Editor’s note: This article was first published in March 2011; the figures it cites for Spain, including annual card fees of 70–100 euros, more than 25 million active cards and interest rates of close to 30%, are from that time.
In a future article we will look at every single credit card in detail because, despite their differences, most of them have one thing in common: they are the worst enemy of anyone who wants to save, and in 80% of cases they are the number one cause of a family’s financial problems. Curiously, few people realise this, even when they are drowning financially.
More than once you will have been stopped in the street, in shopping centres or even at your own bank and urged to sign up for a credit card “with no charges or fees”. That’s a lie! There’s no such thing.
Credit cards come with four pages of small print. If you read that small print, and above all if you managed to understand it, you would never activate your credit card.
“No fees”
Somewhere in the small print you will find a clause saying: “no fees for the first year, provided you make at least 2, 3 or 5 transactions a year”.
Keep an eye on the interest rate, because in some cases the card may carry interest of close to 30% (bordering on usury).
And of course every card comes with a maintenance fee of around 70-100 euros a year, depending on the type of card and the credit limit granted.
These are the least important points. What you really need to be clear about is that when you activate a credit card, you don’t actually have a card: you have a personal loan with interest charged on the whole amount owed.
In plain terms: if you are drawn in by a low 3% interest rate on your card, that’s no problem if you only owe 100 euros. The problem comes when your debt climbs to 2,000-3,000 euros.
You probably think that if your card debt reaches €3,000 at 3% interest, you’ll only pay €90. And that is true, except that once you pay the €90 you’ll notice about €40 gets added back onto your card. That’s why in finance this product is known as the “never-ending payment”.
Finally, because these cards work like a personal loan, if you fail to pay, depending on the clause in the contract you signed, you could be running up charges of as much as €40 a day for payment claims, late-payment interest and so on.
In the United States a case was brought against credit companies whose sales strategy was to seek out people who had already defaulted. They offered card credit to families who, within a few months, would be unable to keep up the repayments, so that they could charge up to 750% more than was actually owed. For the bank or lender, a defaulter was far more profitable than a good payer.
The case went nowhere in court: even though people knew what was going on, nobody could prove anything, or nobody wanted it proved. Either way, if you want healthy finances, forget credit.
Buy only when you have the money to pay in cash, or with cards where you pay off the full balance the following month, but never on deferred payment.
It is estimated that in Spain alone more than 25 million cards are active. If we put the maintenance cost at €1, that would be 25 million euros in profit. But a card’s maintenance fee is not €1; it is around €70-100, plus the commission charged to the shop where you pay with it. We are talking about one of the banks’ many profitable businesses at the consumer’s expense.
See also: Card types ranked from lowest to highest risk
Featured image: U.S. Army USAG-RP by Mary Davis, Public domain, via Wikimedia Commons.
.jpg){kind=link}