Credit Cards and Kool Aid

Credit on Trial, Day 1: By Charles J. Norwood

How many of you still drink Kool-Aid, or any of its variants (Flavor-Aid, Drink-Aid, Publix Powdered Drink Mix, etc.)? I do. It’s cheap, it’s sweet, and it’s good! It even has Vitamin C, so I could assert that it’s “good for you”! Then there’s the flip side—sugar. Very few folks actually follow the required instructions and instead make the syrupy stuff that you get from church picnics. It’s killing you slowly, but hey once you get a sip, it’s hard to stop.

However, the credit card companies have some special Kool-Aid they want you to drink. They want you to believe one thing—you need them to survive. They say you shouldn’t have to save up to buy things when you can have it now. They don’t want you paying with cash. So they put in everything they can to hook you—sending you cards that tell you how special and unique your needs are and how this Platinum Card or that Capital One card was designed for “you” or “your needs.” They’ll tell you that without them, you won’t be able to buy a new car or get a nice home mortgage and with their help, they’ll show you a ‘smart’ or ‘responsible,’ way to get credit. Like a said, it’s a special Kool-Aid.

Don’t drink it. It tastes good going down. But you’re destined for failure. I didn’t get my card until senior year, and I’m still climbing out of debt that at one point reached $2500 last July. (It’s down to $825 now). But I bet you think you’re doing well—making the minimum payments at a good introductory rate. Well, let’s go to the Tote Board for some of those elegant 6 month cards that you’re bombarded with in your mailbox every day:

NOTE: ALL THESE CARDS HAVE 0% INTRO APR:

Student Card Offer:	6 – 9 mos. later APR (after intro rate of zero pct):	Default (Late) on just one Payment - APR :
Discover 5% Cash Back!	16.99%	21.99%
US Bank Visa Card	13.49% + $20 fee	28.49%
Citi Dividend Card for Students	14.56% + fees	31.56%
Chase Platinum for Students	17.49%	31.49%

Sources: DiscoverCard.com, Visa.com, and MasterCard.com national websites.

This is what we call the carrot and the stick. The carrot is the Intro APR rate and benefits that get you hooked. I need not tell you what the stick is for or where they plan to use it on you. I encourage you to look these up, and read “the fine print”—that is if you can find it! The websites themselves go through great lengths to hide the after 6 month APR from you, and many fail to even mention the “finance charges” and fees. Websites make the good stuff appear in LARGE, bolded, colored, text. Look at how the fine print is presented—and tell me how much they “care” about your “responsible credit use.”

Listen—nobody with intelligence runs up a credit card in a month, a day or even a week. It’s a month-to-month buildup. It’s $20 here, $15 there, $100 here, $17 on gas there. Then you make the minimum payment of $15, which, after deducting finance charges, usually builds up your balance secretly.

It’s like borrowing $100 from a friend and they charge you interest of 20%, but they take installments from you of $5/month. (You owe them $120). From that $5, there is an “I’m a Great Lender and Friend” fee of $1 each month. Thus, instead of $5, you pay a net of $4. So it takes 30 months, not 15. So in a sense, you’ve paid your “buddy” $150 for borrowing $100. Not too mention what happens if you borrow more while you’re paying back, which is what most credit users do.

You may even think you’re “beating the system” by getting all those nice rewards—that Kool-Aid does that to your mind. But the American Bank Association cites that people spend 14-18% more income using credit and debit cards than cash—many consciously spend more so they can build up their points balance. Why do we do it? Because it doesn’t “hurt” to see plastic slide through a slit, but you’d think about it more if you took cash into Best Buy or Kroger for your next purchase. So any benefits you get are usually offset—imagine if you had 18% more cash in your bank.

Credit card companies hire the smartest people on the planet. They know how people react psychologically with their finances. They compile statistics and trick you. They also have the sweetest, tastiest Kool-Aid this side of . Mark this down: the day you find that you can’t pay your balance in full for the month—that day is the day you’re overextended.

You never have to wait for that day to come though. There are solutions. Follow The Three. Pay Cash. If you want to know how, or if you have a different opinion from what I’ve said here (I’m all about being fair and balanced) drop a line. In the Comments section.