Credit Cards

The Globe and Mail has a piece today on how credit cards are getting ready to “implode.” The problem: many credit card companies based their profits on having customers too deep in debt. As I discovered, when you are incapable of paying your credit cards on time, you dig yourself deeper and deeper into a financial hole. Somewhat like trying to dig yourself out of quicksand, you work hard, but eventually drown.

Why? Profits are generated not only from the credit, but also from the variety of penalties. You go over your credit limit, you are charged. You are late, you are charged. Their business model is based on clients borrowing too much and failing to pay. As the Globe and Mail reports:

“The flip side of the coin, is credit card issuers that base their business model on consumers not paying off their card balances. Higher balances mean higher revenues along with penalty fees and jumps to higher interest rates in the event of missed payments.

“In this model,” Ms. Nishikawa said, “delinquent borrowers become cash-flow generators, and at the extreme end, the goal becomes: ‘How do we get borrowers into delinquent status as soon as possible, in order to maximize returns?’”

Even in good times, this strategy is a “tight-rope walk” between high fees and high charge-offs. “But when the economy turns bad, as it has, this strategy clearly cannot be sustained.”

She cited Capital One Financial Corp. as “worst in class.”

I was their perfect client. As I was going through my divorce, I relied on credit to pay for my food as I was spending money on lawyers. Eventually, I maxed out and came to the edge of the precipice.

What can I recommend? When you do get those letters from the credit card companies offering you pre-approved cards, shred them, burn them, destroy them in any way you can. The Penny Pincher knows that it is better to live within one’s means.

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