Saturday, June 15, 2013

Credit Cards Make You a Bad Person

Finally, some good news. A recent poll on Yahoo Finance notes that the number of Americans under 29 years old living without credit cards doubled between 2007 and 2012. It then asks the question, “Is this a good sign?”

Participants are offered three possible responses:

1)Yes, younger consumers are being more responsible. Surprisingly, this is the number one response at 47%.

2)Maybe, if they’re not too far in debt already. I was one of the 21% that choose this response. I have seen quite a few young people becoming more responsible. However, this maturity often seems to be forced upon what is sometimes called generation debt by student loans and limited full time job opportunities. To be fair, I worked with some remarkable young men who, viewing the results of their elder’s foolish behavior, are avoiding credit card debt, putting 20% on their homes to avoid mortgage insurance, and contributing surprisingly large amounts of money to their 401-K accounts. Now if I could just get them to pay cash for their cars and pickup trucks. Sigh….

3)No, things are so bad they can’t get credit. This response came in at a depressing 32%. While I am sure this is true for a minority who are truly maxed out, even the poor can get credit. Unfortunately, it is credit at terms that no sane person would accept. I have railed at the exploitation of the poor and the ignorant by financial institutions in the past and will certainly do so again in the future.

Whatever the reasons, our use of credit cards is beginning to decline. In an article entitled, Yes, Credit Cards Are Making You a Bad Person, Derek Thompson looks some of the competing forces at work in our society. Worldwide, there is a drive towards a cashless society. He notes that Sweden plans to eliminate cash within two decades. Even in Africa merchants accept debits through their mobile phones. In spite of the good news in America, somewhere between 70% and 80% of the adult population has a credit card, even though psychologists tell us that credit cards are making us bad, irresponsible consumers. This is particularly true of, “Lower-income people, consumers who are worse at math, people who self-report emotional instability, introversion, or materialism.” These are the people studies indicate should not use credit cards.

We have long known that the easier it is to buy something the more likely it is that we will spend the money. Counting out money is inconvenient. It is much easier just to swipe the card. People who use credit cards spend more money at stores, more at restaurants, and leave bigger tips. That is why merchants generally encourage the use credit cards. It is getting worse. Now cards with imbedded chips and cell phones can be used with a wave of the hand.

The article reports, “In 2001, two business professors from MIT organized an auction for Boston Celtics tickets where one group bid with cash and one group bid with credit. The credit card group offered nearly twice as much for the tickets. "Framing hypothetical purchases as credit card payments may significantly increase likelihood of purchase and willingness to pay," the researchers wrote. They put their cheeky credit card advice right there in the headline: "Always Leave Home Without It."

Credit cards also teach us the lie that we have an unlimited supply of money. When we take cash out of an envelope, put it in our wallet, then spend it, we watch our supply of money dwindle in real time. With the credit card, we forget what we spend, until the bill comes due. Then too many consumers just look at the minimum payment block.

The author notes studies show that the use of credit cards make us fat, really. Consumers are more likely to buy junk food with credit cards than if they pay in cash. While this may be true in grocery stores they studied, they never watched me put cash in the snack vending machine at work. Bottom line, this study discovered that, “the permissiveness of credit cards weakens consumers' judgment in more subtle ways than total amount spent.”

The article notes that credit cards are exacerbating income inequality. Richer families are more likely and better able to use credit cards responsibly. Poorer, often less sophisticated, consumers are more likely to run up credit card debt, leading to higher interest rates and numerous fees and penalties. The wide spread use of credit cards also increases prices for the necessities of life. Merchants are charged fees for processing credit card charges. They are not going to pay these fees. The merchants roll them into the price of their goods or service and pass it on to the consumer. I went looking for what I thought would be a simple number. However, it turns out these charges vary widely between processors. If you are interested in the tangle of fees confronting your local merchant, here is a link describing one of the hidden costs of credit cards.

Card Processing Fees

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