Credit cards (part one): the game is changing
I’ve just about had it with credit cards.
Like most people of my generation, I got my first card in college. Then, and for the next twenty years, getting credit was deceptively easy. I used it in all the typical foolish ways: to pay bills during periods of unemployment, to finance an unsustainable small business, to live beyond my means.
In early 2007, after more than a year of concerted effort and lifestyle changes both major and minor, my partner and I paid off the last of our credit cards. (We still have the original mortgages on our house, but have never rolled outside debt into that loan.) I swore then that I would never carry a balance on a credit card ever again. And I haven’t.
But I do still find it useful to charge purchases to a single card, paid in full each month. Here’s why:
- Purchase tracking — This is the big one, as any attempt to budget or control spending relies on it. No matter how diligent I try to be with recording my cash transactions, I still miss one from time to time — and never mind tracking my spouse’s cash, that’s like trying to catch raindrops with my tongue.
- Overdraft protection — I try to keep a minimum cushion in the checking account and everything else in savings, where it earns interest. Putting purchases on the credit card instead of debit frees me from constantly monitoring our available checking account balance to prevent stiff overdraft fees.
- Cash-back rewards — Our Costco AmEx card gives us a tiny percentage back (1-3%) on purchases. Last year it was just over $500 — not exactly chump change. This year we’re spending less, so the total amount will drop, but even so: 1% > 0.
- Vehicle insurance — On the rare, rare occasion when I need to rent a vehicle (which hasn’t happened in the last two years, but no doubt will at some point), the extra insurance provided by a credit card saves me money.
The problem? Now that I’ve mended my profligate ways, the credit card companies no longer consider me useful.
Credit cards (and indeed the entire banking industry) work via cross-subsidies. Some of the people (a recent article quoting ‘industry lobbyists’ put it at roughly 40%) are the sort of credit user I am now, taking advantage of the benefits above without actually generating income for the issuing bank. The rest are the sort of user I used to be — carrying large balances at high interest rates, occasionally missing a payment and generating large fees and even higher interest rates. The income from that 60% has been enough to not just cover the other 40% but generate enormous profits for the banks as well.
If you’re one of the 40% of responsible (aka ‘non-profitable’, from the bank’s perspective) credit users, be warned; they’re coming for you. They may have already begun. I’ll explain the first big change in part two.