The Low Minimum Payment Credit Card: Clever, Diabolical and Profitable Strategy

The Visa system as we know it today, was started decades ago by a businessman who found himself in the embarrassing position of not having enough cash in his wallet to pay for a dinner for his clients.

He had the money to buy whatever he wanted; he just didn’t have it on him. He subsequently vowed that neither he nor anyone else in his financial position would ever be embarrassed in that way again.

The minimum payment on a credit card account was then set at full payment, due at the end of the month. 

The credit card issuer’s profits came from charging merchants (who were enrolled in the program) a percentage of the purchase price for each transaction, like today.

Plus each credit cardholder was billed a monthly fee for the privilege of having credit on demand.

A FORMULA FOR MORE PROFITS

Looking for more profits and a larger customer base, the minimum payment was reduced to 5% of the balance so consumers would float debt.

This attracted people who, for the first time, could buy things that they could not, otherwise, afford.

As the money-making potential of the industry began to be realized, cards with no monthly fee were issued in order to attract less affluent customers who would float their loans for extended periods.

Then the minimum monthly was reduced to 3% so consumers would float more debt longer.

Finally, the minimum monthly payment was reduced to 1% to 2% for lower-income customers, which pretty much guaranteed that the debt itself would never be paid off. 

HOW DEBT COMPOUNDS ITSELF 

With this burden of a never-ending interest payment as part of the lower and middle-class budget, the credit cardholder had less cash with which to buy food, gas, clothing, and medical care. So he came to rely upon his credit card for purchasing these essentials, which increased his cost of living even further.  

A clever and diabolical move – entirely calculated – the action of lowering the monthly minimum payment has grossed billions of dollars in profit for credit card companies as consumers got in the habit of charging more and more – and worring about it less and less – because they could make the low minimum payments.

As credit limits were raised and balances ballooned, consumers were turned into ongoing interest streams for credit card companies, paying thousands of dollars in interest on debt balances that revolved from month to month.

LAST PIECE OF THE PLAN: THE INTEREST HIKE

Before the typical customer began to get a clue as to what was going on, and that if he didn’t do something differently he would never get out of debt, the final piece of the plan – to lock him in as a perpetual income stream – was put in place.

Interest rates began to be raised even as the prime rate plummeted.

When it is impossible for a consumer to pay off his credit card debt without resorting to a bare-bones life, what choice does he have? 

As long as he has a job and can cover his bills and keep everything afloat, he will keep paying against the debt forever.

And this is where we were, until the sub-prime meltdown and layoffs began in earnest.

WHEN THINGS GO BUST

During the past several months more and more low-income and middle-class consumers have defaulted.

As a result, credit card companies have been pushing the rates for everyone else into double digits, and thereby trapping a slightly more affluent set of customers.

This is a strategy to offset their losses in other financial sectors other than the credit card sector, and to hold the value of their stock.

Bottom line, encouraging customers to charge more and pay less each month, raising rates, and making it drop dead easy for credit cardholders to entrap themselves in never-ending debt has made the credit card industry the most profitable industry in existence, hence the proliferation of credit cards issued by every organization imaginable.

For more on how credit card companies work today, and the strategies consumers can use to take control of their credit cards and pay them down, I refer you to Money-Saving Credit Card Secrets which is a complete education on how to use all the tips, tricks and insider knowledge known only by experienced credit card call center agents to your own advantage.

I also recommend The Skinny on Credit Cards, How to Master the Credit Card Game for increasing your personal financial literacy.