Aristotle provided evidence for the spherical shape of the Earth on empirical grounds by around 330 BC. Prior to that time, most people accepted as truth that the Earth was flat. I contend future generations will look back at our financial system today and label credit cards as “the new flat Earth.” “I can’t live without my credit card,” is now accepted as truth. I contend life after credit cards is not only possible, but an essential part of financial success for most of us.
It is easy to forget how long civilization existed before credit cards. The first general credit card that could be used at multiple types of retail stores was the Diners Club card, introduced in 1950. In 1958, American Express developed the first worldwide credit card network. Since then, growth has been astronomical! How did life exist before 1958?
In 2014, American Express alone reported an interest income of $5.8 billion. In May 2016, the Federal Reserve reported outstanding credit card debt in the U.S. at $953.3 billion. Average household credit card debt now averages around $15,000, with an average interest rate north of 16%.
Interestingly, none of my friends and relatives will admit to being “average.” They pay off their credit card balances faithfully each month, have never paid any interest and earn valuable “points” on all of their purchases. Right!
Enough of boring statistics and facts. I have developed a sure way of reasoning whether a financial deal is good or bad for you, and anyone can use it. Just study television advertising. It costs a lot of money to advertise on TV! No business can afford to do so over the long haul unless it is to their advantage. You need to ask the question, “If it is good for them, is it also good for me?” Call me a cynic, but I think not!
I’ll give you some classic examples. How may TV ads do you see for new cars? How many for used cars? Are you better off financially buying a new car or a used one? When it seems every other ad is telling you it is time to buy gold, is it? Are you really going to tell you doctor what drugs he or she should be prescribing for you? But I think in the TV ad race, credit cards take the prize. Do you still think they were designed primarily for your benefit?
I have been “credit card free” for over a decade, and yet, here I am, alive and (relatively – I’m 75 at this writing) well. I am able to do everything with cash, checks and a debit card you can do with a credit card except on very important thing: I cannot spend money I do not have. The first rule of financial management is to spend less than you make. The real trouble with credit cards is not so much the staggering amount of interest and other fees paid to credit card companies, but the fact that credit cards let people spend more than they make. This is a formula for financial disaster.
As a financial advisor, if I could only influence a client to make one change in his or her behavior, my choice would be easy: Move the client from a credit to a cash system. At least then they would be limited to spending all they make, not more. That first step would be huge, and hopefully they would sooner or later figure out how to spend less, save for the future, and learn the other basic disciplines of financial management.
At this point, you may be feeling sorry for those “other people” who don’t use credit cards responsibly like you do. To you I have another question: Do you spend more using credit cards than you would if you had to hand over cold cash? As you would expect, retailers are very interested in the answer and have studied the situation carefully. They now know people spend from 12% to 18% more if credit is available, than if they have to pay cash. Even my aforementioned friends and relatives admit they occasionally make purchases with credit cards when their bank accounts are not up to the challenge.
And what about those lucrative rewards programs? The math is easy. I am spending 12% to 18% more to get a 1% or 2% cash back reward. Such a deal. For the retailer and the bank!
Yes, I believe future generations will look back and say, “Can you believe they thought they couldn’t live without credit cards? No wonder so many struggled to remain solvent!”