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Wealth Virtues Journal: February 24, 2010

Will Credit Card Reform Really Help the Consumer? Consumers Need to Help Themselves

Filed under: Credit and Debt — Tags: , , , , , — James Ward @ 7:15 pm
© 2009 Poor Richard Web Press, LLC

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No one can argue that the practices of the credit card companies were not very popular with consumers. Some practices such as raising interest rates on a card because of balances on other cards, and raising rates without notice were some of the more unpopular policies that have gone away. 

Now before you start feeling victorious over those big nasty Wall Street cigar smoking fat cats, consider that the banks who issued credit cards have had to write off over $35 Billion in bad debt last year.

Credit card companies have had nine months to prepare while the Federal Reserve clarified new policy.  In that time, the credit card companies have resurrected fees, and lifted interest rates on balances not paid after 30 days. Some have ties fees to “perks” or extra services while maintaining a lower interest rate for the “preferred” customers.  There are also some banks and credit card issuers that could possibly charge inactivity fees or cancellation fees.

In the past, it was fairly easy for anyone to get a credit card. What many people still fail to recognize is that the credit card companies never forced any individual to actually use a credit card.  We individuals did so of our own (dare I say it) free will.  In a society that prides itself on individuality and choice, apparently there are a lot of crybabies that still don’t understand the simple concept of “consequence.”  If you think about why a bank or credit card company would raise your rates when you are carrying tens of thousands of dollars in debt, it is because you have become a risk.  The likelihood that you will not pay what you rightfully owe in balance principal made the credit card companies do what they did.  It is nothing personal – it’s just business.  What is personal is you own ability to determine wants vs. needs.

Take a look at Ben Franklin’s Thirteen Virtues to see how they can inspire you to eliminate your debt, or better yet, use credit cards under the new reform policy to your advantage.  There are two below that I believe are pertinent to the use of credit cards.

Frugality (Make no expense but to do good to others or yourself) – This is first and foremost, the rationale to be used before making any purchase. Consider this as the basic “wants vs. needs” test in determining if you should make any purchase.  Don’t get me wrong – I make “want” purchases all the time using a credit card.  But I do so knowing that the credit card balance will be zero in less than 20 days. Plan for and know your “needs”, and use whatever surplus is available for your “wants”.

Justice (Wrong none by doing injuries, or omitting the benefits that are your duty) – Credit is a form of trust.  You are offered “trust” in the form of a little piece of plastic and with it, an associated dollar limit. Once the credit card company has purchased the item for you (yes, that is what they are doing), you are obligated to pay them back – and soon.  Think about when your neighbor loaned you his lawn mower.  Many folks return it cleaned up and fully fueled – kind of like an interest payment. The credit card company doesn’t ask for as much, just that you pay the balance off in less than 30 days.

It is interesting that over the past year we have seen a decline in the use of credit cards.  With the current high unemployment levels and loss of consumer confidence, it is no wonder that people in general are more focused on their needs over their wants.  There is also a definite rise in the amount people are saving.  This all sounds pretty good to me.  What about those new fees including cancellation or non-use fees? My advice is to read everything carefully before signing up for a card.  Apparently the new reform laws require the print to be bigger and in less legalese.  Don’t sign up for overdraft protection. I would rather be denied a purchase then suffer an extraordinary fee for bank coverage.  Of course, if you know your balance and always pay your cards off, this will never happen unless there is some clerical mistake.

For those of you that still carry excessive balances, a top priority will be to eliminate that balance. This is best done by not actually adding to the existing balance. I also know that there are circumstances beyond our control where the use of a credit card for en expensive purchase is warranted and unavoidable.  This could be due to a sudden illness or need of a loved one, or some other unexpected, but needed purchase.  Do you best to keep the high balance from consuming you over many years.  The virtues of Frugality, Moderation, Temperance, and Justice are your best tools.

Once you are in a position of power over your credit card issuer or bank (i.e., having a zero balance), you should engage with them on lowering your fees and interest rate.  For obtaining new credit cards, avoid cards that charge inactivity or cancellation fees, and look to have only two, or at most three cards.  You may even want to look for cards that offer rewards.  I use a particular card for all of my planned purchases to include gasoline, cable, and other reoccurring expenses.  Since they are planned expenses, they are paid off every month, but my bank provides points based on dollars charged.  The card also has no reoccurring fees.  Based on those points, I was able to get an iPod Touch, and a digital picture frame. It is certainly nice to get the “wants” without having to actually pay for them.

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