When your card is maxed out, you must add extra to your minimum payment, to make sure that your balance stays below your credit limit.

Otherwise you will get dinged for an over limit fee at the end of the month, when the interest that has been accruing all month gets added to your balance and takes you over your credit limit.

So many still do not understand this.

And that’s why the amount of money generated by penalty fees like late charges and over limit charges have increased by about $1 billion annually in recent years, and should top $20 billion this year. [Read more →]

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.  [Read more →]

Having fallen into the low-mininimum payment cycle, a lot of Americans and Canadians are in trouble financially.

Tens of millions, in fact.

Yet, in reading comments on blogs and on-line articles, understanding for the plight of the those who have entrapped themselves seems in short supply.

Those who comment seem to think that just because they resisted the traps set for consumers, or they have enough money for a standard of living that does not need credit, that those who fell in the credit trap are deserving of shame because they “should have known better.”

In fact, it is consumers who are being accused of “taking advantage” of the system, both in regard to the subprime mortgage meltdown and the credit card meltdown, even though it is they who are now losing everything they worked for.

[Read more →]

In my last post I discussed the flaws in just one of Canadian Finance Minister Jim Flaherty’s credit card reform proposals, yet there are others.

Like the U.S. reform bill, at least half of what has been proposed isn’t going to be of much practical help to consumers in helping them get out of debt.

For instance, when you’re getting over your head in debt because your credit card interest rate has just been doubled, getting a 21-day notice or a 45-day notice that your rates are going to double is not likely to be of much long-term value in planning your exit strategy.

What you really need is for your rates to be capped so you can pay off your debt.

[Read more →]

Following the lead of President Barack Obama who signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 on Friday, Canadian Finance Minister Jim Flaherty has proposed changes to Canadian credit card legislation in order to provide more transparency for Canadian credit cardholders.

One of Flaherty’s stated goals is to help credit cardholders understand how much the credit they are getting will cost them in the long run.  

How will he do it?

His proposal is to make credit card companies provide a calculation for each customer that shows the total cost of paying off his credit card balance when only a minimum monthly payment is made. 

While the idea may sound good at first blush, it is deeply flawed.  [Read more →]