10 Dirty Secrets of the Credit Card Industry
NEW YORK ( MainStreet) Credit cards may appear to be convenient plastic rectangles in your wallet, but they can be something more sinister: sneaky debt traps.
The booby traps you encounter may not be your fault but rather those of an industry that values profits and thrives off of your mistakes.
But no need to read the fine print on your credit card terms or do the heavy lifting: below are some secrets about credit cards that are buried in all those numbers and regulations you don't get paid enough to research.
1. Paying Minimum Payments Drags Balances Out...
The minimum payment on your bills isn't a dare; it's what's been mathematically calculated to drag your payment out so long that you pay at least double what you actually owe. This isn't just credit cards; it applies to every consumer loan in the world. The only difference between banks and loan sharks is the amount of time you're given before the compound interest on your loan compels them to come pounding on your door.
"The higher your interest rate, the more your payment goes toward interest, rather than toward principal, and the longer it takes to get out of debt,'" says Gerri Detweiler, director of consumer education at Credit.com, an independent website that helps consumers make smarter credit decisions.
Credit.com includes a free credit card payoff calculator (which you can access here) that allows you to input your credit card's balance, interest rate and minimum payments to see the sobering truth about how long it'll take to pay off your balance, along with how much interest you'll pay by the end.
And remember, we're discussing only on your credit card debt (which is only a small portion of your overall debt). Let's not forget the 2014 Student Loan Outlook ...also how New Mortgage Rules Go Back to the Future .
2. Late Payments Aren't Regulated Very Well...
The laws about late payments are sketchy at best. They're capped at $25 for your first infraction, but the government only protects you from the banks until you really start getting into financial troubles.
If you're habitually late, not only will you be paying the banks all that interest above, but you'll also be paying higher and higher late fees. We saw this in the mortgage industry as well, when struggling borrowers were hit with exorbitant force-placed insurance fees, pushing them over the foreclosure cliff. We live in a capitalistic society, and if you don't pay your bills, Uncle Sam will turn his back on you.
"Timely payments establish a track record of reliability and boost credit," says Randy Hopper, AVP of credit card lending at Navy Federal Credit Union. "If possible, set up automatic monthly payments along with text and email alerts to remind you of your due date."