Yes, plastic can get you into financial trouble, and the credit card companies often make that easy. But let's be honest: If there are problems, blame only yourself.I hate defending credit card companies. It's like sticking up for used-car salesmen, or Congress. Saying anything nice makes you feel like a patsy.
But in the debate over whether credit cards are inherently evil, I must proclaim myself an advocate for the purported devils.The idea that plastic is a snake in your wallet, tempting you to sin, is probably as old as the first Diners Club card (issued in 1950, if you care). Today, the more refined argument made by some attorneys is that credit cards are defective by their very design, a point that's argued in "Why it pays to leave home without it," by recent University of Illinois College of Law graduate Adam Goldstein. He argues that the cards are products, not services, and are designed specifically to take advantage of consumer vulnerabilities.
Most arguments against credit cards note, correctly, that it's easy to get in over your head with credit card debt. That's true for a variety of reasons, mainly:
Screening is lax. Are you breathing? Then chances are extremely good you can get a credit card, and another one, and another one . . . and oh, that credit limit is looking a little tight; let me raise that for you. Unlike most other lenders, credit card issuers don't pay that much attention to your income, employment history, level of financial sophistication or ability to handle the credit lines they're thrusting upon you. They're just counting on enough folks paying their bills to more than offset those who don't.
Minimum payments are low. You only have to pay a tiny fraction of what you actually owe each month. In fact, until regulators finally forced them to change, some credit card issuers set minimum payments so low that they didn't even cover all the interest accrued that month, let alone make any progress on paying down the principal. Since you're not forced to feel the full brunt of your indebtedness, it's easy to deny your balances are a problem -- at least until that awful day when you can no longer scrape up the minimum -- and then you're really in trouble.
Debt creeps up incrementally. You sign up for a mortgage, and it's hard to miss all those zeros; you know you're in debt, big time. By contrast, the incremental nature of growing credit card balances can lure you into complacency. It's possible to spend your way into bankruptcy $10 or $20 at a time.
It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
We spend more with plastic. We've all seen the studies showing that people, on average, spend more freely when using credit cards than when using cash. Then again, not all of us overspend, and some of my readers say they actually spend more using cash. It's the green, not the plastic, that burns holes in their pockets and disappears without a trace into various merchants' tills.
Then there's the bankruptcy rate, whose meteoric rise pretty much parallels the unprecedented increase in credit extended to Americans starting in the 1990s.
Clearly, credit cards can be dangerous in the wrong hands. But those arguing that credit cards are evil or defective usually go astray by insisting that credit cards are dangerous in the average person's hands.
They typically trot out misleading statistics, like the one about the average American having $9,000 or so in credit card debt. I'll summarize the reality here:
•Only 43% or so of households carry any credit card debt, according to Federal Reserve statistics, and half of those owe less than $2,200.
•Only one household in 14 carry more than $10,000 in credit card debt.
•Only one household in 50 carry more than $20,000 in credit card debt.
Whenever I cite those figures, which are from the latest Survey of Consumer Finances, conducted in 2004, I hear from readers who insist the statistics aren't true. The argument usually goes something like, "Those numbers can't be right because I have a lot of credit card debt, and so do all my friends!"
This, in turn, reminds me of the untreated alcoholic who insists that she drinks like everybody else, not comprehending that her universe of comparison consists solely of the rummies on the adjoining barstools.
Sure, plenty of people have serious problems with debt. That "one in 50 households" figure above represents more than 2 million American homes.But most people either don't have credit card debt or have relatively small amounts. Plenty of us use plastic responsibly, as a convenience.
If you have big balances, in other words, you're not the norm -- you have a problem that needs to get fixed. Blaming the credit card companies might make you feel better, but it doesn't get you off the hook.Not that we can't hold credit card companies responsible for their more egregious practices. Bars and restaurants are, after all, held responsible when they over-serve drunken patrons, and card companies' credit-issuing binge over the past 20 years certainly holds some parallels to that situation.
I've written about some of the worst practices, most recently in "Credit card companies' evil tricks" ("evil" was the headline writer's word choice, by the way; mine was "foul"). I'd particularly like to see two changes:
A return to good old-fashioned usury laws. Back in the day, many states capped how much lenders could charge borrowers. Those so-called usury laws lost their teeth in 1978, thanks to a U.S. Supreme Court decision. A federal cap on credit card interest rates at, say, 10 points over prime (which would total 18.25% as of this writing) would put an end to seriously outrageous interest rates and make issuers a little more careful about screening applicants, since they couldn't charge loan-shark rates to compensate for taking on high-risk clients.
It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
Real credit education. The "just say no" approach doesn't work. The ability to get and use credit rationally is an important financial skill in today's world. The prudent, regular and responsible use of credit cards can help build and maintain credit scores, which are used by most mainstream lenders in granting home, auto and business loans. But people need to know that credit card balances should be paid off in full each and every month. And they won't get that message if the schools or other institutions doing the teaching rely on materials prepared by the credit card companies -- as some do.
By the way, if you have credit card debt, the time to take care of it is now. The articles and tools at MSN Money's Manage Debt Decision Center can get you started, and you can get your questions answered on the Ask a Credit Counselor or the Your Money message boards. Knowing that it's you, and not the cards, that got you in trouble is an important first step. Good luck.
By Liz Pulliam Weston
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