The emergence of a new credit card order that encourages consumers to live within their means
The creditworthiness of individuals plays a vital role in building their financial future which is why you have to pay all attention to building and maintaining a good credit score. To create a strong foundation for strengthening personal and business finances, you need to earn well and make timely payment of credit card bills. The discipline demonstrated in making regular credit card payments reflects in the credit score which maintains a steady, healthy level and enhances your borrowing capacity. When you have a good credit score, it becomes easy to start a restaurant business, buy a home, a car and even it could help you to get a better job as some employers refer to credit scores when hiring people.
Credit scores point to trustworthiness
The credit card companies are on the lookout for trustworthy consumers for personal or business financing whom they can issue credit cards because their business depends on consumers making regular payments. Therefore, they choose people with good credit scores, whom they can trust and offer them credit cards. The credit limit extended to customers depends on the credit score because people with high credit score enjoy higher credit limits. That clearly shows that credit card companies encourage people to spend as much as they can within permissible limits.
On the other hand, they also want them to make payments on time which help credit companies as well as cardholders. However, the problem is that many people often find it difficult to pay off the entire bill on time. That is when they fall back on making minimum payments to ensure that they do not turn defaulter.
Monthly minimum payment
The customer angle – When customers make minimum payment against credit card bills the only satisfaction they derive from it is that they could avoid defaulting on payment. Some even wrongly believe that it could help them get rid of balances on time. However, except for escaping being a defaulter, nothing good happens to consumers.
Firstly, the high-interest charges on the balance amount keep spiraling that inflates the credit card debt and can become unmanageable. If you have a credit balance of $10,000 and take the minimum balance payment route, it could take at least 21 years to pay off the entire balance considering that the average APR of credit cards is around 25%.
Secondly, despite making payment, your credit score remains unaffected because the minimum amount does not qualify for credit score calculation. It is a significant disadvantage because the wise credit card user would like to improve credit scores by making timely payment of credit card bills.
Overall, except for deriving the satisfaction of not tripping on credit card bill payments, the fallout of minimum payment goes entirely against consumers.
The credit card company angle – Since credit card companies earn from the interest they charge on outstanding balances, it is quite logical that they are happy with consumers making minimum payment as they would earn more. As the debt keeps lingering, the earning of credit card companies keep growing. However, it does not mean that credit card companies encourage consumers to make the minimum payment. Minimum payment is only a lifeline given to consumers, and the onus is on them whether to use it.
That credit card companies do not insist for minimum payment will be clear on knowing some recent developments in the credit card business. It will also demonstrate their good intention of helping consumers to improve credit score.
Legacy credit cards
Some credit card companies offer Legacy visa credit card to their consumers which is entirely different from other credit cards. Because it is for people, who want to improve their credit score. The card is also ideally suited for those who have experienced refusal in credit card issuance by some companies. It is different from secured credit cards in that it does not require making any deposit for obtaining the card. Instead, it provides an actual line of a credit card to consumers. The company charges annual fees and other charges on the bill that you have to pay even before you make any purchase. In exchange, you would enjoy a small line of credit which you can use for making purchases. As you pay the bill in full, it shows that you have proved your creditworthiness and the credit line keeps expanding.
Since the credit limit has a link to prior payments made, which should always be the bill amount, it clearly shows that the company is not at all encouraging people to survive on minimum payment. The company tries to discipline credit card holders so that they spend within the means that enable them to settle bills in full and thereby improve their credit score.
Freezing spending – a new move
In a recent development, some credit card companies are trying to enforce discipline in expenditures among cardholders to check reckless spending that leads to uncontrolled debts. The Royal Bank of Scotland (RBS) has sent new terms and conditions to millions of card users that empower the company to put a freeze on spending or withdraw credit limits of cardholders who are persistent overspenders. The move aims at helping customers keep away from long-term credit card debt. It appears that credit card companies are going to raise the flag and warn over-spenders before they go down the spiral of uncontrolled long-term credit card debts. If customers pay more interest than the actual amount owed and the trend continues for two consecutive 18-month periods, the credit card company will clamp down on their spending power and freeze it.
The new terms and conditions have raised wide-ranging debate especially among a section of credit card holders who often use zero percent balance transfer deals to keep evading the credit limits and multiply their borrowing capacity. However, it is hard to deny the good intention behind the move to discipline consumers for avoiding the pitfalls of making minimum payments that could lead them towards perennial debts.
The credit card companies are assuming a more significant role in discharging their social responsibilities by encouraging consumers to live within their means.