Credit Cards: The Financial Sand Trap?

Credit cards are a very easy way to get what you want. Imagine the digicam that you have always wanted, the one that has five megapixels, four times optical and digital zoom, the one that can record high resolution videos is right at your finger tips. You are salivating and you can feel the smooth surface and grooves of the digicam as you hold it in your hands. So you take your credit card and charge away the expense. You walk away from the store happy, yet there is that nagging feeling inside of you that you have just done something very wrong.

Just the other day you charged a full tank of gas and bought that big screen plasma TV that the kids have been nagging you to buy for three months, but it's no big deal. You can always pay the credit card company the minimum payment required. You think to yourself that these credit cards are great! I can buy what I want and pay only partial amounts of the total amount due. The next month the same cycle repeats itself. You spend more than you earn thinking that you've got it all covered. That is until the bills come knocking on your door and you are shocked at what you see.

Many people today have become trapped in the debt burden that is the so-called credit card. They pay the minimum and yet each month they don't notice that the total amount due is not going down. The reason for this is that each month, interests are added to your total purchases and the minimum payment required is actually just enough to cover last month's interest charges.

Why do you think the credit card business is very lucrative? Here's why (the following scenario is an oversimplified illustration of the point):

Supposing your grandparents decided to give you $200,000, as your inheritance from the family estate. You decide to get into the credit card business, offering 20 cards that have a maximum chargeable amount of $10,000 each. Your subscribers all max out their cards and only pay the minimum required payment each month. Interest rates vary from country to country so for purposes of illustration we will just use 2.50% per month. This should amount to $250 per month per subscriber that will give you a total of $5,000.00 each month. You know what the good news is for the credit card company? IT IS RECURRING INCOME! Your subscribers didn't pay a single cent on the principal amount due. So the following month it is still the same.

Now let's say that half of the subscribers had their heads knocked to their senses and finally saw the light. They figured that they will only use half of their credit card limit. So 10 of them pay their credit card bill and generate expenses (via their card) of only $5000 and the other half still manage to pay the minimum amount. Put all the interest payments per month together and you still end up with $3,750 as monthly revenue. Amazing isn't it? Well, if you own a credit card company I'm sure you are very happy but if you belong to the other side of the spectrum then I'm sure you are very worried about your situation.

Apparently, a lot of people are starting to realize that their spending habits have much room for improvement. Hence, credit card companies have undertaken full-blown marketing campaigns to gain more subscribers, so as to give them more revenue.