Aug. 22, 2005 - The Cost of Credit Cards |
Hopefully I do not need to explain the problem with running up debts on credit cards. It can ruin a family quickly. Just ask Lender's Slave.
I know, I know -- you don't fall into that category. Instead, you use a credit card just for convenience or to get some great "free" benefit. You pay off the balance every month. No debt for you!
That's good in one sense, but have you ever considered that the credit card companies have got you just where they want you?
Here's how.
1. Credit card companies levy a 2% to 3% charge on every single transaction they process. Do you think retailers eat this charge out of the goodness of their hearts? Nope. They pass the cost right along to us in the form of higher prices. Cha-ching! Credit card companies win.
2. Retailers don't put up with this system without getting any benefits either. Credit card transactions are more convenient for them and their customers. But that convenience has a price. Studies show that consumers who regularly use credit cards tend to spend at least 5% more than they would have otherwise spent with cash. Cha-ching! Retailers win.
To underscore this last point, along comes the following report in the September issue of Kiplinger's Personal Finance. New technology called radio-frequency identification (RFID) allows a person simply to "wave" a credit card in front of a checkout terminal -- no swiping or signing necessary.
Pretty neat. Much safer. Real convenient.
Kiplinger's reports:
"Retailers love it because it speeds customers through the line, and shoppers spend 20% more than they would otherwise."
Ouch! That's a steep cost for safety and convenience.
To paraphrase a well-known investor's advice, "In every financial transaction there is a loser. If you can't readily identify that party, then you are it."
With credit cards, we know the credit card companies win (just look at their profits) and retailers win with increased business. Where does that leave consumers? Well, let's just say we've identified the loser in these transactions.
Still think you're getting a deal on that little cash rebate or with those extra airline miles your credit card gives you? Think again.
|
| • Post A Comment! |
Aug. 27, 2005 - Credit Cards |
| Posted by Anonymous |
We both got credit cards sent to us (not offers, the cards themselves) when we were in college, with disastrous results. 10 years later, we finally paid them all off and stopped using any credit cards at all. About 3 years later, we applied for a car loan and were told that while not using credit cards is laudible, our credit rating suffered because we didn't have any revolving credit. They suggested getting a low-limit card and using it every month, even just once or twice, and paying it off in full so that we could get positive credit. Is there any wisdom in having a credit card for that reason?
--Gem www.roughcutgem.blogspot.com |
| Permanent Link |
Aug. 28, 2005 - Response to Gem |
| Posted by |
First, my heart goes out to you for the debt predicament you found yourself in during and after college. Sadly you are not alone. Your experience only underscores the importance of parents training their children in biblical financial stewardship before they leave home. So many such stories could be avoided.
Second, congratulations on taking responsibility for your debts and paying them off. I'll bet that felt great when you finally put that behind you!
Finally, it is a regretable fact of our debt-addicted society that the use of credit is more highly prized by lenders than the more prudent path of savings. For those who want to establish credit in this system, then you must show that you can handle credit. The way to do that is to start with small debts and pay them off on time as was suggested to you.
Here is how I would do that.
Most of us need to have a credit card to manage our financial affairs at some point -- online shopping, travel reservations, car rentals, airline tickets, etc. I don't have a problem with people using a card for those reasons.
In addition, I don't think it is unwise to "play the game" to establish credit. So, maybe every few months you might charge a few standard items and then pay the bill off. For example, you might charge a few gas purchases or other items where there is not a temptation to "go over" what you intended.
Over time this behavior should be sufficient to show that you can handle credit responsibly and thereby improve your credit score.
This type of behavior I would call a judicious, calculated use of credit cards. You are using the system to your advantage in such a case. The point of my post was to focus on dispelling the notion that all credit card usage is harmless -- even when the bill is paid each month.
What I do find to be a problem is the total reliance on credit cards for purchases because it is "convenient" or there is some "reward." The habitual use of credit cards does impact our behavior and spending patterns. We become loose in our discipline and spend much more than we intend. This has been demonstrated over and over again in studies. The credit card industry is built upon that very simple fact. Few humans can resist the impulse to buy when using plastic.
Edited by stevebraun on Aug. 28, 2005 at 7:46 PM |
| Permanent Link |
Nov. 19, 2005 - interesting point |
| Posted by dinghome |
Unfortunately, retailers are bound by contract with credit card companies to charge the same prices for cash as for credit. Thus, they are often the losers, IMO, having to pay the fees: it's their next best hope to try to balances those fees with better potential sales. For us as consumers, to abandon the use of credit cards, while a nice idea, seems negligible, as we'll pay the same prices -- especially in our country where credit card acceptance is essentially ubiquitous. For the record, I'm a "pay off balance" credit card user. As it stands, I figure I break even; especially since I've actually been protected on purchases gone bad a couple of times.
I suppose it should also be said that my wife & I are especially frugal and are *not* impulse buyers. So I'll agree that your main point (reiterated in comment) holds: that too often credit cards are dynamite in the hands of pyromaniacs. Perhaps on a more moral/ethical level, the credit card system largely takes advantage of unwise folks with poor fiscal discipline. So one *might* argue that participating in such a system for one's personal convenience or gain could present a moral dilemma. Some similarity to lotteries, for example, which statistically take advantage of those who haven't the means to participate. |
| Permanent Link |
Dec. 1, 2005 - Reply to dinghome |
| Posted by stevebraun |
You are correct that retailers are bound by contracts. They hate paying the fees but they do make out in the end. First, retailers don't eat those costs entirely but pass them along to the ultimate consumers. Second, retailers do see increased sales because undisciplined people (the vast majority of us) spend more when using plastic rather than cash. So don't cry for the retailers.
I'm not advocating that we all stop using credit cards to eliminate these higher costs that get passed along to all of us. (Though that would be nice if it could practically be done.) My real concern is the lack of spending discipline with plastic which can result in financial hardships down the road. That is the point of the story in Kiplinger's on the new RFID technology where preliminary tests showed a 20% increase in spending just because it was more convenient to pay!
It would be nice if everyone remained discplined when using credit cards. Some people realize they can't and avoid them. But the vast majority THINK they are disciplined without realizing the impact credit cards have on their spending behavior. That is what I'm trying to alert people to. Using credit cards is not as innocent as it seems.
I'm glad your family has discipline. That it good news!
You raise an interesting point on the moral/ethical issue. I hadn't thought of it that way and will give it more consideration.
Thanks for sharing!
Steve
|
| Permanent Link |
Sep. 23, 2006 - Calculator that Determines Best Cash Back Card(s) for Your Spending Pattern |
| Posted by Anonymous |
The best mix of cash back credit cards for you depends on your particular spending profile -- especially how much you spend in various categories (e.g. gas, grocery, restaurants, utilities, etc.)
The calculator tool at www.creditcardtuneup.com makes choosing the best cash back card (or mix of cards) easy. Given your spending pattern, it calculates your expected annual rewards for each of the leading cash back credit cards and even for your best mix of cards. See the tool at http://www.creditcardtuneup.com/ .
|
| Permanent Link |
|
|