my car with gas, even if I don’t have cash in my pocket.
But, because credit cards are so convenient, just like a match or a lighter is convenient, it is very easy to get burned with the improper or careless use of credit cards. Just because I have a $10,000 credit limit does not mean I should carry a $10,000 balance on my credit card.
When times are good, credit cards are very convenient. When times are bad, and credit card issuers decide to start raising interest rates and tightening up on credit, credit card debt can become worse than inconvenient: credit card debt can become financially fatal. Your budget can afford the minimum payments when you have the “low, introductory rate” of 11%, but when the rate goes up to 22%, which is twice as much, your minimum payment doubles, and now you are in over your head. Increased rates can be a financial disaster.
So should you use credit cards, or not? Should you play with fire, or not?
I think the answer is simple: You should be the boss. You should decide, for yourself, whether or not you should use credit cards, and whether or not you want to pay high fees and interest rates for the convenience of using your credit cards.
The credit card companies cannot force you to use your credit cards. They cannot force you to carry a balance and pay high interest every month. They can’t force you to do anything, because you are the boss.
My challenge to you is this: decide who’s the boss. If you want control over your financial future, decide, right now, to change your credit card behavior. Decide to stop using credit cards, and only pay cash or use your debit card. If you don’t use credit cards, the credit card companies won’t earn a penny from you, and you will never have to worry about high interest charges again.
Not ready to go credit-card-cold-turkey? Start by deciding to never again carry a balance on your credit cards. Use your credit card as a convenience, but pay the balance in full each month. If you do, you pay no interest, so your credit card is virtually free. But remember, fire is dangerous, so don’t let the fire spread by carrying a balance. Credit cards should be a substitute for cash, not a way to borrow, so if you need to borrow money, go to the bank and get a loan at reasonable interest rates.
What do you do if you are already in over your head with credit card debt? Be the boss: cut up your cards, then work out a plan to pay them off on your own, or file a consumer proposal or a personal bankruptcy, and start living without credit card debt.
I’ll repeat it again: you are the boss. Whether or not you use credit cards is up to you. Whether or not you carry a balance each month, and pay high interest rates, is up to you. Credit card companies are neither good nor evil. They are providing a service, and it’s up to you to decide whether or not you want to pay the price for carrying a balance on your credit cards each month.