Renaud Laplanche Shares The Potential Pitfalls of Using Credit Cards

Financial expert Renaud Laplanche recently outlined the ways in which credit cards are bad for you. He was inspired by the story of a woman in Chicago who works nights at a Chicago hospital and spends four hours a day driving for Uber. She barely sees her children because she has to pay off a large amount of credit card debt.

Her trouble started when her car’s transmission broke. Months later, the car’s suspension had to be replaced. She put both of these repair costs on a credit card, creating $5,600 in debt. She decided to use a promotional offer that let her pay no interest if she paid the balance off in six months. When she couldn’t do this, the interest rate increased to 29.99%. This increase was retroactive to when she started the card, costing her $800 in penalties.

Stories like this are not uncommon. Renaud Laplanche says many credit card companies purposely put people in a cycle of endless debt. If a person pays just the monthly minimum payments, they pay far more for whatever they charged due to interest. In this woman’s case, if she kept paying only the minimum every month she would have paid $18,861 for her $5,600 charge. She started driving for Uber so she could put $400 toward her credit card every month.

Credit card issuers charge high interest rates. The average rate for someone with bad credit is 24.5%. The average rate for someone with good credit is also high at 16.9%. Store cards have even higher interest rates. They also have high fees. Credit card issuers have many types of fees such as late fees, annual fees, cash advance fees and balance transfer fees. Between rates and fees, credit card issuers hauled in $163 billion from American consumers in 2016.

Renaud Laplanche says credit card companies design their awards programs to make money. The more a person puts on their credit card, the more rewards they get. He likens this to rewarding a child for not doing their homework as the wrong incentives are being used. People aren’t rewarded for being responsible. They’re instead rewarded for buying things they don’t need so they can get more miles, cash back and points.

You get dinged when you open a new credit card. Doing so results in a “hard inquiry” on your credit report. A recent hard inquiry can reduce your credit score by up to 20 points. What’s even worse for your credit score is having a high utilization ratio. If you owe a lot in comparison to your overall credit availability, you can lose up to 40 points on your credit report. Renaud Laplanche advises you need to keep your utilization ratio below 30%.

The woman in Chicago still has a $3,900 balance on her credit card. By paying $400 a month, she is hoping to have it paid off within the next year. She cut up her credit cards and now refuses to use one. She learned the lesson that credit cards aren’t good for you.

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