Why Banks and Finance Companies Want You in Debt

Make no mistake. Credit cards are deliberately designed to keep you in debt forever.

How so? The repayment terms are designed to encourage you to pay the minimum payment only, thus opening the door for very high rates of interest to be charged (up to 20% and higher) on the portion that you don’t repay on time.

If you need more convincing, just look at your credit card statement. It’s the minimum payment that appears in the little highlighted box together with the due date, not the total balance due.

You are fooled into thinking that all the bank wants is the minimum payment. And they do, but it’s not out of kindness. It’s you who loses your interest free period and it’s the bank that reaps mega-interest payments from you at up to 20% or more.

Don’t let profit hungry banks rule your life. If you use a credit card, then you need to be repaying much more than the minimum payment otherwise you will soon be feeling a lot of financial pain.

For banks and finance companies, debt is their business. For them, the more debt the merrier! And for the most part, the Australian population is very obliging when it comes to being led by the nose into what banks promote as today’s ‘modern payment system’.

What an epic misnomer. Modern payment system indeed! It is a payment system designed for one purpose only. That is, to make banks a shipload of money at your expense.

Recent figures show that Australians have more personal debt than any other citizens of any other country in the world. We even have more on a ‘per capita’ basis than the United States of America. It isn’t often that we outdo the USA. To top that off 1.7 million people will be in debt forever.

In bank-speak, credit card holders are referred to as either revolvers or transactors. Wouldn’t you think that you might be referred to as a customer? Given the amount you and other credit card debtors contribute to bank profits and share prices, you should be regarded as a valued customer.

So what’s the difference between a revolver and a transactor?

A transactor pays off their balance each month and therefore pay very little for the use of the card. In the short term, banks and other card providers make relatively little money from them.

On the other hand, banks and card providers make a fortune out of a revolver. If you are a revolver, you don’t or can’t pay back your credit card balance in full at the end of the month; which means you are paying interest on an unpaid balance, at a rate of up to 20% or more.

For every month that you allow your card debt to revolve to the following month you accumulate ‘interest on interest’, all at exorbitant rates. Your interest free period is lost in the month that you don’t repay the closing balance and also in the following month as well.

You are in the bank’s favourite customer group and also, I should add – their target market.

Of course, you can reach higher honours with your bank or card provider by being a constant revolver. This is a revolver who is unable to pay back the balance month after month, year after year and, with a rapidly growing card balance, tend to be in debt forever. Many people obtain new cards to pay off the existing ones and the debt keeps shifting and mounting.

If you are in this group, then you are more than likely struggling financially. The irony is that you and four in ten of Australian households in financial stress are generating incredible profits for the banks and card providers and keeping their share prices buoyant.

What the banks do is legal although the morality of any organisation deliberately designing products to encourage its customers into a never-ending cycle of debt is questionable.

In case you thought that as a transactor, you were having a win over the bank because they don’t make much money out of you, then think again. To a bank or any other credit card provider, a transactor is nothing more than work in progress.

How so? Because most transactors are only a job loss; a relationship breakdown; or a serious health event away from becoming a revolver almost overnight. This is why financial protection plays such an important role in is an absolute must, but this is a story for another day.