On Not Owning a Credit Card
Thursday, 07/8/2010 - 8:45 am by Bryce Covert | 22 Comments
Why are we forced to engage with a system rigged to keep us in debt?
Good credit is like a golden key to the city. A good credit score gets you access to apartments, mortgages, and sometimes even jobs. A bad credit score will follow you around like a bad stench that you can’t wash off.
I don’t own a credit card. At age 25, I’ve made the conscious decision to avoid getting one since I was 17, when I opened a student bank account and began receiving credit card offers in the mail. Every time I’m tempted toward one, a distinct memory comes back to haunt me: my parents sitting at the kitchen table, trying to even up with their credit card bills. I remember how my mother turned to me and warned me about how dangerous they are. She carefully taught me not to spend money I don’t have, and I always figured that with a debit card I’m basically constrained to stick to this program. But with a credit card, I open a Pandora’s box of someone else’s money.
I’m not in a majority. Seventy-eight percent of consumers own a credit card, and the average cardholder has 3.5 credit cards. But credit card usage is falling, particularly in this economic crisis, and card companies are reporting drops in customers. Many consumers are now wary of company practices exposed by the financial meltdown — and are looking to simplify finances by paying off (and staying away from) debt.
Yet ever since I opened my first bank account, I’ve been repeatedly told — by the financially dumb and savvy alike — that I have to get a credit card in order to have good credit. And there is an unmistakable undertone to these admonishments that I’m naïve if I don’t. It doesn’t matter that I’ve never missed a payment on anything in my life. I pay rent on the first; I pay my electric bill when it comes in; I make every payment to my student loans ahead of schedule. But when my credit score is stacked up against someone who has 3.5 credit cards, I look less responsible because there is less proof of my ability to meet financial deadlines.
As our colleague Josh Rosner has pointed out, credit cards should really be called debt cards, since that is what you get when you open an account — debt. Any money spent with a credit card is money you immediately owe to someone else. Credit cards are designed to give a false sense of wealth and then hit you with a load of fees. Rosner notes that it all began in the late 1970’s, when consumers moved from charge cards to revolving debt issuance. This changed the consumption patterns of the whole country. Now, the average credit card debt is about $3,700 per adult, or $7,400 per household.
And opening the account is the easiest part. As New Deal 2.0 contributor Elizabeth Warren has repeatedly noted, most people can’t even understand their contracts, and the fees can easily gobble up your savings. Hence Warren’s fight for a Consumer Financial Protection Agency as an essential part of financial reform — it promises to make contracts actually readable, so that people know what they’re getting themselves into. It will also reign in the wild west of deregulation that credit cards now exist in. Warren has been making this argument since way back in 2007, when she pointed out that credit products fall through regulatory cracks (as opposed to toasters and microwaves that could never put consumers at so much risk). With stricter regulation will come better products and innovation in the consumer’s interest. Credit cards will no longer be subject to a patchwork of state regulations, leading to a race to the bottom, but one uniform rule. Interest rates will be regulated. And rules will have real enforcement behind them. With these changes, credit cards could evolve to work for the consumer, rather than functioning as a financial booby trap.
But what if I want to live without debt cards altogether? Because I’ve made the choice to stay away from these dangerous cards and live within my means, I’m blocked from certain activities. Renting and buying houses or apartments is just one of those. There are a number of much smaller things that I’m excluded from — that add up. For instance, some car rental companies don’t let you pay with debit cards; you can only pay with a credit card. The MTA in New York City won’t let me buy a refillable Metrocard without TWO credit cards on file (it’s hard to get your bank to issue you two debit cards). And God help you if you don’t have a Visa or Mastercard logo on your debit card — at that point it’s practically useless. Society is rigged in favor of owning a credit card, and it takes some real maneuvering (or just plain exclusion) to stay away from them. While grassroots campaigns such as Move Your Money are speaking out against predatory credit card policies, I have yet to see a movement to undo the deep connection between consumers and credit cards. (Although if anyone knows of one, I’d love to join it!)
We’ve constructed a world in which the risky choices have been turned into the reasonable ones. While financial reform will hopefully curtail the risks banks took with their own money and put limits on what credit card companies can do, we could use some restructuring of society to decentivize personal risk taking. We shouldn’t reward — nay, expect — people to sign up for credit cards at age 18. We should reward prudent decisions. That would take some serious change.
Bryce Covert is Assistant Editor at New Deal 2.0.
I am 45 yeras old and have never had a credit card. The only problem on your list that I have had is the rental car. I never used a credit card because I was able to understand compound interest the first time I read about it.
