This piece is part of my 2016–2026 archive migration. Some original formatting, content, and external links may be missing, changed, or not be optimized.
A Few Things You Probably Don’t Know
Creditors – have extra money to loan to people. So these people figure, hey, why not make some extra cash by loaning it out.
Debtors – often don’t have extra money. Instead, these people need someone to loan them money to meet their basic needs, extraneous wants, or even funding for a business or organization.
Fresno, CA 1958 Experiement
In 1958 a game-changing experiment came along; 60,000 residents in Fresno, CA (a booming city) received a gift in the mail: A pre-loaded $500 (thousands in today’s dollar) BankAmericard. Consumers now had access to buying things they usually budgeted for or put on layaway.
Credit cards became the key to a more exciting and attractive lifestyle, only accessible to the rich and famous. Now, anyone could appear like they have more money than they did with the invention of the plastic money card. This was mind-boggling for the masses.
Another cool feature of the credit card was simplification; instead of paying multiple bills, consumers could now pay one bill, on one card, at the end of the month to cover all of their purchases. Or they could settle for a flexible payment plan and pay their credit bill off over time, which is the button most consumers press.
But were consumers ready for this kind of financial freedom? Not quite.
Consequently, Bank of America lost millions of dollars in the first few years, but over time, they formulated new strategies to ensure they only profited going forward, which is no mystery to any of us.
The credit card industry is now worth trillions of dollars, and there are thousands of credit card options to choose from across the globe.
Today, 70% of the US population owns a credit card, 40% have credit card debt, and 10% of these people expect their debt to outlive them.
Before Credit Cards, Were Simple Loans
In the beginning, people didn’t have credit cards. So, if someone needed money, they had to take out a loan and were judged by the three C’s (see below:
Character
Capacity to pay the loan amount back
Savings to pay it back or collateral in exchange for the loan
But once technology came into the picture, the credit score came along (credit score range: 300–850). The higher your credit score, the better rates and financial opportunities you get.
Need to build your credit history and profile? All you need to do is get a credit card. Credit card companies set the game up this way. You must get a credit card to operate in the world we live in. If you don’t, you lose [see section: Disadvantages of Using Cash].
3 Types of Credit Card Users
1. Transactors (Deadbeats)
40% of people fall into this bucket. Transactors pay their bills in full every month. They usually don’t carry a balance. If you’re a transactor, a credit card company doesn’t make money off you from interest and fees; they make money off you from your swipes (i.e., processing fees charged to the merchant when you swipe your credit card; these fees are usually <4%).
2. Revolvers
40% of people fall into this bucket. Revolvers do not pay bills in full every month; they carry a balance from month to month.
These are the biggest money-makers for credit card companies.
A $1,000 purchase ends up becoming a $2,000 purchase because revolvers take years to pay off their small debts until they exponentially grow into large debts.
Credit card interest accrues daily on top of your existing balance and the interest you accrue each day. In 2021, 121 billion dollars in interest payments were paid to credit card companies.
Humans Pay The Minimum Payment Because It’s The Default Option
Revolvers often pay the minimum payment on their credit card instead of paying more, and credit card companies know this! Research shows that humans tend to go with the default option since it requires less energy not to make a decision; this is why credit card companies only tell you the minimum amount of money you need to pay at the end of the month.
Carrying a balance increases your credit score. Myth!
You’ll only hurt your credit score and lose your money in return if you fall for this myth; it’s a lose-lose situation.
3. Hackers (Outliers)
Hackers legally take advantage of all credit card rewards and never pay fees. These types of people still make credit card companies money, but they’re not the ideal credit card customer because they can also lose credit card companies money through all the rewards(e.g., free hotels, events, flights, food, cashback, etc.) they redeem.
Which One Should You Be?
Be either a hacker or a transactor. They never lose.
Disadvantages of Using Cash
Ever notice stores that say: “Cash Only or No AMEX Cards”? That’s because companies want to avoid paying the fees they’re charged every time you swipe your credit card.
In addition to implementing: cash-only purchases and accepting specific credit cards (one w/ low swipe fees), companies also increase their cost of goods to account for the elevating costs of credit card fees.
What This Means for Cash Users
You’re losing potentially thousands of dollars every year because you’re paying higher fees for the cost of the goods you buy but not getting anything in return except a loss in income.
Source: Netflix, Money Explained
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.