The Dirty Secrets of Credit Cards

By Paul Michael. Last updated 22 September 2015. 21 comments

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The average American household carries almost $16,000 in credit card debt (only counting indebted households), according to a recent study by Nerdwallet. If that’s not bad enough, the credit card companies are involved in what can only be described as a conspiracy to keep Americans in debt, permanently.

I watched an incredible PBS documentary online last night called “Secret History Of Credit Cards”. You can watch the 5-part eye-opener here at your leisure. But if you don’t have an hour to spare, here are some of the biggest dirty secrets for you. You may want to sit down for these.

1. Minimum Payments Are Ripoffs

The minimum payments banks require on your monthly bill are not regulated. Banks are required to set minimum payments that will allow borrowers to pay off the debt in a "reasonable" amount of time, but after that, it's up to the banks to calculate their own minimums. The result is often minimums that shave only a few percentage points off the principal, which extends the time borrowers pay interest. Here's an example. Let's say you owe a modest $2000 on a card with a decent interest rate of 13% and a minimum payment based on paying 2% of the principal. Your minimum payment would be a mere $40, but it would take you almost 15 years to pay off the balance! Before that debt is retired, you will have paid the bank $1813 in interest. Cha-ching.

2. A Late Payment Can Skyrocket Your APR

Before the CARD Act became law this was really bad, and thankfully, that law has mostly eliminated the practice of "Universal Default," which allowed banks to hit you with a skyhigh APR if you were late paying any creditor, not just your credit card company. And while things are definitely better, the banks can still bump your APR to 25% or 30% or even higher if you make even one late payment. This "Penalty APR" will be noted in your card agreement and will be applied to all new purchases. If your payment is really late, 60 days or more, the bank can apply the penalty APR to your existing balances, too. (Ouch!)  Card issuers are required to review any account that has been slapped with a Penalty APR after six months of on time payments, but that's no guarantee the Penalty APR will be reduced.

3. Late Payments Can Cost You More Than a Late Fee

Have you seen the credit card commercials that claim cardholders won't be charged a fee if they make a late payment, especially if they've been good customers? First of all, every cardholder should know that it's easy to get a late fee waived: Just call and ask. Every cardholder should also know that a late pay can hurt in other ways, too. For one, if you've been avoiding interest charges by paying your balance in full each month, a late payment will immediately incur an interest charge on your balance, and it may take two billing cycles for the grace period to get put back in place. Depending on how late you are, the bank may report your account to the credit bureaus as a late pay, dinging your credit score. If the account has been open for a year or more, the bank could apply the Penalty APR to future purchases. Finally, every day you're late is another day you're paying interest on that debt.

4. There Is No Federal Limit on Interest Rates

Don’t you find it odd that in a time of very low interest on anything from car loans to mortgages, credit card companies can hand out APRs that embarrass loan sharks? Well, it’s not unusual to see 34.99% APRs, especially as a penalty rate, and the reason is simple. Most credit card companies reside in states like South Dakota or Delaware, states that have very weak or even no “usury laws.” So, there’s no cap on interest. By law, there’s nothing to stop them charging whatever interest they want. Here’s a map that links to the locations of top 10 credit card issuers.

5. Grace Periods Are Getting Shorter... or Being Eliminated

There's nothing in the law that requires banks to offer a "grace period" on purchases before charging interest. It's a holdover from the beginnings of the industry. Still, most cards continue to offer them as a perk, and it really is a good deal for consumers, as long as they pay their balances in full and on time. Slip up and leave a small balance for next month, however, and you'll lose your grace period and start incurring interest from the moment you make a purchase. Worse, it can take two months of paying balances in full to reinstate the grace period, if it can be reinstated at all. Check your card agreement and pay off those balances!

6. Cash Advances Hit You Twice in the Wallet

First, as I’m sure you know, you’ll get a different, higher APR applied to your cash advances. But you also get hit with a transaction charge, around 2.5%. Even credit cards that confidently announce “no finance charges” can still bill you for these transaction charges.

