The Credit Card Industry

Credit is great. Effectively used, it creates a more seamless economy, allowing money to be deposited almost immediately in merchants’ accounts and customers to make larger purchases more safely than compared to holding a gross quantity of cash. Additionally, purchases made on credit often come with additional warranty protections – American Express is famous for this. Some companies – Citi, with it’s “Price Rewind” feature, for instance – will also offer to search for a lower price if you register your purchase made with a Citi credit card.

This compact between banks, merchants and consumers breaks down when, for a variety of reasons, consumers become prodigal with their spending habits and run up large balances that they either can’t pay off, or can only make minimum payments. This leaves them with a poor credit score or in hock to the tune of 20%-30% monthly interest and hateful to the banks who provided the credit in the first place.

Often times, this only turns consumers off of using credit cards – Suzi Orman, Oprah’s financial “guru,” has advocated tearing up credit cards and using cash in her “Back to Cash” plan – leaving the banks bereft of future income from swipes and unable to offer personal credit services. Consumers also suffer from having to worry about their personal safety more, since if they wish to make large purchases, they must carry unwieldy amounts of cash. Last, consumers also lose the additional warranty protection.

To sum up, if you do not consider yourself responsible with money, or think your financial situation might change, don’t play this game. The banks play to win and they will win everytime. Instead, get a secured credit card from your bank – one that requires a deposit from which you borrow against – to safely increase your credit score without tempting yourself to do something rash which could hurt you long term. Being more that 90 days late on a monthly payment – whether it’s $4 or $4,000 – will have a negative impact for 7 years on your credit report, so it’s crucial to pay on time and in full every month.

Be responsible. It’s easier than you think. Most banks have their own App that will allow you to easily and remotely check your balance, payments, statements and other relevant information. If you don’t want to have to go through multiple apps to check multiple balances, you can set up an account with Mint and track all your balances at once through a computer or mobile device.

Now, the great news. Banks – from Chase to Citi to Barclays to US Bank to American Express – are tripping over themselves to sign up new customers for credit cards and are offering silly bonuses to sign up, often worth between $500-$2500 per card when used for travel, in the form of miles or points, or cash back.  They make money from each merchant swipe and even more money from interest payments. The banks figure that enough customers will slip up and they will make back their initial investment.

Of course, they are right – otherwise they wouldn’t offer such large bonuses. Additionally, the recent (and somewhat ongoing) economic downturn has left more people uncomfortable with using credit cards. A September 12, 2012 New York Times article illustrates that total credit card debt is down 17% since 2008.

Additionally, under Tier III Basel, which is a new global standard on capital reserves, banks must increase their common equity from 2% to 4.5% and their risk-weighted asset Tier I capital from 4% to 6.5%, among other new reserve standards over the next 5-7 years. I have no clue what common equity or risk-weighted asset capital is, but together they simply mean that banks will have less money to loan out, reducing their possible profit. They also have to reduce their exposure to less than excellent or good credit risks, so their is no danger of not being in compliance with the new standards.

Thus, responsible consumers have been granted the keys to all the doors. Banks need customers who pay their credit card bills on time and in full more than ever. Banks also have less credit card customers than before, so they are forced to offer larger and larger sign-up bonuses to attract these responsible customers.

So, if you are take good care of your finances, you are the perfect candidate to start earning a whole mess of points and money.
For free.

If this interests you, please continue reading my other posts on how to go around the world more than once for free.

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