How many credit cards do you own? I have four and don’t carry a balance. Credit card companies hate me. I’m a deadbeat—that’s their definition not mine. My favorite excuse for turning down helpful sales associates with their “save 10% when you sign up today?” “Sorry, I’m out of card slots.”
The average American has eight with a total debt of $7,500. These “revolvers” are favorites of credit card companies. So much so that:
People…who carry balances from month to month and pay finance charges regularly, feel they should be the favored customers of the credit card business, which is now the most lucrative segment of banking. They make up the profitable majority of the 144 million Americans who have general-purpose credit cards. To a degree, they subsidize the 40 percent of credit card customers who pay in full each month without incurring any fees or charges. (link)
In 1958, the Bank of America introduced the first general purpose credit card. Prior to that, consumers had access to the Diners’ Club Card. Credit cards can actually be traced back to Europe in the 1890s. (link) Today, we’ve reached a point where card use, even of debit cards, has started to replace the concept of paying with cash. You’ve probably seen the ad below. It’s for Visa debit cards, but it’s so powerful when you consider the message it promotes:
Cash Headed for Extinction?
These companies are advancing the bold idea that cash is no longer necessary—keep all your transactions digital. What happens when you give a faceless entity that much control over your finances? What are the benefits? The drawbacks? I use credit cards out of convenience. When they stop being convenient, or require a significantly higher trade off, I’ll stop using them. That may not be too far in the future:
Invoking clauses tucked into the fine print of their contract agreements, lenders are doubling or tripling interest rates with little warning or explanation. This year, credit card companies are changing the terms of their accounts at a historically high rate…[and in] eight years, the major card companies have increased the fee charged to cardholders for being even an hour late with a payment to $39, from $10 or less. (link)
An Evolving Industry
I was somewhat surprised to learn that serious thought was given to outlawing credit cards given their current pervasiveness. (link) Industry expert Andrew S. Kahr is responsible for many of the innovations that brought credit card companies back from the edge of failure during the 80’s and 90’s and strengthened their hold on the economy.
Before many others in the industry, Kahr discovered that it was possible to analyze vast troves of consumer financial data and reliably predict which customers were least likely to pay off their credit card balances each month. “It didn’t require a lot of investigation to see that the people who paid in full every month were not profitable,” Mr. Kahr said…Mr. Kahr and his colleagues mined the data in relentless pursuit of the most lucrative “revolvers”—consumers who routinely carried high balances, but were unlikely to default. “I don’t believe in customer irrationality,” Mr. Kahr said. “I don’t find psychographics useful. I follow financial behavior.” (link)
Mr. Kahr’s ideas also included lowering the minimum payment percentage from 5% to 2%, a move allowing companies to double the credit limit.
This increased revenue in two ways. First, since it would take longer to pay off balances, each dollar of principal would generate more interest income. Second, the principal itself would be increased because cardholders would be able to take on more debt while maintaining the same monthly payments. (link)
Life’s Service Agreement
Few things in life match the terms associated with credit cards. I think that’s why so many people end up in debt and barely making their minimum payment. What can we compare it to? How many things in life allow you to “buy now” and “pay later?” Do many jobs give you a paycheck 25-28 days before you actually do the work?
The bold idea of credit cards may be reaching a tipping point. Only so many people are in a position to make even minimum payments on a card. Credit card companies are thick on college campuses, creating a generation of credit card debtors who have yet to hold a “real” job. So what happens when credit cards reach a saturation point? What happens when everyone’s wallet runs out of card slots? Is there room for another bold idea that changes the industry, that changes how we manage our money, that actually makes sense for consumers?