The Evils of Credit Cards - Alexis KassanThe Evils of Credit Cards
Alexis Kassan
July 15, 2002
As a little girl I remember when I used to go shopping with my mother. We went almost every week. She would take me to all the malls and I would help her pick out new outfits. She was a petite woman and yet I never thought I would be as tall as she was. Somehow, she would always find things she wanted to buy. When we got to the counter at a department store she would simply pull out a small piece of plastic and say, "Charge it, please." My favorite thing to watch was when the store clerk swiped the card through the box-like object and magically got the numbers on my mother's card to appear on a piece of paper. That's where it all began…
Not until I became that clerk did I fully appreciate why these silly little bits of plastic matter to anyone. I started working in a small stationery and printing shop when I was 14. My parents had instilled in me an over-active work ethic. I also got a checking account so that I could put my paychecks into the bank. I remember the first check I ever wrote. It was for flowers for my step-mother who was in the hospital at the time. It blossomed from there. When I got my first paycheck to put in the bank, I immediately started flipping through catalogs. I began saving towards expensive items, like my signature purple crushed velvet cape. I went on to eBay thinking, “I could get anything I want here and my parents wouldn’t even know!” I also began to sell things like beanie babies during that big craze. Money went into my checkbook in big chunks and then vanished as if it had never been there. It was empowering!
During this time, I kept a meticulous balance on my checking account. Every time I wrote a check, made a deposit, went to the bank for a withdrawal, or got interest on the money there I rebalanced it. This was probably the only good habit I got in to from all that. After a while my parents noticed that I had many new things that they had not purchased for me. They made me go through, in detail, every check I wrote and what I had gotten. They thought I was trying to hide drugs or something because of how much money I’d run through. It was because of my exquisite balancing that their plans were foiled.
Recently, however, things have gotten much different. The internet has become increasingly useful in purchasing necessary items such as textbooks, gifts, and recommended products. On the other hand, anyone without a credit card is at an immense disadvantage because no online retailer wants to wait for a personal check to clear through the banking systems. My parents adamantly refused to get me a credit card before my departure for college and so I was left hoping that there would be stores or websites accessible to me that took checks. Of course, I was to find that there were not. The first few months of my college existence were torturous in terms of finding gifts for the holidays or shopping at all. I paid at least $20 in ATM fees to get cash and spent even more on cabs and buses to get to the nearest mall.
And then I turned 18. Finally I was mistress of my own life and domain. The first order of business was to get a credit card or two of my very own. College provides a unique opportunity for getting such devilish devices. The credit card companies know that you need to buy things. They target people who look like they own expensive clothing. Heck, they target anyone going towards a degree, thinking that eventually they will be able to pay back the money. In the meantime, they’ll be trapped into minimum payments and the company can reap the loan-sharkingly high interest rates.
My first order of business was to choose which cards would be the start of my collection of plastic. It was only when I looked at the bottom of a receipt from Joann Fabrics that I found my credit card calling. There it was. A point for every $100 I spent on my card and then I could get free stuff at Joann’s! So I called the number and, to my surprise, was approved for an MBNA Visa card with a credit limit of $1500. Since that was such a breeze, I decided to get some more cards. There was a Citibank MasterCard being offered through campus flyers, various types of American Express Cards, Discover, Diner’s Club… the world was my oyster to be purchased with the swipe of a magnetic strip. In the end, I only got two cards, the Visa and an American Express. The MasterCard had too high of an interest rate, I decided, and whoever takes MC also takes Visa, so what’s it matter?
I started spending right away. For the first few months I paid off the balance each time. Then my Visa limit increased automatically. “I’ll never need $2000,” I scoffed to myself when I saw my available balance. By the time summer came, I was $700 in debt. I wanted desperately to pay off my card but whenever I got close there was something else to buy. The kicker was how I was getting the money to pay off the card, I was evaluating the trouble other people had gotten into with credit cards!
And here I am a year later, still with credit card debt. I’ve spent probably in excess of $5000 on my credit cards throughout the year. I still have a balance of $600 or so. This summer alone I’ve plunked down a couple grand to the balance of that damned Visa card. I’ve gathered about half a dozen $10 gift cards to Joann Fabrics, each representing $1000 that I’ve spent over the past year and a half. It never seems like it’s that much money until you look back at the cards. So here’s some advice on credit cards for those of you who don’t have them… Don’t get them! If you absolutely must, just get one. And make sure you have a low credit limit. Mine is now up to $3500. Not that I’d ever have that high a balance, but they want me to have the option of having that high a balance.
