A Conceptual Clarification on how The Credit card System works

Now its important to take your credit card usage very seriously and I say this in term of usage because when I tell people I haveas hobby of not picking  cards, they look at me as if I’ve gone crazy and have a problem.

But I’ll tell you my only problem is that the chase sapphire really increased their annual fee to a 550 a year and now it no longer make sense to keep compound with the HP Morgan reserve, so those are the problems that I deal with, but today we’re being informed that new data was just released and found that 15 million Americans have skipped their cards payment and that I represent percent more common and now represents 3% of all credit cards users.
Anyway, let’s discuss exactly what’s going on, what this means for the future of all credit card users and how it you’re reading this.

Not to mention this could be a very severe sign of what’s to come because if the tend continues we could be in for very rough times ahead, so.

Let’s go further down this credit card rabbit hole.

First let’s go over the basic and cover some of these headlines we got about millions of Americans slipping their card payment and this represent users who delve financial hardship which allows them to temporarily deter their payment interest fee for a specific period of time, this is also during a time where almost half of America is in card debt.

With almost 1/4th of these people adding to their credit card balance as a death resist to the illness, and even more than that 40% of the people can’t afford to make more than the minimum of the payment and this is if my own generation had this.

So all the fellow millennials our there because one out of every 3 of us recently had to increase the card Debt out of necessarily and the cherry on top of this Is that we now have articles coming out taking about how consumer debt hits it’s all time high now surpassing 14 trillion dollars but how severe is all of this.

What does it mean for you people really and how do you know whether or not you’re going to end up in another depression or OT really isn’t that big of a deal just blowing it out of proportion again.

Like most of all this news alike headlines, but as it is right now the outstanding card debt is not looking as good, by the end of 2019, American have accumulated roughly 30 billion dollars of the debt and that’s works out to be an average debt of 5,700 per person and just as you would expect when you go and break this down further, it was found that the people who had the lowest household networth are the one’s with the highest credit card debt.

This is mostly because they love no other option other than to use the credit to pay for the essential and because cards interest rates would be ridiculously high, it makes it extremely difficult to pay off, if you can’t afford to make more than a monthly minimum payment which like I mentioned earlier represents 40% of all card users.

Now on the surface you might think that card companies must love this, the more debt the people pule on their cards the more companies make and if you think that you’re bkt entirely wrong, but credit card companies just make money though interest payments, instead they make their money through different ways.

So the First cards make their memory though what’s know as an interchange fees, this happens every single time you use or swipe your card and when you do that the credit card company collects a small 2.7% processing fee for the merchant, so even if you never pay interest and you always pay off your balance in full, credit card companies are still making money and as you can see from American’s express they make more money from processing fees that thru so from interest and many other companies do generate about 10 to 20% of their total revenue from this as well.

Now the second as we’ve just talked about, they do make money from interest payments obviously the credit charge you 27% interest that money is going straight into their pocket, I’m about to slow you owing a credit card company could be extremely overdrive, American Express made 3.2 billion dollars from interest payments, now of course it’s important to mention with this that not all of their interest income come as profile because there’s a portion of people out there who just charge up a credit card and then never pay it off in default, so crossing the street, it’s estimated that 10% of the credit card users end up doing this leaving then with about 90% profit margin on interest.
And that is fees: this could include the annual fee you pay on s lot of the rewards cards out there, it might be a late fee or a balance transfer fee or a clash advanced fee, so given all of that for the credit card consumer things are not looking so good and with the 5.7k annual balance and the average of a 20% interest rates that means that people on average are spending a 100% a month on interest payments.

Credit cards
Now recently in an effort To help curb default many lenders have set up their financial assistance waivers, with the credit card users Can eventually raise their hands and really Pause payment, interest fee, penalty fee for a few months with no impact to the credit score at all. In fact this was so common that practically any time I logged into my American Express or chaise bank account, there’s a big banner up there that asked if I was impacted by the situation and if so it was very easy for me to do through and pursue payment.
Even though I didn’t do this, I did check it out and the entire process seems relatively easy and very simple with only a few clicks away, so given how many people are suffering credit card debt. How many people are struggling financially, the delays for the stimulus check being processed and with everything Else going on, people would be smarter to take the offer and have extra cash at hand as needed and then come back to this after words, when all of this begins to stabilize however, this would be in the perfect ideal fairly take land world where everyone pays up their credit card as agreed, no one carries a balance and after all of this is done, people just end up resuming their payments as normal which as of right now, we’re not sure whether or not this is going to happen.

The concern is that people dip themselves into more damage by borrowing more money, as seen by the 25% of people who increased their credit card debt during the crisis and then when all of this is over the unemployment rate still remains high, this stimulus runs out, the unemployment benefits exipires and banks are going to be scrambling around when a portion of those people can’t argued to pay them back.

This is especially true when 40% of the people out there can’t afford to make more than the minimum monthly payment and that leads us to believe this is not going to be an easy hole to climb out of, so to help get ahead and combat this, banks have just recently begun lowering their customers line of credit out of nowhere, without any warning whatsoever .

There was even a recent data point from someone who had their 7,500 credit card limit reduced all the way to $350 but for credit card companies, doing this makes sense, if people lose their job or began using up their savings then typically credit card are next in line and if people are unable to get jobs to them Pau of their credit card that could end up as a default on the credit card and a loss for the credit card company. So in a way lenders are getting ahead of this by decreasing the lines of credit to people who can potentially be a higher risk.
So in that way they can begin to mitigate their risks, in the event that people charge up credit card and decide not to pay them back but depends on how you see this, not all of it is bad new and in the middle of everything there is some light at the end of the tunnel.

First the total credit card debt actually fell this quarter from 950billion to 890 billion meaning some pipe are actually going and paying off their credit cards. However no hoof need comes without some bad news and the bad news is that the overall credit card debt is always high in the quarter 4 of Every single year on the holidays and them it’s paid back after the new year.

So this trend of people paying off their credit card after holidays is not really nothing new and if this trend continues by September of this heat we’re going to be in the same debt as we saw in quarter 4 of December last year and we just end up digging ourself in more and more credit card debts.

Now the second. Little bit of good news here is that 70% of then consumer debt is made up of mortgage debt at a time when right now, interest rates are at its lows, so I think it makes sense that people are borrowing more money right now when interest rates are at record lows levels , they just end up costing less at the long term.

The third is expected that overall credit card usage drops to its lowest level in March since 1989, although to be fair that’s just a time where credit card companies are decreasing their limits pretty much everywhere is closed and people are forced to stay inside and not spend their money and just save it instead so the way I see it that hair kind-of make sense but even with all of that, it leads us to the question.

What’s going to happen when The Economy reopens people are going to. Eventually return back to work and they can’t afford to pay off their credit cards. I thinks the truth is seeing credit cards skyrocket like 10.k% is not that surprising given hoe simple of a process it is.

And then there’s pretty much no downside to dealing financial hardship and just having a temporary parse on your credit cards, although the people is if these debt go unpaid for too long it could ruin people’s credit scores, it could send their end up taking a huge loss, they’re going to be his less likely to even money to other people in the future. Which would cost and end up resourcing our economy growtth

It just means that future loan are going to be a lot more difficult to obtain in and your credit likes are going to be a lot more smaller which means therefore after your credit card realization which therefore affect your credit score we vsj even begin to see this happening now. As lenders are tightening their standard very similar to how we saw in 2008.
So that’s my view on the credit card, wherever it’s good idea to increase the limit it’s not up to me to say.

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