Understanding the Risk

The risks involved when a person deals with credit cards are a little bit different. These risks are very apparent and indeed a person needs to be consciously aware of how to combat these risks at all times. The risk here has to do with temptation rather than injury and fighting temptation is a lot more difficult than preventing injury. While most people understand the risks involved to themselves with credit cards they might be interested to know that the company itself is also taking a risk along these lines. The risk that a company faces might be difficult to pinpoint at first and for that reason these risks are discussed in more detail over the rest of this article.

Risks to You

Your risks, as previously mentioned, are probably already blatantly obvious. Still, we need to cover them in order to provide contrast with the next section. The first risk that you undergo is the risk from the interest rates. Interest rates are very large now and because of that if you are in a situation where you can not pay off the debt you have accumulated on your credit card you might unfortunately end up in a situation where the debt is bad and the interest rate is making it worse. The same holds true for fees as well and many credit card companies absolutely love using fees as a one two punch with their basic interest rates. Even a credit card with no annual fees will have other fees. Overdraft fees, late fees and anything else you can think of is liable to be charged by a credit card company.

Risks to the Company

In order to understand this risk it is important to understand briefly the reason for credit cards being around in the first place. Before the advent of the credit cards in the mid 20th century the only way for a person to get a loan was to go to the bank and put down collateral in order to receive the loan. While there was nothing wrong with this loan in principle there was always the risk that the consumer would lose their collateral were they to default on the loan. This made loans less popular. Credit cards were specifically created to be vessels of drawing credit without requiring collateral. The lack of collateral made the situation more difficult for the credit card company in terms of risk and in order to offset that risk they came up with the idea of charging a higher interest rate. This higher interest rate makes up for the risk borne from having no collateral but at the same time makes the situation just as risky for you.

Article correct at its author date: May 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

If you would like to display this article on your web site please email us.