Love interest? In 2019, the FDIC reported that Americans paid $121 billion in interest to credit card companies. That’s one big chunk of change.
It’s no secret our world runs on credit, but the in’s and out’s of this complicated, trillion dollar industry are less obvious. Netflix’s clever Money, Explained documentary series takes viewers into why and how America has become cuckoo for credit cards.
1. The first credit card rolled out in 1958. Americard sent 60,000 Fresno residents what would become the world’s most iconic piece of plastic. But at the time, this mystery card was an unknown entity. It didn’t take long, however, for millions of Americans to get on board. The credit card allowed middle class Americans to purchase all the trappings of an increasingly technological, everyday life. Forget Leave It to Beaver. This was the beginning of Leave It to Credit.
2. According to a 2019 poll, one-fourth of Americans have credit card debt. One-tenth of Americans expect their debt to outlive them.
3. Credit card companies conduct thousands of experiments each year, all motivated by one question: “How do we make the most money off each of our cardholders?”
4. In the eyes of credit card companies, there are two categories of cardholders: transactors and revolvers. Transactors pay their bill in full every month, while revolvers do not. In 2018, the Federal Reserve reported that 40% of Americans are revolvers, 40% are transactors, and 20% do not have credit cards.
5. Even if you pay your credit card statement in full every month, credit card companies still make money off your transactions. Every time you swipe your credit card, a processing fee is charged to the merchant. That’s why many merchants do not accept AMEX, which charges notoriously high processing fees. To compensate for these fees, many merchants have to raise their prices. If you use a premium credit card like Chase Sapphire or the AMEX “black card,” you earn enough perks to offset these increased prices. If not, you’re not only paying higher prices: you’re also subsidizing fancy credit card holders along the way.
6. This “subsidization” of fancy credit card holders facilitates a transfer of wealth from lower income families to higher income families, contributing to America’s notoriously large wealth gap.
7. The average APR (practically speaking, the interest rate you pay on credit card debt) is 16%. Most often, this is compounded daily. In other words, every day that you do not pay your credit card bill in full, the amount of interest owed increases.
8. Credit card companies are motivated to subliminally convince you to make the minimum acceptable payment. The longer you wait to pay your statement in full, the more money they make.
9. In 2019, the Federal Reserve reported that 30% of Americans wouldn’t be able to cover a $400 emergency expense. The result? Americans often turn to credit cards during times of crisis, and credit card companies profit from their financial insecurity.
10. You can benefit from credit cards if you use them responsibly. But an understanding of the industry’s motivations brings added nuance to these benefits.
Made to spend.