I’m Such a Deadbeat

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There are over 600 million credit cards in circulation that accounts for 1.5 Trillion dollars in consumer spending. An estimated 115 million card holders carry a balance on their credit cards every month, also known as “the revolvers”.   These cardholders are the “sweet spot” for the banking industry that generate over $30 billion dollars a year in interest and fees. - Source

If you’re like me and pay off your credit cards every month, we are known as the “deadbeats” to the credit card companies.   Deadbeats are consumers who avoid interest and fees by paying off their balances in full every month, rather than paying the minimum payment and carrying a balance.

Why it Pays to be a Deadbeat

Credit card companies can automatically increase your interest rate if they have any reason to believe that the risk of being repaid by the customer has increased.   This means that if you’re accumulating too much debt on your credit card or if you fell behind on any other obligations such as a mortgage or a car, this is enough reason for them to increase your rate.   This practice is called the “universal default”.

Let’s say for example you have a Chase credit card at a 6.9% interest rate and a Citi credit card at 11%.   It was the holiday season and you went out to buy gifts for friends and family.   You charged all the gifts on your Citi credit card and went near the high credit limit that was available.   As a financially responsible cardholder, you promptly paid off the balance in full the next month.   A few days later, you receive a letter in the mail from Chase stating that your interest rate is being increased from 6.9% to 19.9%.   It doesn’t make sense does it?   Banks are allowed to increase your interest rate at any hint that you may be a high risk customer.

Usury laws were designed to help protect consumers from lenders who charge high interest rates.   However, major credit card issuers are based in states without usury laws.   Let’s take the example from above.   If you have a Citibank credit card, take a look at where they’re located. South Dakota. If you have a Chase credit card, you’ll notice that they’re located in Delaware.   So what do these two states have in common?   These two states have no caps on the interest rate they can charge consumers!

Why Creditors Love “Revolvers”

Besides the obvious that “revolvers” pay only the minimum payment and generate huge profits for credit card companies, creditors understand that it’s difficult for someone to change their spending habit.   A consumer who recently filed for bankruptcy is a prime target.

“Nearly all debtors stated that they had received offers for credit in the first months following their bankruptcy” -Source

Frequency of Credit Offers Per Month in First Year after Bankruptcy – Source

Average 14.56
Median 10
Standard Deviation 29.35
Respondents 339

 

So why are families fresh out of bankruptcy such an ideal target?   It’s hard to imagine someone to dramatically increase their income in the first few years out of bankruptcy.   Just because someone filed for bankruptcy doesn’t necessarily mean that they’re more financially responsible.     People in financial distress are more likely to carry balances, exceed their credit limit, and use cash advances (which carry higher interest rates).   So what now?   New bankruptcy laws prohibit consumers filing for bankruptcy within 8 years; this means 8 years of minimum payments to the creditors!   The banks have just hit their “Sweet Spot!”

How to go from a “Revolver” to a “Deadbeat”

By now, who wouldn’t want to be a “deadbeat”?   I can write an entire article on how to save money and pay off your debts.   Off the top of my head, the single biggest advice I can give you is to live within your means and start a budget.   I know it sounds lame, but I challenge you to create a monthly budget and stick with it for at least 3 months!     Anyone who is overwhelmed with debt and on the verge of default, there are realistically only a few options: credit counseling, debt settlement, and bankruptcy (if you haven’t already filed within 8 years).   You can go to SpringCoin to get a free debt analysis if you feel you’ve dug a hole too deep.

I’ll end it on this note:   Congratulations to all the deadbeats out there!

 

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