The credit card business is extremely profitable. The companies make a small percentage on each charge through the merchant.  But the real profit is on the interest the companies charge on people who carry a balance on their cards. Today, the top interest rates are at an all time high. The interest rates credit card companies charge today would have been considered loan shark rates in prior decades. The companies also charge late fees and over-limit fees to earn additional profit. Most families use their credit cards to make ends meet and most families are able to carry the balance. But, if you are carrying a balance on your cards and you become unemployed, have a medical emergency, or get divorced, the financial stumble will likely cause you to miss a payment.  Missed payments trigger high interest rates. With late fees and over-limit fees, an $8,000 balance can easily double within a relatively short period of time. This is case for many people especially because, when a family gets into financial distress, they rely on the cards even more and begin "robbing Peter to pay Paul."  The debt continues to snowball and at a certain point, it becomes mathematically impossible to pay off the balances with the usual monthly payments. When you miss a payment, the fine print in your credit card contract is triggered and the credit card company begins to charge you heavily.  In addition, the credit card company can change the terms and conditions of your contract without your acceptance by giving you only a 15-day notice. What this all amounts to is that the credit card companies make the rules and have written them in their favor.

When credit cards first came into existence in the 1960s, they were conceived as a convenience for the well-to-do as a way to avoid carrying cash. However, in the 1970s, the companies realized that in order to make the business profitable, they had to extend credit to a much larger audience in the hopes that a certain percentage of card holders would not be able to pay off their balance and the cards would earn money off of interest.  In the 1980s and 90s, they began realizing the late fees were the real profit stream. The companies began marketing to Americans by offering 0% introductory interest rates, luring customers to open a card and carry a balance. Once the introductory rate expires, the companies begin profiting and if the card-holder misses a payment, the snow-balling begins and the companies begin making real profit. How do they know who to target? Credit scores.

The most extreme example of this was Providian. Providian in the 1990s was targeting the riskiest consumers to make money off of late fees. Providian experienced double-digit growth during the 1990s and at one point was making more than 50% of its profit from late fees - not from interest - from late fees. This profitable business model caught the attention of the major credit card companies and they began following suit. In addition, the credit card companies began reducing the minimum monthly payment from 5% of the balance to 2% of the balance. This is designed to lengthen the time you spend paying off your balance and increasing the time the credit card companies can charge interest (and lengthens the time that your family risks being hit with a financial emergency and the fine print terms are triggered). To determine how long it will take you to pay off your balance, click here.

© Michael Sheridan. All rights reserved. The information contained in this website is not meant to constitute legal advice.  If you require advice in relation to bankruptcy matters, schedule a free consultation.

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