The trick to credit cards is that they’ll give you all the credit you want when you can’t pay it off, like when you’re still in college. Then you get in trouble by running up high balances. You make the minimum payments or maybe just a little bit more than minimum. They charge you 20% plus on whatever you don’t pay. By the time you whittle your way back to $0 balance, you’ve paid at least twice what you would have if you purchased whatever it is with cash. All in the name of convenience. Once you’re in trouble, they offer you credit cards with higher limits and lower rates on the transfer of balances from other cards to theirs. So now you owe someone else the money and interest you could have avoided. So what? Eventually you amass a nice little packet of plastic cards, sometimes too many to use for poker. Then you go to a bank a few years down the line and try to get a mortgage. That’s when someone like me, a credit evaluator, looks at the amount of cards you have and the balances you’ve been paying since your 18th birthday and tells you, “Sorry, but you weren’t approved for that loan you wanted.” Suddenly you’re screwed out of a car or house or something you actually need. Better put that on the cards too. Spread out a car purchase over 10 credit cards and then sit down for a good cry. You’ll be paying it off about three times longer than you would have financed it at the dealership.
There are ways to avoid this, and please take me seriously here, I really do know what I’m talking about on this one. Most loan officers, for cars or homes, look to see that you have a history of paying off your credit cards and other debts. The following things will show up on the report they review to determine your eligibility:
1. Current Credit Cards
2. Student Loans
3. Other Loans (car, personal, etc.)
4. Mortgage Loans
5. Current Store Credit Cards
6. Any Bankruptcies you’ve had in the last seven years
7. Any accounts you’ve closed in the last seven years
Ideally, you should have 2-4 major credit cards and 1-3 store credit cards. You should show payments to the loans you have. For example, if you have a student loan and have some extra cash while you’re still in college, make a payment or two. If you pay before they start sending you bills it all goes to principal and you decrease the amount you’ll pay and the time over which you’ll pay it exponentially. On top of that, you can pay as little or as much as you want to before the bills come. Once you get bills you have yet another minimum payment.
Why don’t banks want you to have credit cards? Ah, good question. Because if you decide to use them all at once you have increased the risk of maybe not paying the loan they might give you. This is called “defaulting on the loan” for anyone who’s interested. The two most important things that loan officers look at are your credit score, provided by one of three services, and your debt-to-income ratio. The bank I worked for would not make a loan to anyone with a 40% or higher debt-to-income ratio. This ratio is just what it sounds like. It’s how much your minimum payments are annually on all your debts over your annual income. We also looked for a score of 650 or better. Kind of sounds like the SAT’s, doesn’t it?
How are the scores determined? It’s a secret formula. Mwahahahaha! Just kidding. It’s a function of how long you’ve had each of your accounts and how many payments you’ve made. It also includes a decreasing factor for any payments over 10 days late. The later the payment, the lower it brings your score. It also calculates how many accounts you have into the equation but that doesn’t play as big a role.
You may be wondering why I said that only bankruptcies and accounts closed in the last seven years show up. Apparently, the credit bureaus think that seven years is about enough time to recover from any financial misfortune. So they keep all your active accounts on the reports they send but anything over seven years old they consider to be irrelevant and erase.
To continue the case study of myself, I figured out just after getting my credit cards, and my car, might I add, that it would be unwise to charge everything to plastic. I made up some guidelines for myself so that I wouldn’t get too far down the rabbit hole of finance. First, I only put things I knew I can pay off on the American Express card. This is how AMEX is supposed to work. You have to pay the full balance at the end of the fiscal month. Mostly, I just use it for gasoline and to keep this wonderful webpage running. Food and necessities were to go on my debit card because the experts say you should always have the cash to pay for food. Anything I didn’t have the money for immediately and needed to buy went on the Visa card. I still approximately follow this plan, with a few additions. I’ve never missed a payment and I’ve always paid more than the minimum payment on my Visa. I still keep meticulous records for my checkbook, even so far as including my ATM and debit transactions instead of relying on the bank’s website to tell me what’s in the accounts.
“Paper or plastic?” The retail industry is answering that time honored question with resounding unanimity… PLASTIC. The average consumer can’t afford to merely bend to the whim of the evil credit empire. To quote mothers everywhere, “remember your greens.” Don’t forget that cash exists and it doesn’t charge interest!
If you still have questions about credit cards, e-mail me and I’ll post them, anonymously, to a page up here for the benefit of all.
