The decline of credit cards

By Felix Salmon
November 11, 2009
Ezra Klein, on what he considers a vicious cycle in credit cards:

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Ezra Klein, on what he considers a vicious cycle in credit cards:

The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.

I’m not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we’re going to get there is, essentially, by taxing the stuff we want less of — and that means increasing the interest rates and annual fees on credit cards.

Sometimes this is going to happen in an underhand and less-than-honest way: Odysseas Papadimitriou has a great blog entry on how Bank of America is denying that introducing a $50 annual fee constitutes a repricing of its credit cards, for instance. But the big move, away from credit cards and towards alternate means of payment and sources of credit, is surely to be welcomed.

The sad aspect to all this is that millions of people hold large credit card balances and have no ability to refinance them with personal loans, or even any particular notion that such a thing might be possible. They’re going to be harmed by this move. But over time, if things go right, their numbers will naturally dwindle, and we’ll be left with a much healthier system of consumer finance.

Comments
14 comments so far

a personal loan usually is very different from a credit card – it has a lower interest, but it’s much more rigid otherwise.

a credit card is practically a line of credit with high interest for the used money, but 0 percent interest for the unused money, no prepayment penalties, a certain grace period, etc

the main problem from the consumer perspective was that the bank could easily change the terms of the credit contract without your consent – but this is getting harder after the new credit card regulations …

overall, I’d guess the demand for revolving credit with flexible terms is still quite high …

Posted by EastEuropeanWay | Report as abusive

One nice feature of a credit card is that it puts a firewall between the payment card and the bank account. Possession of an Acct#/PIN can’t permit cleaning out the balance.

Posted by Mel | Report as abusive

Totally agreed. I have an umblemished credit card record, but if I cancel my credit card and migrate to debit cards only, won’t this hurt my “credit rating”? The system needs to change.

Posted by Kramer | Report as abusive

I’m with EastEuropeanWay: personal loans are not a good substitute for credit cards, in general. For the flexibility of the credit cards, you pay a higher interest rate than you would for a bank loan. They can certainly help to smooth consumption in a way that personal loans are unlikely to be helpful.

If my wife or I lose our job, we don’t have to immediately cut our expenses by half because our available lines of credit can fund a good chunk of our normal consumption for a long time. How far would we get with a personal loan after one of us loses our job and the other’s salary just barely covers our other debt payments (house, car, student loans)?

Credit cards are also much more useful than a bank loan for sudden expenses. If my car breaks down and needs $1,500 of work, I can bring it to the shop and pay the same day with a credit card. If I have to take out a personal loan from the bank, the turnaround won’t be nearly as fast.

Posted by ateamrules | Report as abusive

I use my credit card(s) on a transactional basis, paying it off every month, and never as revolving credit. I use credit cards for this rather than debit because:

1) it allows me to check the transactions made before my actual $$ is paid to the credit card company and I can dispute items before paying real money for them. I’ve had my card number taken 3 times in the past 8 years, I also have several accounts (Netflix) tied to credit cards and want to be able to quickly change the card if necessary.

2) I get rewards, 2% cash back currently with no annual fee, this 2% cash back is coming out of the 2-3% merchant fee, my bank debit card does not offer me that. I feel I’m being ripped off if I don’t get the 2% back when I pay cash or use debit. At one time Amoco offered a discount for cash but you don’t see that anymore do you. Although sometimes if I do a big ticket purchase I’ll ask what the discount is if I pay with cash, if its more that 2% I’ll do that instead.

Posted by Steve | Report as abusive

“t one time Amoco offered a discount for cash but you don’t see that anymore do you”

Not so much with gas prices down. When it was 4$/gallon it was more available (often had to ask for it, many filling stations don’t want to advertise it for fear of abrogating card agreement)

I’m with the commenters above in that personal loans are less flexible than credit cards and suspect many users are perfectly prepared to pay reasonably for that flexibility. Jsut because some consumers are in over their heads is not a reason to punish the more ‘aware’ users By that basis shouldn’t we ban cars because some people are bad drivers (not me, of course). I don’t think so.

Posted by SP | Report as abusive

I thing Kramer has it right. I haven’t had a credit card for more than 10 years, and, as a result, my credit is effectively non-existent. This is despite the fact that both my wife and I make six figure salaries.

