Today I am expressing my opinion on a topic I've wanted to for some time now, but didn't know the best way how. That topic is credit cards. Love them or hate them, almost anybody can get one. Are credit cards good?
The Modern Day Facts About Credit Cards
Although the concept of credit as we know it has been around since the late 1800's, the first credit card made it's inception in 1951 in the form of a monthly charge card intended for business travelers at select merchants. The credit card as we know it, with a revolving monthly balance that doesn't need to be paid each month, was introduced in 1958.
Add 6 decades of “innovation” and marketing to the credit card, and it has turned into a financial instrument used by a select few in 1951 to the ability to buy a bottle of Coke from a machine at the mall. This same machine several years ago only accepted coins and dollar bills.
The widespread use of credit cards has also contributed to the increase of household debt in the United States and across the world.
Through the 3rd quarter of 2015, here are the most recent statistics on credit card debt:
- The average U.S. household credit card debt is $15,355
- Total U.S. credit card debt is $712 billion
- That is the 4th largest source of American household debt behind:
- Mortgages- $8.12 trillion
- Student Loans- $1.2 trillion
- Automobile Loans- $1.03 trillion
- That is the 4th largest source of American household debt behind:
I now understand why I received so many e-mails from my banks about interest-free credit card balance transfers at Christmas. Buy loads of stuff you can't afford today, transfer the unpayable balance to our card and pay triple before next Christmas. Then repeat the said process for next Christmas.
Credit card debt isn't restricted to one single social class. Higher earning households tend to have a higher balance than lower-income households, but families in every walk of life are struggling with consumer debt.
The average credit card interest rate is around 15%, although rates range from 10% to 23% depending on the type of card and your credit score. These rates are significantly higher than other types of loans, so the debt issue becomes even more of an issue.
So the question I'm begging to ask, “How did we get so much credit card debt?”
According to NerdWallet, a primary reason is the increased cost of living and a decrease in the median household income. I believe this is part of the problem, but I also think they have been used irresponsibly because of cheap credit and the “disposable society” that we now live in. Similar to the epidemic increase of diabetes with the increased daily intake of sugar in our diet. As a nation, we are addicted to spending money and eating sweet foods.
Credit cards are easy money. It's a whole lot easier to buy things when you can “pay for it later” as opposed to having to use a Benjamin ($100 bill) or a Jackson ($20 bill) to pay for your groceries, television, or mortgage payment.
Add the “Keeping Up With The Joneses” mentality and you get into a material goods competition where you upgrade from cloth to leather furniture or purchase the newest iPhone when your current iPhone 5s is still in good working order. Things you really don't need but seem to be annual dues to be a citizen in the developed world.
Before you know it, that tiny debt snowball turns into a debt avalanche. And I don't mean these terms in the way expressed by Dave Ramsey. 😉
Why I Use Credit Cards
I'm somewhat of an exception, I suppose, when it comes to credit cards. I've never carried a large balance and have always paid in full every month since I received my first one in 2004. I have also never been known to spend money with reckless abandon. In fact, I try to save every hundredth of a cent whenever possible.
I've had a credit card since I was a freshman in college when my parents co-signed for one. I don't remember the credit limit, but it was around $500 if I remember correctly. I used it to buy food from restaurants when I didn't want to eat at the cafeteria and to purchase textbooks every semester. I paid off the my balance each month and I worked during the Christmas and summer breaks to replenish my bank account.
I've read plenty of horror stories where others get knee-deep in credit card debt after signing up for a card to get a free t-shirt at freshman orientation. I never had this issue, thankfully my parents had taught me the best they could about them, although I know I had some fellow classmates that had similar experiences and had to get some crazy jobs in the summer to pay off the debts and then tore up the cards. But the fact still stands that an 18-year old high school graduate is still essentially clueless about the harsh reality of what happens when you don't pay your bills on-time.
