Tuesday, January 14, 2014

Life with(out) credit cards

I have lived the last 12 years without credit cards. It's not that hard to do, but it requires determination to do it, and maybe help from friends you trust. I've also developed philosophical reasons for avoid credit cards, too, beyond the practical reasons that are not always easy to see. One of the biggest obstacles to letting go of the credit is psychological. The credit card has come to represent a way of life in America. Let's see what we get with a credit card and how to wean ourselves off.

My life with credit cards has been pretty messy. I'd see something that I wanted right now, buy it and them work very hard to pay it off while paying 18% interest on the card. Think about that. The Fed funds rate is less than 1%. Most banks are paying 1/2 of 1% for savings accounts. Then banks turn around and lend that money at anywhere from a few percent to 18% which is rather typical of credit card companies. In some circles, this is called usury - in others, it is a respectable way of making money if you're a bank.

Now if you're Ben Stein, you have credit cards, but you pay them off before the grace period expires. Ben Stein is a wealthy man with a mini-media empire. He can afford to pay off his cards quick and easy. Most of us are still struggling with flat wages and rising prices, and we don't have cash coming in from a business that makes money from the work of others.

Credit cards make money, even in a deep recession. Credit cards are the profit center of most retail establishments. I know because many years ago, I worked retail and during their training, I learned where they make most of their profits. Here is what I learned:

  • If you pay cash for your purchase, the store makes $1-2 for every $100.
  • If you pay with a 3rd party credit card, the store makes $3-4 for every $100.
  • If you pay with the store's credit card, the store makes $8-10 for every $100.
That means that the margins on cash alone are very thin, with the business plan sitting on top of a very high credit card use expectation. Stores want you to use credit, and they make aggressive offers to get you to use their credit. Some stores will offer $20-50 off on a purchase just for opening a line of credit with them. Some offer an additional 20% off just for using a credit card. "Shall I put that on your K-Mart card?"

I avoid all of that and don't even let the temptation enter my mind. The size of the offers any store makes for using their credit card is a measure of their expectation for profit on the credit card. That's how I look at it.

Another way of looking at credit cards is that they are a hidden form of inflation. Credit cards make everything more expensive. The interest over time adds up, so basically, you're paying for someone to sit on their butt and collect money you could have used for something else. The compound interest is even worse on large balances and makes paying the balance more difficult, especially if your wages are flat or falling. If you want to donate to the 1%, get a credit card. They will be happy to take your money.

There is a psychological aspect to credit cards, too. Most of us have been led to believe that we need to have a credit card to build a credit record to buy a house. There are less dangerous ways to build credit history: lines of commerce and secured loans. Credit ratings are based on payments to anyone nowadays. Those payments are what are known as lines of commerce. Make regular on time payments for a few years and your rating will go up, even if it is not for a loan.

That wasn't the case decades ago. Credit ratings for homes was firmly in the territory of credit cards then. I remember how even in high school, that was the emphasis. Get a job, get credit, pay it off and buy a house. That was what they taught in school.

Things have changed. Now retail establishments have to deal with a new generation that won't touch credit cards. Maybe they saw what their parents went through and decided against it. I learned about that while renting a car at Enterprise car rentals. I asked if they would take a debit card, and they said sure, as long as they can take a healthy deposit. I asked about it and they said that Generation X or Y, I can't remember which one now, won't use credit cards, so they found a way to adapt. I'm glad to see sanity appearing in the current generation of kids.

Watch TV for a while and notice the ads for Discover, Visa and American Express. Notice how important and impressive the characters look in the ads. The ads feature people buying expensive things on credit, but there is no mention of how many hours of work is required to pay it back or how much interest will be paid on the card. It's free money, right?

Another way to build credit scores is to buy a car on time. Just make regular payments and don't miss any. Keep that job and get good training so that you have more skills and make a bit more money. Making regular payments on secured loans is a very good way to build credit scores. I know because I thought my credit score would fall without a credit card. But I went from fair to excellent just by making regular payments early or on time to everyone. That's everyone including the bank for the home loan, the car loan, the utilities, and the insurance companies. It all counts now.

You don't have to go into debt with credit cards to build a credit score. I'm proof of that, and there are many thousands of people doing the same thing all over the country. That is a small part of how we can turn this country around from debts to prosperity. It all adds up over time.
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