From my point of view, the system is completely broken since there is no way, particularly in the current climate, that anyone would ever give me any credit (car, house, boat, whatever). Or at least not the kind of credit you would expect…

As more people move away from the revolving, super-liquid and outrageously expensive credit of credit cards, the system will have to change, which is only a good thing.

Posted by ckm | Report as abusive

I think the article is not being viewed in the correct context. For one, credit cards are extremely flexible devices that enable consumers to smooth consumption requirements. However, using a credit card to fund some form of an asset sale, etc at 10.25% (minimal) is not to intelligent compared to a 5 – 6% personal loan. Another issue is the payment leverage ratio. Credit cards allow much more leverage than personal loans. For instance, my citibank payment ratio is approx. 67, meaning for every $1 I pay a month, $67 is financed by it. Compared with a personal loan that has a much steaper ratio (depends on many variables by 20 – 40). Therefore, reducing liquidity available to the consumer. In summary, credit cards are great for short term financing while personal loans should be used for longer term asset funding. People just need to realize that just because you have available credit doesn\’t mean you need to spend it.

Posted by Jonathan | Report as abusive

Migrating to debit cards would/should be a good idea, but it leaves one’s account more open to thievery without any recourse. When congress gives the same protections to debit cards that credit cards now receive… I will switch; not until then!

Posted by Eli Baker | Report as abusive

I had two main thoughts when I read the original article:

Maybe having people who don’t need credit cards move away from them isn’t a bad thing. I mean, if some company is losing customers who didn’t actually need it’s product isn’t that just the market eliminating some inefficiency?

Also, I thought the companies didn’t really make money on those people anyway. I was under the impression that cards were complaining they wouldn’t be able to make as much money off their less reliable customers so they wouldn’t be able to cross-subsidize their cashback or airline mile schemes. If those customers don’t generate net profits, what’s the point in keeping them when they want to leave?

Finally, ateamrules made me think about something. I recently had to pay $1600 to fix my car. I had no problem making a payment with my check card. The reason I can say this is that I have a substantial “cash” cushion. I wonder if higher savings rates in some developing countries are in part due to lack of access to easy to use revolving credit. (In my case it’s due to a refusal to use it.)

Also, if this trend continues, I can imagine there would be huge opportunities to make good money lending to people without credit scores (not to be confused with people with bad credit scores) at reasonable rates.

I do not agree with the logic behind the article. Why should people with money use Debit Cards? They are more open to fraud. My Debit Card I use only at the bank’s ATM to withdraw cash. I take advantage of my Credit Card(s) grace period, which is longer for some cards than for others, and pay the full balance when it is due on the statement. I have never had any Credit Card change my terms, start charging a fee, or anything like it, and my oldest card dates back many decades. Especially in case of a joint checking account, it is risky to use Debit Cards, people being fogetful, and the Federal Government would not be so concerned with overdraft charges on Debit Card use when holder is not notified, if few people were affected by these charges.

Posted by Zulema | Report as abusive

For the time being, consumers stil have the option of refinancing via low rate and 0% balance transfers. However, credit card companies have increased the fees on these transactions substantially, from an average maximum of $75 last year to 5% of the transaction with no maximum today.

Another issue is the continued availability of these offers. Most credit card companies have decreased the duration of these offers from 12 months to 6 months, and tighter credit card standards are leaving more people in the lurch.

I love this line: “Credit cards are useful payment devices, but atrocious borrowing devices.” It’s so true and yet, so often, not well understood.

For people that pay their card off one time every month, credit cards – and the rewards many of them offer – are a good thing.

That said, so many people find themselves spending more than they have when they use a credit card and, for that reason, so many people are shifting to spending on debit.

I work for PerkStreet Financial and we believe that people who spend responsibly using debit cards deserve fantastic rewards too.

http://www.perkstreet.com

Credit companies are still going strong, and they are the ones contributing to much of the financial problems that have plaque America in recent times. Americans need to wean themselves off their addiction to debt, and reducing the usage of credits cards is one way. They are not like ID cards, where having one is essential.

Posted by simoniddings | Report as abusive
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