Note: All Orchard Bank credit cards are now issued by Capital One.
Arguments continue to be made that credit cards are evil and that they represent all that is wrong with the economy today. Issuers continue to lend money to people that can ill afford to take it, and when they can’t pay it back, their world is forever changed. But are the credit card issuers really to blame?
If everyone paid their bills on time and in full each month, credit card companies would only be able to make money through the interchange fees they charge merchants, so just like a lot of other things in life, those that are well prepared and responsible reap the benefits while those who are unprepared and irresponsible do not.
So what are the spectrums of good and bad credit card use? Allow me to play out a scenario where someone with an 800 FICO score and someone with a 500 FICO score use the same credit card for their entire lives. Exactly how much can be gained and or lost from a single credit card over a lifetime is not an exact science, but the difference between responsible and irresponsible credit card use is quite staggering. So here we go …
Bobby B: Responsible Credit Card User
Bobby B just turned 25 and has all of his financials in order. After checking his credit score, he found out he has excellent credit and decided to apply for the Chase Sapphire Card. After being approved for a $5,000 credit line, Bobby B uses this card for his everyday purchases such as gas, food, and entertainment.
Every month, Bobby pays his credit card balance in full, which is about $500, never paying a dime in interest payments. Assuming Bobby B maintains this record until he is 60 years of age, (35 total years) he earns the following rewards from Chase:
- 210,000 rewards points for monthly use ($6,000 spent per year x 35 years)
- 10,000 bonus rewards points for his first purchase
- No bad remarks on his credit report, which will help in obtaining other credit in the future.
Equating the standard conversion rate of $1 equal to 100 rewards points, Bobby B cashed in for $2,200, never giving anything to Chase. Not enough to retire on but certainly a nice little payday.
Mikey P: Irresponsible Credit Card User
In this less happy scenario, Mikey P just graduated with $50,000 in student loans and other unsecured debt. After checking his credit score, Mikey realizes he can only receive a credit card designed for people like him … someone with poor credit. He applies and is approved for an Orchard Bank MasterCard, with a $1,500 limit, that carries and APR of 19.24%. (Varies from year to year but for arguments sake, lets assume this is the average APR over the course of Mikey P’s card use). In addition to the poor APR, Mikey P has to pay an annual fee of $79.
Mikey uses this card for his everyday purchases such as gas, food and entertainment and decides to only pay off a small portion of his balance every month. Gradually receiving a credit limit increase over the course of his lifetime, he spends around $300 a month on this card and pays off the same amount on his monthly statement, receiving one late fee of $35 a year and leaving an average rotating balance of $1,500.
Assuming Mikey maintains the same record until he is 60 years of age (Same as Bobby B, 35 total years) he loses the following amounts in interest and yearly fees from Orchard Bank:
- $2,765 in annual fees ($79 x 35 years)
- $1,225 in late fees ($35 x 35 years)
- $10,101 in interest payments (Average balance of $1,500 with APR of 19.24%)
- No rewards or bonus offers from Orchard Bank
All told, the total loss by Mikey P for being an irresponsible credit card user is $14,091 – Money that was spent on something he never saw.
Now granted, the above two scenarios are somewhat extreme. Hopefully, Mikey realizes that he’s being stupid and does not continue on the same path. But sometimes when you try to dig yourself out, you only dig deeper. Some would say that it could be a lot worse in scenario B, so the lifetime loss on one credit card could actually be much greater. Credit card issuers love guys like Mikey, and live with guys like Bobby.
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