Posted by Scott Mollett | July 8th, 2010 at 11:18 am
A life without “debt cards?” Imagine what it is like for 10 million undocumented workers for whom even a simple checking account is not an option.
And speaking of bank accounts, I think major retailers have already gotten the clue that accepting ATM cards is the way for them to go. Unfortunately that does not help you get a car loan or a credit reference on a lease application.
Is it really possible to live debt free? How many people earning an income somewhere near the median are going to pay cash for a new car? Even if they avoid that route, buying a good used one will still cost around $10,000. Buying a house without a loan is even less of a possibility.
Posted by Texano78704 | July 8th, 2010 at 11:44 am
I also think it’s particularly lovely that credit card companies have actively made the decision to inundate college students and recent graduates with credit card offers…just trying to suck us in as soon as they can.
Posted by MRE | July 8th, 2010 at 1:50 pm
If you don’t think you’re strong enough financially to have a credit card, don’t get one. If on the other hand you do have enough readily accessible savings to cover at least 2 x the credit limit (of say $2000), they’re really convenient.
Credit cards aren’t someone elses money, or extra money, they’re your money with an accounting error. I’ve had a credit card since I was 18 - I’m 30 now, and I’ve never paid interest on it. In fact, I use it enough that I don’t pay any fees.
Posted by Alex D | July 8th, 2010 at 2:04 pm
On the MTA point that is inaccurate. I too don’t have a credit card. I have been using an easypayexpress card (refillable card) with my debit for a year now. As for purchasing one from the vending machines, thats possible with debit as well.
At any rate other than that I agree with this article. I watched my mom and relatives go through debt from having a credit card. I chose to just avoid it. Of course these days they make it harder to get into the club if you never had a card. Few more hoops and some extra fees involved. I chose to just stay away than put myself through that financial wringer.
Posted by BoBthePhysist | July 8th, 2010 at 2:33 pm
@Alex D - the reason that you don’t pay any fees is because the retailers that you shop at need to incorporate the credit card company’s fees into their prices.
Now, the store doesn’t add a surcharge when you use a credit card (because that’s prohibited as part of the retailer agreement, and in a number of US states as law) but people buying with credit means that around 2% of the item cost goes to Visa/etc - which means that if everyone paid with a credit card, stores need to charge 2% more to make the same profit.
Using a credit card doesn’t just cost you more, it costs everyone around you more.
But yeah, they sure are convenient.
Posted by Jason | July 8th, 2010 at 2:42 pm
Like Alex D, I have had a credit card for 15 years and have never paid a dime in interest or fees.
If you’re so disciplined that you’ve never missed a payment on anything in your life, they why are you so scared of having a credit card? Just treat it like a debit card and pay off the entire balance every month.
I literally use my credit card for every transaction that will allow it. There are so many advantages to it. And I’ve never felt the slightest temptation to carry a balance. I honestly don’t understand what you’re scared of.
Posted by Eric S | July 8th, 2010 at 3:00 pm
@Jason - I get what you’re saying, but your conclusion doesn’t follow. If retailers were giving up 2% in profits because of credit card fees, they would simply stop accepting credit cards, and instantly increase profits.
Of course, they don’t do this because the 2% is more than made up for in added sales, due to the convenience. That’s why most retailers choose to accept credit cards even though they are charged a fee for doing so–because it makes them more money overall.
Posted by Eric S | July 8th, 2010 at 3:06 pm
Bryce - Great piece. Congratulations on staying out of debt at 25. I am 28 and have also never had a credit card. My parents are working-class folks and have not helped me financially at all since I was 17, and I have still managed to do fine. The rental car thing is occasionally an issue, but mine are usually through work so that isn’t always a problem.
As for renting a house or apartment, I’m surprised that you have a problem with that. Look for places managed by an individual landlord rather than a property management company; they will be more flexible. My current landlord obtained a good reference from my previous landlord, who told him that I always paid my rent on time, so he was fine with my lack of credit - I told him about it from the outset, and he did not even run a credit check on me. Furthermore, I’m not living outside my means - I make $41,000 annually, so it is not unreasonable to expect that I would be able to pay $525 monthly rent on time.
I also have enough savings now that I could buy a car or car repairs with cash if needed, and I have good health insurance, so I’m not too worried that something might happen that suddenly requires credit.
I will, however, have to put some serious thought into how to proceed if I want a mortgage loan in the future, but I have plenty of time to think about it.
Good luck.
