Credit Card Fees
What of the world of hidden credit card fees? Or even the obvious ones? Everyone knows someone who has been charged credit card late payment fees.
“If you don’t like to pay credit card interest, always pay the bill in full before it is due. Right? A month or so ago I couldn’t find my Visa bill. So I guess that $1,000 will be more than enough, write out a check, and send it in. The next month the bill includes a “finance charge” for $16. Upon inquiry, it turns out the guess was wrong. The first month’s bill was $1197.77. I pay the second month’s bill in full, including the additional $197.77 and the $16 finance charge, four days before it is due.
“Recall that if the first month’s payment is $1197.77, rather than $1000, there is no finance charge at all.
“In effect, there is a “loan” of $197.77 from the credit card company. It runs from the seventh of one month (when it is due) until the fourth of the next month (when it is paid). To charge $16 interest on a 26-day loan of $197.77 amounts to $224.62 interest each year — a whopping 114 percent! Since the card advertises a 14.88 percent “annual percentage rate” you understand my curiosity.”
How Credit Cards Work
When you sign the merchant’s credit card charge receipt, you are creating a “negotiable instrument or other writing which evidences a right to the payment of money.” This negotiable instrument is deposited electronically into the merchant’s checking account, a special account required of all businesses that accept credit. The account goes up by the amount on the receipt, indicating that the merchant has been paid. The charge receipt is forwarded to an “acquiring settlement bank,” which bundles your charges and sends them to your own bank. Your bank then sends you a statement and you pay the balance with a check, causing your transaction account to be debited at your bank.
The net effect is that your charge receipt (a negotiable instrument) has become an “asset” against which credit has been advanced. The bank has simply monetized your IOU, turning it into money. The credit cycle is so short that this process can occur without the bank’s own money even being involved. Debits and credits are just shuffled back and forth between accounts.
And then there’s the insanity of having to borrow money to pay off your credit cards. It’s a no win situation. The next example is from a loan application:
I’m Keith from Wichita, Kansas and I’m applying for a sizable loan for between $30,000 and $50,000 to be qualified sometime this January.
I need this loan to pay down credit card debts I have for the past credit card balances I have accumulated as my hours were cut back on the job. I’m looking at getting a different job and moving to Kansas City or Salina by the end of March.
I have been using credit cards to pay for food and car fuel for the last 2-3 years because of the monthly short-fall of cash. I need to lump all my credit card debt together into one decently sized payment each month, and I can pay it off for you some how. I don’t have any collateral though, so this is purely a cash loan.
Banks benefit twice–once from the credit cards, and then again from interest on the loan to PAY the credit cards. The banks make profit from this, but will make much more profit if a credit card holder pays late or carries a balance on their credit card. One of the examples above demonstrates this point: over 114% interest if fees and penalties are included.