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Am I Being Too Hard on Credit Cards?

Am I Being Too Hard on Credit Cards

I’m going to show you how to make $13 billion a year.

Create a product that is irresistible, addictive, and just a little evil. Of course, you know what I’m talking about. Crack. Yes, I’m going to show you how to create a crack business.

You are going to make billions by giving crack to people, and then when they use it, you get paid. And here’s the good part! If the crack user can’t pay you in full each month, that’s cool. You can still give them more crack. They will just owe you money and some interest. Okay, who am I kidding? They will owe you a lot of interest. But your customers won’t care because they still are getting crack from you. They’re happy for now. And if they start using too much crack and are having trouble paying you back? This is the best part. They are locked into the crack agreement. It is rock solid (pun intended). Sue them and put a lien on any future income they make. The crack business is a winner. Oh, sure, do you ruin some lives? Of course, but they had free will. They chose to do crack. Well, yes, you mailed them crack nearly every week and you put crack offers in their textbooks. But you didn’t force them!

Oh, what’s that? I’m so embarrassed. Have I been saying crack this whole time? I didn’t mean for you to start a crack business, what I actually meant was for you to start a credit card business. How embarrassing that I mixed up the two! My sincerest apologies.

Am I being too harsh on the poor credit card companies that only make $13 billion a year?

I was on a 20/20 episode several years ago. Also featured on that show was a lowly professor named Elizabeth Warren (I wonder what ever happened to her?). She said, “Credit card companies have a special word for the customers who pay in full every month. They’re called deadbeats.”

Why deadbeats? Here’s how Visa makes over $13 billion a year:

1.) Transaction charges. Every time you buy something with a credit card, the company selling you that something has to pay the credit card 2% to 4%. So if you buy a new iPhone for $500, Apple pays Visa $20 of the $500. Visa is making money with every swipe.

2.) Interest charges. This is where they really make their big bucks. If you buy stuff but don’t pay off your credit card bill, Visa is happy to let you pay off the balance over time. In return, though, they will charge you interest. That interest might be 5%, but more likely, it will be 15%, 20%, or even 25%+. Every day you don’t pay off your Visa bill, you are getting hit with a very high interest rate charge. This is why it can cost you twice as much for that iPhone and why it can take so long to pay it off. As Elizabeth Warren says, credit cards don’t want you to pay off your bill. They like it when it takes months, years, and even decades to pay off your bill because they get to collect all that nice interest.

This is how Visa makes $13 billion a year. There is good money in giving people what they want and then charging them twice as much for years to come.

We’ve learned that credit cards are magnificent and evil at the same time.

It’s hard to get around without them. But at the same time, they are incredibly dangerous and expensive. Sounds like a bad relationship I once had. And that’s pretty much what credit cards are.

They are a very bad and abusive relationship. So, if you can resist, great! That’s definitely the way to go. It’s too easy to get sucked into the buy now and pay later trap. Every swipe of the card is a deal with the devil.

So, what’s worse than using a credit card? I guess it would be using a credit card to buy crack. Try to avoid both.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.

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About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

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