Can somebody clear up this misnomer for me?

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7055
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Can somebody clear up this misnomer for me?

Postby 7055 » Sun Mar 30, 2014 5:40 pm

I'm having a hard time understanding credit card companies, they seem contradictory. Why is it that you have to have a good credit score to get approved so that you are not a risk but then when you get your credit card, which is basically loaned money, they hope that you only pay the minimum balance or miss some payments so that they can make bank off of you. Doesn't that seem contradictory?


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Postby Kaiokenryu » Sun Mar 30, 2014 8:41 pm

i think you are taking the latter way to its no so correct conclusion.

in my experience it isn't that the CC comps. want you to "pay the minimum".....its that they understand that there is an entire sector of the population that WILL only pay the min. they will gladly take all of the loaned money upfront....as they still earn what are called swipe fee...which translate into billions of dollars annually globally. the interest earned on the revolving balances happens to be delicious gravy on top of their mashed potatoes.

some of us carry a balance for one reason or another...its the price paid for borrowing money like you said. but even if they cut out interest....they (the CC companies with integrity) would still be just fine. that's how much money there is in swipe fees.

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Postby JoDa » Sun Mar 30, 2014 8:58 pm

Yeah, I don't necessarily think they want you to only pay the minimum or miss payments, they just want you to USE the card. There is a lot of money in swipe fees, and also a lot in people who pay a small amount of interest because they aren't careful to pay the full balance off before the statement date.

But those are beyond how credit scores work. You can never pay a single dime of interest or fees and still have a great credit score. You don't get "bonus points" for paying interest or fees, you get them by reporting a small balance, which you can pay in full before any interest hits, making timely payments, and not running up your balance beyond a reasonable number (generally considered to be under 10% of available credit). If you charge only normal expenses you can easily pay and pay every bill timely, you can get a great credit score without paying through the nose for interest or fees.

I'm also not so sure they like people who miss payments. Those people are always a risk for just not paying - whether through settlement, bankruptcy, or a write-off. I don't know how much CC companies collect in fees from people who will honor their debt but occasionally miss or make payments late versus how much they lose from people who just never pay, but there are a number of people out there who just never pay or only pay a fraction of what they owe. I have family members who went through debt settlement and only paid about half of what they spent. That's a big ding to their bottom line (in my family members' case, the companies in total wrote off something like $20K)!
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7055
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Postby 7055 » Sun Mar 30, 2014 9:02 pm

JoDa wrote:Yeah, I don't necessarily think they want you to only pay the minimum or miss payments, they just want you to USE the card. There is a lot of money in swipe fees, and also a lot in people who pay a small amount of interest because they aren't careful to pay the full balance off before the statement date.

But those are beyond how credit scores work. You can never pay a single dime of interest or fees and still have a great credit score. You don't get "bonus points" for paying interest or fees, you get them by reporting a small balance, which you can pay in full before any interest hits, making timely payments, and not running up your balance beyond a reasonable number (generally considered to be under 10% of available credit). If you charge only normal expenses you can easily pay and pay every bill timely, you can get a great credit score without paying through the nose for interest or fees.

I'm also not so sure they like people who miss payments. Those people are always a risk for just not paying - whether through settlement, bankruptcy, or a write-off. I don't know how much CC companies collect in fees from people who will honor their debt but occasionally miss or make payments late versus how much they lose from people who just never pay, but there are a number of people out there who just never pay or only pay a fraction of what they owe. I have family members who went through debt settlement and only paid about half of what they spent. That's a big ding to their bottom line (in my family members' case, the companies in total wrote off something like $20K)!


Well if they don't want you making minimum payments, why do they make the minimum payments so low and refer to the people who pay of their balance in full as "deadbeats?" The whole thing seems contradictory

And about debt settlement, that's crazy that you can just write off $20k like that, if that's possible, wouldn't everyone be doing it? I'm sure it must destroy your credit score but still...

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Postby MemberSince99 » Sun Mar 30, 2014 9:26 pm

I think minimum payments are designed just as a temporary way for you to show you haven't forgotten about the debt, but I don't think any lender wants you to run up the card(s) and then just pay the minimum for the rest of your life.


I've never heard people who pay their balance in full referred to as "deadbeats" - can you give us any examples of that?


First of all if you do that, your credit will be trashed, the lender you screwed will sever ties with you for possibly many years (or maybe for good), your other lenders will be quick to take action to protect themselves and your credit will take a dive. For years. They don't have to accept debt settlement and may simply hire debt collectors to harass and eventually sue you. If you're thinking it's a free ride, nope, there is a price to pay for it. Trust me, take it from a person who spent years hiding out from the debt collectors, that's not a life style I could recommend to anyone, living on pins and needles always wondering if today is the big day you get served papers for a lawsuit.


I think you have some pretty big misconceptions maybe due to being new. I will agree it can be a bit of a "catch-22" to get started but there are ways around that, it's just not necessarily obvious what they are to most people starting out (for example getting a store card which is easier to get, a secured card, being an AU on someone else's card, a credit union, etc). If you were a lender, wouldn't you prefer to give credit to people with high scores and excellent history vs someone who just did a debt settlement for 20k? From their perspective it's all about risk, and trying to minimize it while maximizing reward (profit).

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Postby 7055 » Sun Mar 30, 2014 9:33 pm

MemberSince99 wrote:I think minimum payments are designed just as a temporary way for you to show you haven't forgotten about the debt, but I don't think any lender wants you to run up the card(s) and then just pay the minimum for the rest of your life.


I've never heard people who pay their balance in full referred to as "deadbeats" - can you give us any examples of that?