7. Good Payers Are Called "Deadbeats"!

Deadbeat – it’s what credit card companies call those folks who are responsible and pay off the balance each month. They don’t like those people, not one bit. That’s because they make little to no money off of them. No, credit card companies like you to carry a nice hefty balance and pay only the minimum each month. If you’re one of those people, known as ‘revolvers’, you’re part of the crowd that contributes roughly 90% of the credit card company’s income. What a crazy upside-down world credit is.

8. You Can Demand, and Get, a Better Deal

APR too high? Hate the annual fee? Want a longer grace period? It turns out your credit card company may just have to do your bidding. See, the fees they charge are not considered a necessary cost of doing business, so you can request, firmly, that they be reduced or eliminated. Now, imagine what would happen if we all did that? No wonder they want that one kept secret. And remember, if all else fails, find a lower cost APR card and transfer your balance. You have at least that going for you. 

That’s the scoop, folks. If you happen to be in spiraling credit card debt, there are places you can go to for help. PBS has a great list of resources right here. And from now on, I hope you all look a whole lot closer at that handy piece of plastic in your wallet. It’s far more ominous than it first looks. Pleasant dreams everyone.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any bank, card issuer, airline or hotel chain.

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Guest's picture

I am a deadbeat according to the credit card company's term. I always pay my outstanding amount on time, and guess they don't really earn off me. Hey, they might just one day cancel my credit card because I always pay on time! :-D

Guest's picture

Although the credit card companies do deliberately extend credit to people they know are irresponsible, it's hard not to ultimately find fault with the fools who reach the age of majority with absolutely no clue how to handle their money. You are an adult, you asked for credit (they didn't force you to take a credit card from them), so take responsibility for yourself. You are not 13 years old so if you wind up with credit card debt that you cannot pay off I don't really feel sorry for you.

Far worse than the credit card companies in the ethics department are debt consolidation firms, which entice the very people too money-foolish to handle a credit card and get them to pay exhorbitant fees to "consolidate" their debt. Many promise to "erase" debt but this is misleading to put it mildly.

Then there are states like Texas which make debt collection extremely difficult. Does this promote responsibility? No. I've had to deal with this personally when a landlord stiffed me for my deposit. I won a court judgement but three years on am still trying to get the money out of her. The laws in my state simply make it too easy for people to dodge their responsibilities. That's the other side to this issue--and perhaps explains why credit card companies charge those high rates.

Paul Michael's picture

In an age when cash is being replaced by plastic and technology, it's not really possible to survive without some kind of plastic in your wallet. A lot of places won;t take checks any more. I don't carry thousands in my wallet, so if I want to purchase a big box itme I'm left with giving either a debit or credit card. Most banks combine them both now. And try making transactions abroad with a debit card. My own company only deals with Amex, and we all have to have a Corporate Card. So, in an ideal world, you could avoid the CCs. But in our world, they will become a part of your life, if not now then soon. Saying you're not being forced to use one is like saying no-one's forcing you to own a car. 

Guest's picture

So who is forcing you to carry a balance? I've not paid a dime in credit card interest in over ten years. It has something to do with keeping a sensible budget.

Paul Michael's picture

Not saying that at all. Read a few stories about people who paid on time for years, with no balance, and then lost a job or had a medical emergency. See what happens then. I agree that people misuse credit cards, but the companies make it very, very easy and attractive to spend money and pay only a minimum. You are not a profitable customer for a credit card issuer. I sincerely hope you never get into a situation where something prevents you from paying off your balance. Once that happens, it can be a slippery slope. 

Guest's picture

I've never found paying the minimum remotely attractive (I know how to read). But then I am not retarded. I take responsibility for my actions and manage to get through this scary adult world unscathed.

