Here's a fact you probably know, but is still sobering to see in black-and-white."Credit-card companies make most of their money by charging interest to customers who don't pay off their balances each month." (The Wall Street Journal, "Credit-Card Firms' Problem: People Are Paying Their Bills," May 25, 2006)
Times are tough for credit card firms these days, the article said. More people, in fact, are paying off their balances, shrinking the companies' revenues and profits. To make up the difference, card firms are increasing late-payment fees and raising rates. They are also launching new technology designed to get you to use your card more often.
The bottom-line: Your credit card company makes more money when you spend more than your income. They have a strong incentive to get you into debt, and keep you there. Now that's "priceless."
Be wise. Instead of doing your part to help the poor, suffering credit card firms, be like Jim Raley. Jim, a 34-year-old from Atlanta, once racked up $14,000 in credit card debt and paid hefty interest. Now he pays his balance off each month, keeping more money in his pocket instead of the card companies'."I am one of their nightmare customers," he said in the WSJ article. (Note: credit card issuers aren't completely hurting; they still rake in transaction fees from retailers every time customers use their card.)
More people paying off their card balances is news that isn't necessarily as good as it sounds. Many pay with cash from a home equity loan, where interest is tax-deductible, or transfer balances from high-rate cards to those with temporary 0% interest. While that helps save a few dollars, it's still borrowing from Peter to pay Paul. And Paul is smiling all the way to the bank.
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4 comments:
To be a real nightmare customer for a credit card company, you would go with a no-fee card and use it only in emergencies.
JD
JD brings up a good point. And research shows that people who use credit cards...even those who pay them off each month...spend more than people who just use cash.
CJ
CJ - that is a good point about paying in cash vs. card. I have heard about the research too.
We are happy to say we are "nightmare" customers in that we pay off our balance each month. However, I recently received an offer for 5% cash back on grocery/drug store purchases and gasoline purchases (and 1% back on all other). Would you recommend that (and still paying card off each month) or advise sticking to paying in cash?
Great blogs.
DT
One caveat on the 5% cash back cards:
There are often limits on the amount the card company will pay you back...5% sounds good, until you check the fine print and find out it's only up to a certain amount that might be a lot less.
As for paying cash or using a card, it really depends on your behavior. If you find that your expenses are significantly higher when you use the card primarily--i.e., you are overspending--then it's best to stick with cash. Otherwise, use the card and take the cashback.
I used a combination of cash (for spending money) and credit card (for meals) on our vacation. I haven't done the final tally, but I think we still overspent... though we came back with $100 in "leftover" cash and didn't eat out every night. Stay tuned...I plan to write about my findings soon. ;)
thanks for the comments...and keep coming back!
CJ
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