Posted by Melissa | July 8th, 2010 at 3:41 pm
I’ve had them at times (”for the credit score”) but got sick of it and said no. 35, at least 10 years since I’ve last had one. And rental cars is probably the hardest part but some chains will let you just pay up front incl deposit and return deposit when you’re done. Texano78704 mentions that you can’t buy a $10k car without dept. Yeah, no, you probably can’t. Know why? Because you can’t afford one. Not going to afford one more by borrow/payback then you are with save or make more/buy. I’ve never owned a 10k+ car and I never will. $5k is a pricey car in my book. I know people with $1M in the bank who have never bought a $10k+ car because it’s a dumb move - you don’t need one. They only make them because oddballs decide to buy them for some strange reason. I do own a $150k house and yes, if I hadn’t made a modest amount in the .com era I probably would have needed a mortgage for that or needed to rent for quite a while before building up to buying it. Not trying to snow anyone, living without debt isn’t easy - despite being the richest person I know in the area (i.e. I own more then $0, rather then a negative) I lead a much more modest life. But it’s sure nice to not really have to worry.
Posted by LarrySDonald | July 8th, 2010 at 3:41 pm
If you are disciplined enough in financial matters, why not get a credit card (with no fees) and use it as a debit card. Credit cards have so many benefits such as cash back, fraud protection, return guarantee, travel insurance and extended warranty. Most banks give those benefits to consumer for free and make money from the merchants instead.
Posted by Minh | July 8th, 2010 at 3:48 pm
Credit Cards are only as dangerous if you use the rope they give you to hang yourself.
Looking at them from a legal standpoint, they are the single best way to pay for a purchase in such a way that minimizes one’s exposure to fraud and gives a remedy for breach of contract that is not dependent on going to court. Until you pay your credit card bill, you’ve effectively given yourself the ability to reverse the transaction without going to court.
They are better than cash, debit/direct transfers, or checks due to the protections built into the federal law; to the extent that not paying with a credit card whenever possible seems foolish knowing what I know now.
Posted by Smitty | July 8th, 2010 at 4:26 pm
Thank you to all who have joined into this discussion. It’s been really interesting to see how people react to this issue.
Yes, I am a financially responsible person, so theoretically I could trust myself to get a card and reap some rewards. But my first reaction to that is that while I may trust myself, I don’t trust credit card companies, and I REALLY don’t trust the contracts. So why should I even bother getting embroiled?
The answer to that question is really my second, and most important, point: I should bother because I HAVE to. And that’s the point of this post. More power to the people who have credit cards and are debt-free, getting good rewards. But a huge portion of our population is in credit card debt. What I’m really concerned with here is that there are structures that make it so that you have to get a credit card. As Melissa points out, we’re young, but at some point we’ll probably want a mortgage. And at that point, we’ll probably be at a disadvantage. Why should people be forced into taking this risk? Melissa, Scott Mollett, BoBthePhysist and I shouldn’t be at a disadvantage because we don’t want to participate.
Posted by Bryce | July 8th, 2010 at 4:38 pm
I don’t think you’re reasoning for not having a credit card is very good. It sounds to me like you don’t trust yourself to handle your own money, and that once you get a credit card you’d instantly be in debt.
I’ve had a credit card since the day I turned 18, and have never once had a late payment. I actually have 3 now, one being a card I no longer use. Having a credit card is great, the main reason being I get 1-2% back on each purchase I make with that. It ends up being a few hundred dollars a year I am getting back. The other main bonus to have a credit card is my credit score is >740 and I am only 23. When I go to buy a house next year it will make it a lot easier to get a loan.
Credit cards can be bad if people spend more than they are making. If you’re never carrying a balance (I have never once done that) then they are great because of the money you can get back from them. I’d highly recommend getting one and just paying it off every month.
Posted by Tyler | July 8th, 2010 at 5:41 pm
I didn’t get a credit card until sometime in my 30s, and only did because I needed to rent a car. I’m now 57 years old and have managed to only have one credit card at at time, and ALWAYS pay off my bill each month - without fail. I treat the credit card like it’s a debit card, but using it gives me 30 days to have to pay up.
I agree that the whole system is seductive and a rip-off and if you can stay away from them, do it. But if you have to get one/use one, my only advice is to treat it like any other bill you have to pay, and make sure you’ve got the cash to pay it off when it arrives in the mail.
Great piece, Bryce. A lot of people need the wake up call.
Posted by Elka | July 8th, 2010 at 5:43 pm
You really need to understand the difference between having a credit card with a balance, and paying it off at the end of every month. Huge, huge distinction. Credit cards are not evil per se; it is bad to have a month to month balance. The important thing is to pay it off at the end of the month, not to just walk around with a huge debt.