It is credit. "What if you lost your job?!?" Well, like most responsible people I have savings. In the direst scenario I have friends and family to turn to. I cannot conceive of just charging up my credit cards like an imbecile and then whining about my debt.

You do realize that part of the reason for the high interest rates is that there are people who default on their cards. Would you rather that this form of credit were not offered at all? That there be no penalties for late payments? It's difficult to make out who you are trying to defend other than people who are mentally disabled and/or unwilling to meet their financial obligations.

Guest's picture

If credit card companies don't make money from "deadbeats", then how does American Express make any money at all? The answer is transaction fees.

Guest's picture

american express not only provides customers with "charge cards", they have credit cards as well

Guest's picture

Yes, and Amex has the industries highest transaction fees which is why many merchants do not accept it.

Also, the regular Amex charge cards have hefty annual fees.

But in the end, do not discount cc company profits from transaction fees, they can be considerable and potentially more profitable then interest charges.

Someone carrying a balance of $10,000 paying 10% interest is not as profitable as someone spending $5000/mo and paying off the balance.

Andrea Karim's picture

And creditors have been praying on the mentally disabled.

In one case, the film shows Citigroup's lending arm foreclosing on a Mississippi shack owned by developmentally impaired woman and her severely retarded 44-year-old son after they were refinanced into a loan they couldn't afford.

I understand that some people are great with money, and that many of us have families that we can turn to in times of financial stress. My own debt was created by irresponsible behavior, but that doesn't mean that that's the case for everyone.

I wonder if perhaps defaulting on a loan or line of credit would be more or less prevalent if interest rates and penalties weren't shooting up as the result of universal default? I suppose there's no way to know short of actually doing away with the practice (which some banks are, in fact, eliminating).

Guest's picture

I never knew that there were secrets about credit cards like those that you have just revealed.

I love what you have just given to us as a tip and i hope other credit card holders also realize the pros and cons there is about them.

Thank you very much for the good post.

Guest's picture

None of this suprises me.

Guest's picture

I think it's possible, (to those who feel credit is just a fair practice), that if it were not for credit and even insurance, that the overall cost of daily life would be much lower. Imagine a world, where people actually had enough money to get what they need. Notice I said need, not want!!

Guest's picture

Credit card usage is similar to drug addiction - just dont start. I'm thrilled for people who are responsible and foresighted enough to pay their balances in full on time, but I dont agree for their mean-spirited comments directed at those who are perhaps less "together" with their finances. It comes down to knowing your own tendencies and not putting yourself in a situation to fail. If you know you like spending a bit too much, dont get a credit card. Just dont go down that road. Focus on making more money, and just buy things with cash or debit card, once its gone, its done. And yes its possible to get along without CC's. I've been doing it for years. It simply forced me to find a way to increase my earnings so I can occasionally splurge on stuff I like without getting into long-term trouble. Repaying loans is very difficult for me, so I try not to take any.

Guest's picture

1. When I started my senior year in HS (in . . . gulp 1991) my mom and my homeroom teacher withdrew me from my second Shakespeare class and enrolled me in a class my teacher was co-teaching with our business teacher. It was practical economics. Lessons included learning how to read stock reports, credit reports (and more importantly what a credit report), balance a check book, get a credit card, and our research project was to find a job that would hire a high school graduate, calculate our payroll taxes & Social Security costs, find a local apartment, budget for utilities, rent, food etc. We had field trips to the grocery store, etc. Then we had things thrown at us, like- what if you have to go to the doctor, how much will that cost. . . . anyway, best thing my mom ever did for me, and I even wrote the business teacher how I credit her with my 896 credit score today. I can read Shakespeare in my free time, at least I didn't fall into the same trap so many of my peers did with astronomical and debilitating credit card debt.

