can you live without credit cards?
With Congress about to pass restrictions on some of the ways that credit card companies make life miserable for unwary users, the credit card companies are claiming that they're going to have to raise fees, curtail reward programs, and eliminate grace periods on those who pay off their cards every month.
This is obviously BS. If the credit card companies were losing money on people who pay off their cards every month, they wouldn't be giving them credit. They're making money now, even with the grace period and reward programs, because they charge merchants a cut every time someone uses their credit card. And if they could make more money by eliminating the reward programs, etc., they would have done so already. If they start charging fees, they'll just drive their customers away.
The NYTimes has an interesting discussion on the subject going, with lots of people saying that if credit card companies started charging annual fees, and/or eliminating the grace period, they'd just stop using credit cards. I'm in this category — I use my credit card for convenience, and could switch to a debit card without too much hassle. I'd need to keep more of my money in the checking account to ensure against overdrawing, but could presumably find an interest-bearing checking account to use.
That said, there will be losers (other than the credit card industry) as a result of this bill. There will be fewer card offers with low teaser rates, and the people who successfully juggled different accounts to always keep the interest low will be worse off.
The credit card industry may also try to squeeze more out of merchant fees. I'm not quite clear on how the system of merchant fees isn't a violation of anti-trust law, but they've got a pretty good monopoly going on. And merchants are afraid they'll lose huge chunks of their customer base, or that customers will spend less, if they don't take plastic. I noticed last summer when gas prices were really high that some stations were offering discounts for cash — I hadn't seen that in a while. (Visa and Mastercard don't allow stores to charge a transaction fee for using them, but they do allow discounts for cash.) I'd assume that if they increase the fees enough, more stores will start offering discounts for cash.
Could you live without your credit card? And how much of a discount for cash would it take to get you to switch over?
May 19th, 2009 at 10:36 pm
Yes, but it would give me an illogical uneasy feeling. I hesitate to go off credit now since we haven’t bought a house yet, and the FICO system is very stupid about this sort of thing–you get penalized on your mortgage interest rates for not borrowing money. We currently have two cards. One’s an Amazon points card that we run almost all our monthly expenses on (paying off at the end of the month) and the other is reserved for when my husband has to pay for reimbursable travel expenses for work. The long term plan is to go off credit, but it would be convenient to keep the card my husband uses for work travel. Of course, if the credit card companies cut the points or slapped on bogus late fees I would be very likely to cancel the cards in a fit of righteous indignation.
May 20th, 2009 at 3:18 am
I can’t imagine going off plastic, but I can imagine going off credit cards. That is, I use my debit card almost exclusively now — the credit card is for large purchases like airplane tickets. I haven’t carried more than $40 at a time in a really, really long while.
There’s online purchasing. Credit cards are useful for that. I don’t like the idea of using debit online; also, I’ve had my debit card suspended for “suspicious activity” while purchasing online. (It’s not what you think! I paid for my son’s summer camps online & for some reason that alerted them.)
May 20th, 2009 at 6:47 am
People buy more than they ought, on credit. In keeping the economy pumped up, this has been a feature, not a bug. The companies which issue credit cards, when they cut back on the availability of credit to folks who are overspending, will engender more contraction in the larger economy. Marlo’s Furniture will go under, as will some other big box stores, and people will sit around last year’s dining table on last year’s chairs.
Should people continue to overspend? Well, we’re seeing the consequences of old overspending all around us. Getting from here to a culture of waiting til you have the money before you buy something is going to be painful.
We’ve been parasites on the credit card system, buying almost everything on a card which gives us 2% back and paying our bill every month. We try not to get sucked into buying stuff for which we wouldn’t pay cash. I expect that our sweet deal will end, and that’s fine.
May 20th, 2009 at 9:12 am
We pay for just about everything on our credit card (we have one joint card between the two of us through our credit union), and we pay it off immediately. Haven’t paid a dollar of interest in two years. We do it for the reward points. In the past two years, I would guess they’ve earned about 1-1.5% for us. Not bad in this economy. I hate the idea of giving them up, but that’s just because I like the rewards. If the program were to go away, I think we would just use debit for most things but still hang on to the card.
May 20th, 2009 at 9:40 am
My employer has structured my health care coverage in such a way that I have to pay up-front for all health care costs and then get reimbursed after the fact. It typically takes about 2-3 weeks to get the reimbursement. And so I have developed a pattern of putting all health care expenses (about $4500 so far in 2009, for a family of four) on my credit card and paying them off when the reimbursement comes in. This keeps our monthly budget more stable.
