Chap 4: Credit Cards

…with the massive costs of setting up and administering a credit card program, plus a learning curve that caused millions of dollars in write-offs, it became obvious in the late 1960’s that only two companies of any size would survive. They deleted any reference to charge or debit in advertisements, and Chargex became Visa, MasterCharge became MasterCard, and both started to evolve into financial service companies instead of simple credit card issuers.

At first, banks actually had little interest in credit cards. It was the desire to eliminate cheques that changed their minds. At one point, more than two-thirds of the entire economy’s transactions were processed through cheques that involved massive amounts of labour and paperwork. Processing billions of little pieces of paper became a very expensive undertaking.

Credit cards became their bridge from the use of cheques, to their eventual goal of electronic banking. A sort of training ground for customers to wean them off cheques and onto little plastic cards. The third was to get into a fast growing area that was becoming very lucrative and easy for them to compete in because of their massive client base.

The Free Grace Period

Does your interest free period stop just short of payday? This can be very expensive and isn’t well known to thousands of cardholders. It means you will be charged interest at the end of the grace period, for that full month, even if you pay only one day after the cut-off. For example:

If you get paid on the last day of the month and promptly pay your balance – it’s still too late…One call could save you literally hundreds of dollars just by adjusting your date by as little as a week.

Understanding Credit Card Interest

Picture a business with an unlimited supply of low cost product and a big profit margin. That’s the essence of a credit card operation. Plus they have millions of customers who carry a balance each month. Many of whom choose to pay the minimum $60 to “avoid” the whole $2,000 bill. After all, a small $60 payment stalls off the balance for another month.

There are two ways a card issuer deals with an account not paid in full. The difference can be very important and very expensive. So check your particular card:

Yes – you will still have a grace period on new charges – even though the meter is running on the old amount.

No – once you haven’t paid it in full, there is no free time on any charges until the balance is paid off and a new cycle starts. Their premise is to use it or lose it.

The major issuer of Visa cards, the Royal Bank, notified customers of this change effective in July 2003, and it is likely that many never did read the insert into their statement some months’ prior to that. It also means that many other carriers will likely follow suit sooner rather than later.

Congratulations! You’re Pre-Selected

With the natural hazards of pre-approvals, almost all mailings these days are pre-selected instead. Even when the mailer shows pre-approved, the little asterisk will refer to a very hard to find spot that reads: “Subject to a credit bureau report and meeting income requirements.” It also notes that you may not actually qualify at all. Getting a pre-selected application in should only create as much excitement as that Publishers Clearing House letter stating you may have won already.

Killing Your Credit Card

Terminating a credit card is more than just putting it away, but that should definitely be the first step. Obviously, the issuer will send out mailings to entice the holder to utilize the card again, as they want their card getting exercise - often.

Lenders from time-to-time also look at accounts with no balances. For example, three credit cards with no balances, but $2,000 limits on each still mean the person can, at any time, run up $6,000 in charges. That amount of additional debt can cause another $180 in additional monthly payments if just the minimum is paid and could drastically impact the ability to pay other payments after that point.