Monday, January 25, 2010

Are Credit Cards Really "The Devil"

Most people in America use credit cards on a daily basis and why not, credit cards make purchases easy and fast.  Just pay the bill at the end of the month and you won't ever accrue interest. Credit cards even give you cash back their more like a friend then an enemy. So why do so many people say that credit cards are evil? Well the truth is at some point you will hit a bump in the road and guess what that snake in the grass will be there to bite you.

Enough Credit to Bankrupt You

Most credit cards allow you to carry a balance greater then you can pay in any single month. You know its that number we all brag about, my Visa have a limit of $50,000. All a $50,000 card allows you to do is dig a huge hole and jump into it.

10+ Times More Interest Then Banks will Pay

The interest rates on credit cards are out of control. Most cards will have an interest rate of 9% - 29.99%. Most people don't even know how the interest rate on their cards are calculated, therefore I will stop at this point and explain it.
Most credit cards, like American Express, use the average daily balance method where interest will accrue each day. Here is how it works.
First calculate your Daily Average Balance. This is accomplished by adding each days balance in the billing cycle then dividing by the number of days in the billing cycle. Second find the Periodic Rate by dividing the APR by 365. Lastly multiply the Daily Average Balance by the Periodic Rate and by the days in your billing cycle.
Assume we have a 3 day billing cycle with 15% APR.
Day 1: You charge $1000.00. Your balance is $1000.00
Day 2: You charge $200.00. Your balance is $1200.00
Day 3: You charge $500.00. Your balance is $1700.00
Here is the math:
Daily Average Balance = (1000 + 1200 +1700)/3
Daily Average Balance = 1300
Periodic Rate = .15/365
Periodic Rate = .000411 (I rounded the rate a bit)
Interest Owed= 1300 * .000411 * 3
Interest Owed= $1.60

Fees That Only Superior People Can Pay

The fees are ridiculous on virtually any credit card today. If you are late the fee on most cards is around $20 - $40, granted you shouldn't be late but at some point you will inadvertently slip up. The other fee that gets people is the annual fee. The annual fee affect two types of people the most, the young consumer that is just starting off with their credit adventure and the one that gets conned into getting a "Black from American Express" because it makes you superior.

This Won't Cost You a Cent

Credit cards make people forget that they are actually spending money. I know what you're thinking, "I know using a credit card is spending money I'm not stupid". Before you get on the defensive hear me out.
Credit cards work a lot like chips at casinos. Casinos found out a long time ago that people spend more with chips then with actual money. It's just something our minds do, we see it differently when it's not actually money. This same principal exists with credit cards you don't see the money going out or ever see how much you have each time you charge it so you become sloppy.

Trust Me I Want What's Best For You

Credit card companies can't be trusted, several people I know have seen late fees and interest charged that was simply incorrect. Most of the time if you catch it and call them they will remove it but let's face it you can't trust them.

Just The Way It Is

So to answer the question are credit cards really "The Devil"? No however they are designed to harm you more than to help you. You can always play Russian roulette and come out alive but play it long enough and you will lose it all. Just look at it this way if credit cards were so great and you needed them so badly why would they need to advertise so much.

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