By Carlos De Paula

A look at most people’s postal boxes these days would give impression that banks are giving away money. If you have good to fair credit, you get tons of credit card offers. If have a crummy credit rating, you are still getting offers, many with life saving low APR balance transfers. Even if you have just filed for bankruptcy, you will still get less savory offers, but they will be there.

It is very easy to have enough credit corresponding a few times your annual salary. These offers are often quite appealing, with zero to 3.9% APRs, great offers on balance transfers, and often banks raise your credit limit within 6 months, if you pay your credit cards on time.

Sounds good, after all, at zero percent you cannot go wrong. It is money given away!

Not so fast. When you sign a credit card application, you normally believe you have a contract set in stone. Just like any other contract, you believe, any changes would need to be agreed by both parties, in advance, and should be negotiable. Guess what, credit card companies, as a normal course of business, amend the contracts unilaterally, without asking your permission and without negotiation. If you use the card again, you are agreeing with the change!

These changes normally have to do with the appealing APRs that first prompted you to get the card and instruments whereby banks can increase them punitively. Back in the old days, if you were late on credit card payments you would get a nice call, the day after the payment was due. And a nastier one 10 days after. I suppose banks eventually figured that most people were normally late due to an honest oversight, sooner or later, and thus the rules of the game were changed. Initially, banks began charging late fees, which often amount to more than 30 dollars, every month you are late. You would no longer get a call, just a $30.00 bill on the next statement.

Adding insult to injury, if you do have quite a few bills to pay, eventually you might be late a couple of times a year. So the banks perceived, I guess. Now, if you are late at least twice in the course of a consecutive 12-month period, the bank can increase your APR, on the ground that you have just become a little bit of a higher risk. So, your appealing zero percent credit card, suddenly becomes a 12 %, then an 18%, until becoming a ridiculous 30% APR credit card.

By that point, you might be trying to shift credit card balances to new offers, and thus try to manage your APR crisis. Guess what. A lot of credit card companies have a policy of obtaining your credit report every once in a while, and you might have an immaculate record with them, never been late a single time in 20 years, but the fact that you goofed with bank “X”, which is in no way affiliated with them, gives them ground to hike up your APR. All of a sudden you are no longer one of the their best clients: it does not matter that you shifted a $5,500.00 balance to their appealing 6.7% APR last month. Your new APR is now 18%, more than the 16.7% of the card you shifted from!

And the story goes on, and on. By the time you are through with them (which might be never in most cases), you have an unmanageable debt, all done lawfully.

You might ask, why do banks lend out such huge mounds of money to people they know will not ever pay the full balance, because they are incapable of sustaining such high debt load? And why do so with unsecured credit, in other words, based on a promise to pay, without any collateral? We might instinctively believe that the amount of deposits a bank holds gives it “value”. Our instincts are wrong. The reality is that in accounting, the deposits are considered a liability. Why so? Because the bank has to pay the deposit back. So what gives a bank real “value”, is put it simply, assets, are operations that will generate money for it, among them, loans.

Although secure loans are safe, they generate a little spread (the difference between the cost of money to the bank, and the interest paid by the borrower). The real bucks are in unsecured credit, such as credit cards. Additionally, not only are there big bucks in unsecured credit, but also “big fat”.

In this day and age of mega bank mergers, banks have to prove they are good prospective partners by the sheer volume of loans on their portfolios - the fat. Not only that, it does not matter for a bank that you are only paying the minimum due every month. If you that, you are giving them profit, which is what they need to build fat for potential mergers, and build value in their balance sheets, wherefrom big year-end bonus will come for management. Really, a 65 year old bank president cares less if you are still going to be paying your credit card 20 years from then, he wants his bonus now! So, in a nutshell, the “system” serves them well, even if they know an “x” number of people will eventually file for bankruptcy or simply stop paying the bills.

Some folks have taken the position that bankruptcy might be a good way to “get back at the system”, essentially becoming professional Chapter 7 filers. However, the bankruptcy laws have been changed, and the general opinion is that the new law will not make life easier for debtors. Using bankruptcy “to get back at the system” is indeed a thing of the past.

So, my advice to you is, keep the number of credit cards you have to a minimum. If you can, pay off your entire balance at the end of the month. If you can’t, never pay only the minimum due. If at all possible, don’t get any store credit cards, which always have high APRs from the start, and which are generally more aggressive collectors. Use the old system of saving money to make major purchases and never exceed a year’s income in credit card debt. Don’t let the situation get out of hand: consolidating your debt might be a good idea, and always do it sooner, rather than later.

YOU CANNOT WIN THE CREDIT CARD ROULETTE. DON’T TRY IT.

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