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I hate defending credit card companies.
It's like sticking up for used-car salesmen, or Congress. Saying anything nice makes you feel like a patsy, since their defects are so readily apparent.
But in the debate over whether credit cards are inherently evil, I must proclaim myself an advocate for the purported devils.
The idea that plastic is a snake in your wallet, tempting you to sin, is probably as old as the first Diners Club card (issued in 1950, if you care). Today, the more refined argument made by some attorneys is that credit cards are defective by their very design, a point that's argued in "Why it pays to leave home without it," by recent University of Illinois College of Law graduate Adam Goldstein. He argues that the cards are products, not services, and are designed specifically to take advantage of consumer vulnerabilities.
Most arguments against credit cards note, correctly, that it's easy to get in over your head with credit card debt. That's true for a variety of reasons, mainly:
Screening is lax. Are you breathing? Then chances are extremely good you can get a credit card, and another one, and another one . . . and oh, that credit limit is looking a little tight; let me raise that for you. Unlike most other lenders, credit card issuers don't pay that much attention to your income, employment history, level of financial sophistication or ability to handle the credit lines they're thrusting upon you. They're just counting on enough folks paying their bills to more than offset those who don't.
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Minimum payments are low. You only have to pay a tiny fraction of what you actually owe each month. In fact, until regulators finally forced them to change, some credit card issuers set minimum payments so low that they didn't even cover all the interest accrued that month, let alone make any progress on paying down the principal. Since you're not forced to feel the full brunt of your indebtedness, it's easy to deny your balances are a problem -- at least until that awful day when you can no longer scrape up the minimum -- and then you're really in trouble.
Debt creeps up incrementally. You sign up for a mortgage, and it's hard to miss all those zeros; you know you're in debt, big time. By contrast, the incremental nature of growing credit card balances can lure you into complacency. It's possible to spend your way into bankruptcy $10 or $20 at a time.
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We spend more with plastic. We've all seen the studies showing that people, on average, spend more freely when using credit cards than when using cash. Then again, not all of us overspend, and some of my readers say they actually spend more using cash. It's the green, not the plastic, that burns holes in their pockets and disappears without a trace into various merchants' tills.
Then there's the bankruptcy rate, whose meteoric rise pretty much parallels the unprecedented increase in credit extended to Americans starting in the 1990s.
Clearly, credit cards can be dangerous in the wrong hands. But those arguing that credit cards are evil or defective usually go astray by insisting that credit cards are dangerous in the average person's hands.
They typically trot out misleading statistics, like the one about the average American having $9,000 or so in credit card debt. I'll summarize the reality here:
- Only 43% or so of households carry any credit card debt, according to Federal Reserve statistics, and half of those owe less than $2,200.
- Only one household in 14 carry more than $10,000 in credit card debt.
- Only one household in 50 carry more than $20,000 in credit card debt.
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