I found an interesting article in the Wall Street Journal this morning. It puts the whole aspect of credit card debt in a different perspective.
You have noticed the interest rate cuts Federal Reserve chief Bernanke has been implementing lately, right? You are probably wondering how these cuts are quick to affect how much you earn on your savings account but slow to decrease the amount of interest you pay on those credit card balances. Any decreases to the average rate charged on a credit card will never be as low as that of the federal funds rate because the interest rate your credit card charges you is directly related to their profits.
But how does this relate to you paying someone else’s debts? Lately credit card companies have seen an increase in delinquencies and this is reflected in the amount of debts they have had to write off resulting in higher bad debt expense. As profits shrink (average interest rate charged) a bigger proportion of those profits is used to offset this bad debt expense. In other words, more of your payment is used to pay for the debt of Deadbeat Joe.
By carrying a balance and only making minimum payments on your credit card not only are you paying for your debt but also that of someone else.
I am not sure if the article is free to view (some are sometimes) but if you would like to try you can find it here.
