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 →]

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 →]