First of all if you do that, your credit will be trashed, the lender you screwed will sever ties with you for possibly many years (or maybe for good), your other lenders will be quick to take action to protect themselves and your credit will take a dive. For years. They don't have to accept debt settlement and may simply hire debt collectors to harass and eventually sue you. If you're thinking it's a free ride, nope, there is a price to pay for it. Trust me, take it from a person who spent years hiding out from the debt collectors, that's not a life style I could recommend to anyone, living on pins and needles always wondering if today is the big day you get served papers for a lawsuit.


I think you have some pretty big misconceptions maybe due to being new. I will agree it can be a bit of a "catch-22" to get started but there are ways around that, it's just not necessarily obvious what they are to most people starting out (for example getting a store card which is easier to get, a secured card, being an AU on someone else's card, a credit union, etc). If you were a lender, wouldn't you prefer to give credit to people with high scores and excellent history vs someone who just did a debt settlement for 20k? From their perspective it's all about risk, and trying to minimize it while maximizing reward (profit).


I understand they don't want you to default on your credit but I have heard of tricks that the credit card companies employ to get you or encourage to pay less every month and carry a balance, thus allowing them to make money on interest.

One of them is that if you set up a direct withdrawal of funds from your bank account, some of them will only pull the minimum payment unless you make sure you set it up to pay your balance in full.

To answer your question about "deadbeats" It's from "the Skinny on Credit Cards" by Jim Randel

In that book it also talks about how they lowered the minimum payment from 5% of your balance to 2% to get people to spend more and carry a larger balance or something along those lines.

It also talks about how they like giving credit cards to college students because they have a tendency to rack up debt.

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Postby MemberSince99 » Sun Mar 30, 2014 10:00 pm

I've heard of those tricks as well. Never had them done to me personally but I'm sure they've been done to others. Those are unethical in my opinion, even if they aren't illegal (though they may now be and probably ought to be).


Personally I figure I'm an adult, and I want control of who gets paid what when from my account. I take the time to go online and I pay. I have their numbers in my cell so if I can't get online to pay I can call. I accept that part of being responsible is making sure I pay my bills.


Well that must be his personal opinion then, and not that of any reasonable person I've ever heard. Seriously, how is it reasonable to call people who pay their bills "deadbeats"? That's the opposite of what that is. It's like calling people who take great care of their kids "child abusers" it makes about as much sense.


I heard that too but I thought with the CARD Act they had to increase that. I know some of them increased it, but if you go into a lot of debt and rely on the minimum you will be paying a very cheap mortgage for pretty much the rest of your life if you try to pay it off that way. I'm sure they would love it provided you make your payments, or some of them would, others would kind of take a dim view of it, and none of them will be likely to give you more credit while you are doing that, so that kind of tells you how they view that behavior even if it profits them.


Last I heard, and I have not been to college in many years now, but last I heard, they were no longer doing that. Maybe someone who knows more about it can pipe up on that one.

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Postby JoDa » Sun Mar 30, 2014 10:18 pm

I've heard the deadbeats thing before, as well, but that has not been my experience. I NEVER pay interest, and whenever there's the slightest hint I may start using a card less, the issuer tosses me something...an increased line, an "interest free" offer, balance transfer goodies...whatever. They don't care that I pay them off every month, they just want me TO KEEP SWIPING. The "deadbeat" cancellations/reductions I've been hit with have been from full-on non-use, and only from shadier issuers (Cap One and HSBC). Solid, reputable companies like their customers who swipe a lot and pay their bills.

And, just to be clear, settlements like my family went through DO trash your credit. This isn't something people just do because they don't feel like paying the bill and will get off scott free. They wracked up MAJOR debt they couldn't pay and felt the best way out was settlement. I disagree - I think they should have buckled down and dug themselves out...theirs was not a situation of "extreme circumstances" but rather "extreme spending" - but the fact that those things happen mean that CC companies are eating some costs. I don't have the data to say whether eating those things outweigh the high fees for missed or late payments, but I know they do happen. And, yes, they're paying for it now because they can't get credit to save their lives. Going on an all-cash diet has been very trying for them after living on credit for so long, but they have no one to blame but themselves (seriously, seriously...they make enough that they should be able to live comfortably, but behaved irresponsibly).
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Postby otter » Sun Mar 30, 2014 10:35 pm

I think a lot depends on the card issuer as well. I think a lot of the sub-prime issuers(First Premier, Cap One, Credit One) and store cards are content seeing their customers paying the minimum payment since the limits on the card are low and the interest rate is high. Those issuers don't make their money off of swipe fees, but on interest and other fees. An issuer like Amex, though, would tend to get nervous seeing a customer with a high CL who has maxed their card out pay the minimum for months at a time.

I don't think the average creditor likes seeing missed payments though (except for the sub-sub-prime lenders). I think you might be getting confused with banks... banks love when their customers overdraft your checking account because they can charge outrageous overdraft fees (although some of the recent banking laws do away with some of the excesses of that banking practice). There's nothing better for a bank than to charge 4 overdraft fees for an account which is only overdrawn by a couple of dollars.
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Postby JoDa » Sun Mar 30, 2014 11:14 pm

And even 4 overdraft fees aren't enough that the "borrower" will be able to declare BK or enter settlement over them, so they'll get the money. I'm very happy with the way the new regs are set up, though not so much with their marketing. When the new regs went into effect, I got the emails to "accept or decline overpayment protection" and I, of course, declined. Decline the transaction if something weird happens and I don't have the money, fercrissakes! But they still send me monthly emails asking me to "protect yourself from overpayments!" i.e., let them overdraft me AND PAY FOR IT. It's very slick marketing, and for someone who didn't totally understand what they were authorizing and living on a shoestring, they may opt in to those fees unwittingly.
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