Profinance Insight #3: Our head, our heart and money – what you need to know credit cards

Have you noticed credit card advertisements on television? – sign up to the new deal, with 0% interest for a period of time and you’ll get into their rewards scheme. If you follow the marketing further, we’ll never get charged as long as we pay off our the balance each month.

Why would banks and credit card companies offer such absurdly good deals?

At face value, its hard to understand how the Card companies make money. But a check of the financials for Visa shows a profit of $5.991 billion. Mastercard is similar and its clear these companies are making a lot of money.

So what is happening? For most people the difference between what should happen and what does happen is quite different. Let me explain;

As you sign up to that great 0% interest for the next 12 months and get issued with a $5,000 limit. You’re engaging in a sophisticated multi million dollar global marketing campaign.  The trap is set – waiting for the inevitable. Then;

  • Christmas come along and you really want that bike for one of the kids and they’ll only be seven once and you want to be the great parents… it goes on the card.
  • Then, your parents in law shout the family an overseas trip. They’ll pay for flights and accommodation as long as you pay for the meals. You‘ve got to have this special event and you need a few dollars to make it happen…what to do…yep, its easy, you just put it on the card.
  • And then there’s the braces for one of the kids… the kids have got to look right and fit in, yep, you got this one too!

By this time, you’re at the $5,000 or $10,000 or $15,000 limit. For many middle class New Zealanders this situation is the norm. Couples with good incomes and financial positions find themselves paying 20% interest rates. If you think I’m wrong – latest RBNZ figures show that NZ’s credit card debt is $7.193bn.

What is happening, is that in essence the Card companies understand the psychology of our brains. They know that sooner or later;

  • We will be faced with an emotional purchasing decision, and
  • It will be a small ticket item that will not justify the work involved with a cheaper and better funding method. And;
  • They know that due to the apparently small size of the issue and our embarrassment that we got ourselves in this position, so many of us will ignore or leave the issue lying there for years – even at a 20% interest rate.

If you want to dig deeper into how to manage Credit Cards have a read of this article by Canstar.

Canstar – control your credit cards

But in the meantime, before you make that next purchase and with Christmas coming on think about;

  • Can I do this a better or more cost effective way.
  • On this purchase, what emotional decisions am I making to justify it.
  • And do I need it.

And if you do have a credit card – see if you can just get rid of the thing – it’s only designed to have one out come.