Friday, December 2, 2011

How Americans Get into Credit Card Trouble!

Credit Cards are a trap.  When you step into this trap, it is easy to blame the person who set it.  But you should be blaming the person who stepped into it - YOU.  Just walk away from this baited trap!

A reader recently sent me this link to his website, where he has posted a humorous video about customer service at Bank of America.  While it is a funny video, I think he himself might be missing the real issue.  The issue isn't customer service, but his own habit of taking on credit card debt, over a period of nearly a decade - at very high interest rates - and paying, over time, nearly as much in interest as he did in purchases.

I am not sure of the point of his video.  The customer service at Bank of America has generally been good.  If you don't bounce checks or sign up for their crazy-interest credit cards, it is a great bank.   If you call some low-wage telephone customer service person and give them a hard time about the bank's policies, I am not sure it accomplishes anything.

It is like when I was in Canada, and some Canadians would  lecture me about how bad America is and how wicked George Bush was.  What am I supposed to do about it?  I voted for the other guy.  And I don't make US foreign policy, try as I might.  Beating up on me is about as constructive as beating up on the slug in the call-center at BoA.

The guy answering the phone at BoA can tell you your bank balance, and that's about it.

The real culprit, in this scenario, is US, not THEM.  We need to all look long and hard in a MIRROR before marching on Wall Street.  While the excesses of banks and predatory lenders are to be condemned, we also need to fess up to our complicity in the deal.  Loan sharks stay in business only because people willingly come to them asking to borrow money.

If you go to a loan shark, and later get your kneecaps busted, are you really an innocent victim?  Or should you have seen that coming from a mile away?

This excerpt from the website link is troubling:

Human Shield: Well, as far as going back 9 years, I can’t really go back 9 years and calculate how much you’ve borrowed. But as far as… I can calculate what the highest balance you’ve had, which is of $11,160.99 (inaudible) year to date.
Customer/Victim: OK, well, I actually kept all my statements, and I recently did total it up and it came out to around 18,000 — 18,671.64 — total. You know, one month I borrow some, you know, of course the opening balance, over the course of the years it all totaled up to around 18,000.
Customer/Victim: Over the whole 9 years I added it up. I added it all up — every time I borrowed some on that account it all totaled up to 18,000.  So I guess you wouldn’t have a total of how much I paid back in those 9 years?
Human Shield: That is correct, sir.
Customer/Victim: That is correct — same issue. Well, I did total that up, and I actually paid back just over $26,000. Now that’s — so it came out to I paid the bank back more than I borrowed, right?
Human Shield: Well, your account still has a balance of $7,000.

Do the math on this.  The poster is astute in saying he "borrowed" $18,000 over the years.  Most folks think they "spend" on a credit card.  But as I keep trying to beat into everyone's head, a credit card is a debt instrument, like a mortgage or car loan!  When you swipe that card, you are borrowing money, never forget that.  So kudos to the poster for figuring this out.

The sad part is, over 9 years he paid back $26,000, or a difference of $8,000, PLUS the $7,000 he still owes.  As he notes, he has paid back more than 41% in interest so far and owes about the same amount.  In other words, he will pay back $15,000 in interest on $18,000 in borrowed money for purchases.  Nearly double.

And of course, this is for a credit card with an interest rate that has varied from 13% (which many people think is a "good rate") to 22%.  Both are horrible interest rates on loans.  You would not buy a car, a house, or even a waterbed these days on a 13% loan.  But people blithely sign up for credit cards based frequent flyer miles - the ultimate free pony if there every was one.

I am not picking on this guy for being dumb or anything.  Why?  Because most Americans do the exact same thing at one time in their lives.  I did it myself.  We are all complicit. 

And we all feel outraged at the bank - the loan shark - for kneecapping us.  But as we lie there in an alley, in a pool of our own blood, in agonizing pain, wondering whether we will ever walk again, we know, deep down in our hearts, that somehow we had this coming.  That we should have NEVER asked for money from Tony Knuckles!  Because, let's face it, we knew it would end up this way.

And the CRAP we buy on credit cards is never worth it, either.    A person could do without $18,000 in purchases over nine years - that is about $2,000 a year of stuff, that you could cut out easily.  Getting rid of Cable TV and Cell phones, for example, would more than cover that.  We get into debt over WANTS not NEEDS.  We get into trouble by living beyond our means by a measly $2000 a year.

Those interest payments are killer, man!  I had a BoA VISA, too, and I let a payment go late (I was on vacation so I paid it the day BEFORE the statement came out, and that was not counted as a timely payment for the next month!) and they Jacked my rate to 25%. Some banks go as high as 30%!

In one month, I paid $500 in interest. Ouch.

I looked around at all the stuff I owned (two houses, six cars, two boats, etc.) and thought, “what the ‘F’ am I doing owning all this stuff and paying interest on loans to have it?”

It took two years, but I sold more than half of what I owned, paid off all my debts (including my mortgage). Owning things turned out to be a form of slavery.

I realize not everyone is as lucky as I am to be able to do this.  But this experience should be a wake-up call to everyone to look at their debts and ask themselves why they are paying, over time, nearly twice for everything they own.

I cut out cable TV, cell phones, buying books (libraries are FREE!) and designer coffee. No more paying for bottled water or seltzer, either (champagne is actually cheaper!). I cut my insurance costs by hundreds a month by dumping junk coverage and shopping around.

It took a long time to re-think my lifestyle, and it is never over. I was spending my way to the poorhouse on a six-figure salary!

I have two credit cards now, a Simmons First card – 7.14% variable APR with a $5000 limit, and a Capital One 6.5% card (for my business) with a $5000 limit.

At least this way, I can’t get into so much trouble, and if I do, I can realistically pay off the balance at an interest rate that is reasonable.  A low interest rate credit card is the only credit card you should get - if you get one at all!

But I try to pay CASH for things, and not use the cards at all. Credit cards suck, really, and they are so, so dangerous and easy to use. And I think EVERYONE gets in trouble with them at least once in their life.

A few years back, people would simply refinance their home and start the whole credit card debt process all over again. Whoops! Can’t do that anymore…. ouch.

Those frequent flyer miles cards with the 22% interest rates are like loaded handguns. They are fine, if you pay off the balance. If you don’t ouch.

70% of all Americans surveyed claim they pay off the balance on their cards every month. According to the credit industry, 70% of all Americans carry a balance on their credit cards.

We do lie to ourselves about our finances, don’t we?