A Credit Card is a Debt Instrument. Simple concept - it eludes many, if not most.
When you apply for a Credit Card, you are applying for a loan. You are going into debt. That is plain and simple enough.
Yet, many people don't get this - or refuse to get this.
"I pay the balance every month!" they cry.
Yes, so far that is the case. But the Credit Card industry knows you better than you know yourself. And they know that, sooner or later, you will join the legions of "average Americans" who have $15,000 of household credit card debt.
Yes, read it again, that is the average that 55% of credit card holders carry as a balance.
A Credit Card is a debt instrument.
What does this mean? What do I mean by this?
Well, to begin with, when you sign up for that $10,000 limit "miles card" at 15% interest, your credit score is dinged by that amount. Even if you "pay off the balance every month", the people who know a lot more about debt and finance that you ever will realize that this is a potential debt on your account, and will decrease your available borrowing power accordingly.
Your credit score will decrease and the amount you qualify to borrow will decrease, with each additional credit card you get. And yet, many people see having numerous credit cards as a sign of "good credit". It is not.
So, whether you "pay off the balance every month" or not, it shows up as a debt, or potential debt, on your record. If you get a lot of high-limit credit cards, it means you might not be able to borrow money for a mortgage, when you really need it.
A Credit Card is a Debt Instrument, period.
Again, look at the agreement. It is a loan document - with a balance, an interest rate, and repayment terms. Only unlike a regular loan, the payment terms can go on indefinitely. Yes, that is the beauty of "revolving interest" - for the lender, that is.
"But I pay off the balance every month!" you cry.
Good for you. So far.
No one sets out to end up in intractable Credit Card debt. And no, the folks who end up over the barrel, being gang-raped by VISA and MASTERCARD were not "weak" or "stupid" - they were merely Average Americans with their $15,000 intractable credit card debt.
And you think, for some reason, you can outsmart the smartest banks, the smartest bankers, the smartest psychologists - in the whole wide world - and "pay off the balance every month" and get free airfare to Duluth.
Good luck with that. Why do I say this? Again, the Average American with Credit Card Debt has about $15,000 in household credit card debt. They didn't get there voluntarily - or willingly.
Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had credit cards, and 55 percent of those families carried a balance. (Source: Federal Reserve Bulletin, February 2006)