We also had a situation earlier this month where my husband’s student loan didn’t come in. The school was demanding $1000, on basically two days’ notice. We had to put it on the credit card. Of course the student loan posted two days later, and I’m sure it will be forever until we get reimbursed.
One issue I face is that our savings account is a web-only account thru INGDirect. In general I’m very happy with this account. I didn’t like having savings, checking, line of credit, and mortgage all at the same bank. (It didn’t start out like that, but after enough bank mergers that’s how it ended.) I specifically sought out a different bank that was paying higher interest rates for savings. However, it takes almost a week to transfer money over to that account, and another almost-week to get it back again. With the tuition problem, for example, I had just initiated a transfer over to that savings account … but 6 days later it’s still not available for me to withdraw. And to transfer it back again would have taken even longer. It’s not making it easy to back away from the credit cards when responding to time-sensitive cash crunches.
May 20th, 2009 at 12:52 pm
I’m sure that AmEx loses money on me. It’s my second card. I use the credit union Visa for most stuff (it’s a reward card, the last twelve billing periods we pushed about $50,000 through it and got $750 rebate), but occasionally put something on the AmEx Blue. Whatever they’re getting from the merchants can’t possibly cover the marginal costs of me as a customer: just sending me statements every month has to cost them at least $40/yr.
Still, if they try to charge me for the card, I’ll cancel it.
The credit union, though, is making money on me.
May 20th, 2009 at 3:31 pm
I put all our typical expenses on the card each month – gas, food, incidentals – and pay it off each month. I get $ back and have no annual fee. If they started charging a fee and/or stopped the $ back I’d go debit card and cash — it would probably help me save money too!
what discount would I need to switch to cash? 7% I think – – that would cover the sales tax.
May 20th, 2009 at 4:15 pm
I have one cc that I use for groceries and fuel and pay in full. The main reason I keep it is for travel. Hotels and such don’t like debit cards.
Oh, and I actually do use my debit for online purchases. The one time someone used my number, I was reimbursed almost immediately (while I was on the phone with the bank)-because it’s bank fraud, I’m not the crime victim. ~lmc
May 20th, 2009 at 7:36 pm
I absolutely rely on having plastic (meaning a card to use for purchases + documenting the expenses. I almost never pay for anything in cash. We do charge business expenses on our credit card (and get reimbursed fairly rapidly, but with ccs, we’d have to front the money for 2-3 weeks, which would be annoying). But, I’d switch to debit if I had to pay for the card. we have a card with an annual fee, but that earns airline miles, which we actually use, effectively, for business class flights (which we’d never pay for).
May 20th, 2009 at 11:24 pm
Could I live without credit cards? Absolutely. Do I want to? Not really. Mostly, we use our cards to pay for ongoing monthly expenses (EZPass, or the rental of my daughter’s drumset for school, for example). We tend to pay off our bill from month to month, though right now one of our cards is carrying a hefty balance because we just charged summer camp.
I’m surprised by how many people spend money on cards just to get rewards points. That always seemed like a scam to me, but I guess it works.
May 22nd, 2009 at 7:20 am
Ignoring the defaulters (who obviously lose banks money) there are three main types of credit card customers – those who pay off their balances every month without fail, those who know that they will be borrowing money for some time, and a middle group, who think that they are in the first group, but actually, often fail to pay their cards off.
The banks make lots of money from that third group, because they are happy to take cards with high interest rates, kidding themselves that they will never pay them. But, at least in my case, they structure it so that if you are even one day late, you pay interest for the whole month at a high rate. A surprising number of people (including me, until I got more organised) are in that second group at least some of the time, and they are very very profitable.
And of course, you’re right, they make money from merchant fees (although it also costs a merchant to accept cash – security costs, and bank costs from counting the money).
I’ve noticed that whenever I don’t have a card (I got pickpocketed, and lost my card for a week) I do spend much less money. Not sure if the effect would last, though, once I got used to carrying more cash around.
February 4th, 2011 at 12:08 pm
I leave my card in the wallet and spend cash at my favorite hardware store, which gives a 5% discount.
Soon we will have more pawn shops, for the unbanked, courtesy of Elizabeth Warren. http://volokh.com/2011/02/03/pawnshops-becoming-more-respectable/
Pawnshops are a VERY expensive way to borrow money.