After I graduated college, I did get a better card that offered Cash Rewards (5% on gas, 2% on groceries, 1% on everything else), but now all it rewards is 5% cash back on gas & no foreign transaction fees. Still great but I primarily just keep the card for length of history. I have since gotten two additional rewards card to have more available credit and because I occasionally have issues making purchases at some online merchants with my first credit card due to security protocol with one of my cards.
I have never personally requested an increase on my credit limit because I never come close to spending the monthly credit limit. Although I did receive automatic increases on both cards when I paid off my student loans and auto loan.
I just use cashback rewards cards from my banks. I have been tempted occasionally at getting a 3rd-party card for airline miles or a retail card that offers better cash back incentives, since my current reward programs are not that great anymore. But in this chapter of life, we drive when we travel (where 5% gas rewards come in handy) and our regular monthly credit card expenses are primarily our cell phones, insurance, and part of our monthly grocery bill. In a year's time we spend only around $5,000 on our credit cards, not including gas. Not a number to balk at for collecting rewards, but not enough for me to switch to a card that requires an annual fee or where the rewards might gradually reduce over time.
We used to spend more on credit cards, but now that certain companies (my former apartment complex & the electric utility) started passing on the 2% transaction fees to the consumer, the potential rewards do not offset the additional costs.
Another reason I like credit cards are my purchases are protected from fraud. If somebody steals your debit card number, it's a lot harder (maybe impossible depending on the circumstances) to get your money back. A stolen card can negatively affect your credit score, but if you are a responsible user & you don't need to apply for a loan, this isn't a bad thing.
Alternatives To Credit Cards
Did you know most retailers have 2% built into the cost of everything you buy to offset credit card transaction fees?
My wife and I try to pay cash typically for physical purchases under $20 (to not run up our monthly balance and “forgot” we spent so much money) and because some places advertise a cash discount in lieu of a credit transaction. The king of this is the discount Aldi grocery store chain. They only accept cash or debit card transaction where you pay the surcharge.
The best alternative to a credit card is a debit card. Now that you can run a debit card through as a credit transaction and not get charged the debit surcharge, this is a great alternative. You still need to have the money in your account to make a purchase and cannot once your account runs out. Plus some debit cards still offer rewards.
If you have a debit card, this means you have a checking account. With a checking account you can use your banks online bill pay option to pay your monthly bills or setup automatic debits. This means you don't need to drive to the electric utility or cable office each month to pay the bill in cash.
You can always carry cash and this is the most effective way of controlling spending. If you only have $50 in your wallet when you go to the store, you can only buy up to $50 of goods and need to put some items back on the shelf if you exceed that amount. I personally don't like carrying a lot of cash, in case you lose your wallet (speaking from personal experience) you never see that money again. With debit or credit cards, you call the bank and they send you a replacement cards in a couple days. Still an inconvenience, but better than losing a large sum of cash to a gypsy.
My Opinion On Credit Cards
As you know, I use credit cards on a regular basis. I think they should be available for anybody that uses them responsibly. If used correctly on items you are going to purchase anyways, you get rewarded and will actually save money.
There are people that don't need credit cards and end up living to pay the bank for the rest of their lives and give credit cards a bad name. Others know that credit cards are an uncontrollable demon & know to avoid them.
I don't think there should be a “credit card prohibition” or further government intervention. But I do wonder what the economic drain from the historic levels of consumer & student loan debt will be. After enough households become indebted, will all the disposable income go towards bank interest for prior purchases or still towards consumer goods that provide jobs & stock dividends for society?
Will it be like the end of the movie Fight Club when all the modern institutions are demolished and everybody gets a fresh start?
Only time will tell & I don't think credit cards should be handed out like candy at a parade. If you are going to use them, there needs to be an element of financial literacy and responsibility accompanying them.
Thanks for reading and feel free to leave any comments or questions!
What is your opinion on credit cards? Did you use them in the past, but not anymore?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.