Personal Finance Expert Renaud Laplanche Explains the Ways Credit Card Issuers Can Trap Consumers in Debt

Many people in the United States are trapped in a cycle of credit card debt. A person has an emergency, such as their car breaking down, and charge the expense on one of their credit cards. If they only pay the monthly minimum payment, they will pay far more in interest than what the original charge was for.

Renaud Laplanche is a personal financial expert. He recently explained that some might think they’re getting a good deal on promotional offers, such as “no interest if paid in full in six months.” What’s hidden in the fine print is that, if you don’t pay it in full, the interest rate could jump to nearly 30%. This increase in interest rate is retroactive to when you made the purchase. If you charged $5,600, this could be an $800 penalty.

The average American household has nearly $8,400 in credit card debt. Renaud Laplanche says the problem is getting worse, not better. In December 2015, American households collectively had $900 billion in debt. By November 2019, this increased to $1.08 trillion, which an increase of $180 billion.

Consumers tend to lack knowledge about credit cards. This is despite many personal finance websites such as NerdWallet, Credit Health and Credit Karma. People don’t realize that if they just pay the monthly minimum payments it will cost them dearly. If they charge $5,600 and just make minimum payments, they will end up paying $18,861 back with a 29.99% percent interest rate.

Interest rates are high on credit cards. Even someone with good credit typically has an interest rate of 16.9%. Store credit cards have even higher interest rates. The Banana Republic, for instance, offers a store card with an interest rate of 27.49%. Combined with making minimum monthly balances, a balance can remain outstanding for decades.

Renaud Laplanche says it’s not just high interest rates where credit card companies make huge amounts of money. They also charge high fees. This includes late fees, annual fees, cash advance fees, balance transfer fees, and foreign transaction fees. Credit card companies made $163 billion in 2016 from fees and interest.

Credit card issuers reward users more for spending more. They offer miles, points, and cash for using your credit cards. This encourages people to put as much as they can on their credit cards. Renaud Laplanche says this is like rewarding a person for eating more cake. People don’t just put everyday expenses on their credit cards as a result. They buy frivolous things they don’t need just to earn awards.

Opening a new credit card causes a “hard inquiry” to appear on your credit report. This brings down your credit score by, on average, 10 to 20 points. Hard inquiries don’t stay on your credit report for too long, however. What really affects your score is your utilization rate. This is how much credit you have versus how much you are using. A high utilization score can bring your credit score down by 30 to 40 points or more, resulting in even higher credit card interest rates.