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There are some things you can't live with and you can't live without. Many of us would probably put credit cards high on the list. It can be hard to remember what it was like before credit cards established a permanent home in our pockets or pocketbooks -- how we used to carry a lot of cash or our checkbooks with us. Credit cards are super-convenient, and they often even reward us with cash when we use them. But they also drive many of us deep into debt, as they help us buy things we can't really afford, or just charge us exorbitant interest rates on all our reasonable and unreasonable purchases alike.
Alas, poor credit card issuers like Capital One Financial (NYSE: COF ) , Citigroup (NYSE: C ) , and Bank of America (NYSE: BAC ) are now facing greater scrutiny and regulations. And in the tough economy, they've suffered major losses because of delinquencies and defaults. In response, they're taking steps to boost their top and bottom lines -- by offering their customers many nasty surprises.
For example, Citi has reportedly decided to shut down its Home Depot (NYSE: HD ) co-branded card, and it has canceled many cards co-branded with gas companies, such as ConocoPhillips (NYSE: COP ) and ExxonMobil (NYSE: XOM ) . I've seen many reports of customers finding out about cancellations at the pump -- when they didn't have sufficient cash on them to fill up. Oops.
More insidious is this: Many credit card customers, even those with strong credit scores, are apparently having their interest rates hiked to 30%, with higher rates possible when the prime rate rises. Bank of America, meanwhile, is reportedly introducing annual fees for many of its cards soon -- ranging from $29 to $99. That kind of seems like the companies are inviting their best customers to close out their accounts, no? Well, that may well be the case, because "good" customers with high credit scores who pay their bills on time are not the most profitable customers for card companies. They make much more money off those who rack up big debts and then slowly pay them off.
The opposite of investing
When I see nosebleed-inducing interest rates like 30%, I think of investing. This is the opposite of it. As investors, we're typically out to find the best returns possible as we search for bargains. The typical stock, though, earns a far lower return: historically, around 10% per year for the stock market as a whole.
Imagine that you found a stock or mutual fund that grew at 30% per year for a long time. It's rare -- Best Buy (NYSE: BBY ) has almost done it, with a 29% average annual return over the past 20 years. That's enough to turn a $5,000 investment into more than $800,000!
Think about that for a second. Remember that as powerfully as that wealth grows at 29%, debt can balloon just as quickly if left unchecked. If you have a line of credit where you don't have to make monthly payments, debt growing at 29% will more than triple in just five years. Even if you make minimum payments every month, it can take decades to get it paid off -- and cost you thousands in interest.
I tried to come up with some more examples of long-term 30% growers for you, but they're hard to come across. So consider this: If it's so difficult to find an investment that will grow at 30% for you, why would you want to set yourself up to have your debt grow at such a rate? It digs you into a hole that quickly becomes very hard to escape.
What to do
To protect yourself from aggravation, you might want to carry two cards with you at any one time, in case you find one suddenly canceled. You should also read any communications from your card companies carefully, looking for announcements of new or higher fees and interest rates. You can probably switch to a no-fee card if you need to, but don't be surprised if your new card introduces annual fees, too.
But more importantly, don't let yourself get saddled with debt and a 30%-plus interest rate. Don't let debt ruin you, as it has ruined many people. Pay it off and work on investing -- growing your money instead of shrinking your worth.