Credit Cards Explained: How The Credit Card System Works

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How The Credit Card System WorksWhen I first started writing about credit cards I quickly realized that there are credit cards for bad credit, and credit cards for excellent credit – but very few credit cards for those in between. What I came to realize over the last two years is that to some degree, this is because there are two types of credit card users who I like to identify as the credit card “Haves” and “Have-Nots.”

The Haves
The people in this group are responsible with their finances and have excellent credit. They use every credit card like a charge card and pay off their balance in full each month. The credit card “haves” reap the benefits of credit card rewards programs and are often able to pay for some or most of their vacation every year with credit card rewards alone.

The interesting thing about the credit card “haves” is that many aren’t rich by any means – they are just frugal and financially savvy. They live below their means, and take the time to read the fine print for every financial service before they apply.

Most importantly, the “haves” understand that credit cards are not a way to postpone financial troubles and are not a realistic way to alleviate money problems.

The Have-Nots
Credit card “have-nots” use credit cards as a way to live above their means. People in this category may have started off with great credit, but now use credit irresponsibly and have quickly sees their credit scores tank. The massive amount of interest that accumulates on their debt makes it hard for them to ever get ahead with their finances, and they may find themselves stuck in this situation for many years to come.

“Have-nots” use balance transfer cards as a way to postpone debt that they owe. Many become discouraged and simply don’t want to face their debt head on, so putting it off until another day is a much easier option.

Eventually the “have-nots” go in search of more credit only to be presented with cards for bad credit with dangerously high fees. The fees are so high because these cards are considered high risk by the lenders, mainly because people who apply for them often don’t pay on time or may not ever pay the debt off because they are already in such a big hole.

The Have-Nots Pay For The Haves
The sad reality is that, in the end, the “have-nots” enable the credit card companies to operate as profitably as they do. Those who are responsible with their card have their vacation paid for by someone who was irresponsible and trashed their credit. The “have-nots” allow the “haves” to gain from fantastic interest rates and awesome credit card perks.

Many new regulations were put into place with the Credit CARD Act of 2009 (new age requirements, requirement to opt in to over-the-limit fees, must be 60 days late for a retroactive interest rate hike), but the fundamental system remains the same. In the end, everything really comes down to personal responsibility. In the world of credit, everyone starts out on the same level, there is no class system, and no elitists from day one.

Those who approach their financial situation realistically and responsibly are able to benefit from many of the financial services out there. However those who lack financial discipline often find themselves in a predicament that is very hard, if not impossible to get out of. In many ways, the rich get richer, and the poor get poorer. The only way out of being a “have not” is intense discipline and devotion to getting out of debt.

Are you disciplined enough to be a “have” or are you going to let credit card companies take advantage of you as a “havenot”?

This post was written by Kevin Fleming who runs CreditShout, a blog that reviews credit cards like Chase Sapphire and helps people to manage their finances.

Categories: Spending and Saving

  • KDB

    The problem is that credit cards are like the freebies drug dealers give out – once your are “hooked’ it is hard to quit the habit. So even if you have some, and start using, chances are good you’ll end up with balance.