2. Suze Orman is a crazy orange Umphalump with no shortage of shoulder pads and goofy sweaters, but she's dead-on right with the emergency fund evangelizing. Our hot water tank broke two weeks ago. $800 later for parts and labor, and I am SO SO SO glad I have a decent emergency fund. It took a lot of work and sacrifice to save up for it, but I feel better knowing that I can handle some of these crappy situations without going into a complete panic. Incidentally, I did get a Lowe's card to save 10% off the price of the actual tank, and it's already paid in full. I think this article is good because if you KNOW the rules, you can use them to your advantage - be a dead beat to them, be in control of yourself. Back to Suze, I wish she would go to Congress and do a "Can you afford it," segment when they work the budget.

3. My first credit card was from Citibank. This weekend, after sixteen years, it dies and is replaced by a Bank of America card because I use the UPromise rewards program (to date, I've reduced my student loan by $1800 by paying medical bills first with my credit card to both get a discount from the hospitals, then a UPromise kickback, then paying the cc balance in full from my emergency fund). Strangely, I was sad to lose my Citibank card having had it for so very long, but then I remembered when two years ago someone stole my number online and made $10,000 in purchases. Even though we very closely monitored our credit, and alerted Citi the instance we saw the first errant charge for $300, because we hadn't lost the actual card, they refused to close the account and reissue a new card. Within a week there were 8 charges totaling more than $10K. I had to sign 8 different affidavits and have them notarized. So, then I realized, I won't miss Citi.

Credit cards are a part of our lives, because they are a part of our culture. How we use or misuse them depends on us, and I am grateful to the writer for educating the public on these issues. The better informed you are the more you can make the credit card and credit card company work to your advantage.

Guest's picture

I am sure yoiur stories are true but must correct you on one point.... your credit score FICO only goes up to 850... you must be an incredible customer to have a higher score than what is capable.

Guest's picture

Also, yes credit card companies make a fortune in transaction fees - not as much as from the revolvers, but a lot. Your wait staff and hair stylists, etc. have to share in those fees with their tips - so if you are a heavy user of credit cards or even debit cards, consider bringing a stash of ones with your when you dine out or get your hair done, etc. to give as tips (if you're a tipper - to each his/her own).

If you frequent small/locally owned businesses, consider that a cash transaction puts as much as 4% back into the local business person's pocket as well.

I'm not telling you to actually do either of these things, but they're things I do because my sister is a lifer-waitress who told me about the tips thing and we really try to buy from local merchants when we can. One day at a craft fair a woman told me about the credit card transaction fees and I wrote her a check instead. Some people don't take the risk of checks, so cash may be inconvenient, you have to take the information that's there and make your own decisions based on your values and priorities.

Guest's picture

"Let’s say you pay off the balance of your card in full at the end of one month, say April. But in May, you don’t pay off your complete balance. Boom, some credit card issuers will charge you for two months’ worth of interest." can you explain this a little more? How are they allowed to do that??? I found a similar artilce called Credit Cards – Flexible Friend or Foe? and it explained this a little as well, however I am still confused. Thanks!

Guest's picture

I belive i can. I have worked in the credit card industry for 25 years. What bit you was the obnoxious way that interest is assessed on your account.
It is based on on average daily balance.

if you buy something on 1/1 for $1,000, get your statement on 2/1,
pay $1000 on 2/15.
on 3/1 your average daily balance is
1000 x 15(number of days it takes for them to get your check)/28 (Days in month).

Stinks don't it. Want some good news?

Visa just lost a large legal action. They was forcing merchants to hide the cost of the credit card transaction. now merchants can charge extra to use credit cards, and less to use cash. This is actually very good news. I can explain if you need me too.

Guest's picture

It's nice to know that my credit card company loves me! I have been their favorite type of customer for about ten years. I am finally getting my act together though. No one ever realizes how much minimum payments end up costing you either. Especially if you are routinely late or go over your limit. I did that, a lot.

Guest's picture

I had a credit card with merrick bank and the interest was terrible, plus they took 6 dollars a month for the annual fee. I finally ended up cancelling the card bit I probably paid them like 4 or 5 hundred in fees and interest while I had the card.