Posted by Nonsense | July 8th, 2010 at 7:40 pm
To the extent that employability is contingent on the willingness to take on debt, employment is indentured servitude in disguise.
The gotcha clauses and other contract-law gamesmanship is disgusting enough for any self-respecting person not to want to do business with the credit card industry, even if the cash flow model happens to work for one’s own situation.
Credit cards are evil, per se. And the use of credit scores in employment decisions is unethical. Being a deadbeat is of course unethical, so the HR establishment’s claims of a legitimate interest are plausible concerning some lines of work, but using ‘no credit’ against someone in employment decisions constitutes indentured servitude, as featured in On the Waterfront.
Posted by Lori | July 8th, 2010 at 9:15 pm
I think it’s just quaint that your attitude toward consumer credit seems to be informed largely by your parents’ inability to manage their own finances responsibly. I suppose we all have a tendency to want to believe those who reared us ‘got it right’ when they taught us how to manage our own money in spite of the overwhelming evidence to the contrary.
I’ve had access to several lines of consumer credit (commonly known as credit cards) for nearly ten years now. I have NEVER paid so much as a penny in interest. It isn’t difficult: I know what my income will be from month to month; I pay my bill every month; and I keep a savings cushion because I spend less than I earn in case of emergencies. If you’ve made it out of high school without learning this, your parents failed you.
You seem to suggest that you ought not to suffer any disadvantage in any transaction because you cannot show any history of creditworthiness. You seem to believe that someone should want to rent you a house, or lend you a substantial sum as a mortgage. These agreements are no different from a credit card: the landlord or lender wants to be as sure as possible that you’ll make your payment every month. On the other hand, if you take your own advice and only buy houses you can afford with cash, then you can still drift happily through your credit card-free life. You’re arguing that reliance on credit is A-OK when it’s massive (like a mortgage), but should be avoided at all costs when it’s a manageable size.
And don’t fall into the trap of believing that the fact that mortgage interest rates are lower than consumer credit rates. Mortgages are secured by the real estate they’re used to purchase. If you default the lender doesn’t lose everything: they get your house. Credit cards aren’t secured, so if you default, it’s game over for the lender. That being so, the lender charges a higher rate for the higher risk on the credit card than on the mortgage in the instance of a default.
So get over yourself and get off your uninformed high horse. If you lack the discipline to manage your finances responsibly, you deserve to be poor.
Posted by Jamal Hussein | July 9th, 2010 at 2:16 am
I concur with those who say a fear of credit cards in and of itself is irrational and pointless. Jamal’s points are especially spot on. I too had parents who eschewed sustained, disproportionate debt … not credit cards. They are two very different things. I occasionally forget to pay my bill by the due date and, unlike all the previous posters apparently, have paid interest and fees. And survived! And when they were overly egregious or not my fault, I complained and got them waived. And I’ve always had multiple cards so when I feel one card provider has treated me unfairly I can sincerely threaten to switch my business, and do. It has been valuable for me to have that negotiating leverage, not to mention if you’re on vacation and for some reason one of your cards doesn’t work it’s awfully useful to have another. The benefits of cards far outweigh the negatives for responsible, informed users. Checks are obnoxious. Carrying around piles of cash is not useful. I like to minimize the balance in my checking account and am not keen on having my debit card rejected at the till and credit cards allow me to aggregate all of my smaller purchases into a single monthly outflow that matches my paycheck. I’ll take that.
Posted by AZeroSumGame | July 9th, 2010 at 1:26 pm
Jamal’s comment amounts to one big “yo mama” jibe. Nowhere does this post imply that Bryce’s parents were somehow unable to “manage their finances responsibly.” Quite the contrary. They sat around the kitchen table doing just that.
There is more than one way to be financially responsible. Instead of self-congratulation on the part of all the good bill-paying credit card holders and debt card eschewers alike, maybe we need some more reflection on the mixed incentives at play that simultaneously condemn and enable debt. I think Bryce’s post has done a good job of starting that discussion.
Posted by SZ | July 9th, 2010 at 3:04 pm
I second that.
Posted by Lori | July 11th, 2010 at 2:35 am
Hi, we put out a break up with the big banks campaign, including asking people to break up with their big bank credit cards. We haven’t pushed the campaign further, but we started the big ask for many adults — break the cycle of debt that credit cards help to create by dumping your credit card, using cash or debit. There are many more reasons to dump credit cards too — credit card inflation and the over financialization of our economy.
http://www.anewwayforward.org/howtobreakup
http://www.bankbreakup.org
Posted by textdog | July 14th, 2010 at 6:15 pm