Wednesday, December 05, 2007

Don't Sign Up For Free Money This Christmas
There are lots of things I don't understand about credit cards or the credit industry. That's by mutual design. I don't care to understand them, and they try to hide the way they operate, so it's an arrangement that works. I am anti-credit card use for myself because the fees and interest rates are ridiculous, and because it's an evil industry that preys on the last dollars (both today's and tomorrow's) of the working poor with the false promise of near-zero interest and the allure of an extravagant life beyond one's means spending money we can't afford. I don't have to understand the details of how they work to understand that it's a business that is just wrong troubling. [See update/backtrack below]

But the more I learn the more horrified I am. In a Senate hearing today - liveblogged by The Consumerist - I found this out: when you sign up for those free-money deals at the checkout counter to get a brand-name card (10% off today's purchase!) at, say, Amazon or Target or whatever, it lowers your FICO score - the same as applying for a new credit card, which likely will increase your interest rates on other credit cards - if not immediately, then as soon as they are able. And rate increases apply of course not just to new purchases but previous purchases still on your balance. Your credit card rate might go up if you are late on your electric bill, if you pay only the minimum payment, if you *use the credit card and move toward your limit.* Each of those apparently raises your risk profile.

So, they agree to loan you up to 5,000 or whatever at 8%. Then if you actually use much of that and approach your limit - in the way they would like and in accordance with your agreement - that becomes evidence that you are a riskier customer and they raise the rate. I mean, anyone who would borrow 5,000 at 8% can't possibly be trusted with borrowing 5,000 at 8%, right?

The bottom line: get rid of your credit card debt, don't ask for new cards, and don't fall for free money schemes. If you have to use a card, pay off the entire balance each month. And don't be late. You have to pay interest on late fees as well, of course. I would say cancel your account...but you don't think they will let you do that do you? Anyone ever had any luck actually canceling a card?

[Update/Backtrack: some caveats, with 24 hours removed from watching some of that emotional hearing. Yeah I've used credit cards in the past and it's not always a bad thing, and of course the entire credit industry is not evil. Without such a mechanism, we'd never be able to afford homes, cars or education, for starters. I've made larger purchases - furniture and the like - and was able to get higher quality items that will last longer and save me money in the long run, because I could pay gradually through my credit card. Now that my interest rate is 24.98%'s not quite the good deal. But, my objections are really to the unfair practices, the really predatory marketing, and the outrageous retroactive penalties on those who can least afford it. And that's just their business model...]

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