Why I Hate Credit Cards

This post is a little off topic for this blog, but I still think it is important for anyone with a business or who is practicing lifestyle design.  The topic?  Why I hate credit cards.

A few years ago I came to the conclusion that credit cards and credit card companies are pure evil.  Their entire existence is dependent on people who cannot afford the things they are buying.  I think we can all agree that it is best not to buy something you don’t have the money for.  A couple of exceptions to this rule would be buying a home or a car.  But in general, it is a bad financial practice to purchase things you don’t have the money for.

Think about this: If everyone was responsible with their credit cards and paid them off every month, credit cards companies would go out of business.  Sure, they earn a transaction fee from the merchant when someone uses a credit card, but the fees they earn are woefully inadequate to keep the credit card compaines in business.  They depend on the exorbitant interest rates they charge to keep them solvent.

So, in order to stay in business, the credit card companies are expecting you to 1) buy things you can’t currently afford, and 2) pay them (the credit card companies) an unconsciounable interest rate for the priviledge.  Talk about a predatory business model.

The payment arrrangements the credit card companies set up are also part of the problem.  They allow – nay, encourage – their clients to make the minimum payment each month.  By making the minimum payment, a credit card holder is doomed to maintain an account balance for years, and the credit card company is assured of extracting as much of their clients’ money from them as possible.  Everyone would agree that maintaining a credit card balance is not good for the consumer, but it sure is good for the credit card companies.

And just to show you how screwed up the system is, I was reading an article the other day that encouraged consumers to carry a balance on their credit cards.  The reason?  Because carrying a balance increases your credit score.  Does that make any sense?  The reasoning is that whether you are trying to build credit for the first time or re-build your credit, carrying a balance and making your payments on time shows the credit bureaus that you are responsible with credit. 

Ironically, if you are really responsible and don’t use credit cards at all or you use them and pay off your balance each month, you’re not showing the responsible use of credit (according to the credit bureaus), so you’re not building your credit rating.  This wouldn’t be so important if your credit score wasn’t used for everything from getting a home loan to buying auto and homeowners insurance.  So it’s necessary to have a high (or as high as possible) credit score, but you have to be a bit irresponsible with your credit to get it.  The system is tilted steeply in favor of the credit card companies.

Perhaps the most insidious thing about credit card companies is the predatory way they market their products to people who can’t afford them and don’t know how to use them.  I’m referring specifically to college students.

I remember receiving my first Visa card when I was still in college.  I was a student.  I didn’t have a job, so I had no way to make a credit card payment.  The lure of easy money was too strong for me to resist.  I didn’t need a new stereo, but it sure would have been nice to have a new stereo.  And with the credit card, it was so easy.  I just had to pick out the stereo I wanted and hand the clerk my piece of magic plastic.  It was a beautiful thing. 

What was less beautiful was when I received the credit card statement.  I didn’t have the money to pay it, which by extension meant I didn’t have the money for the stereo in the first place.  Thank God for the minimum payment option.  I made my first minimum payment and I was hooked.  The drug dealer business model used by the credit card companies had worked like a charm.  Get them young, get them hooked, and you have a client for life.

As if all of this isn’t reason enough to hate credit cards and the companies that pedal them, Adam Baker at Man vs Debt has yet another reason.  In a recent blog post, Baker wrote about how credit card company reward programs take money from the poor and redistribute it to the rich in the form of “rewards.” 

In a nutshell, here’s how it works: Credit card companies prohibit merchants from charging credit card users extra to make up for the fees the merchants pay to the credit card companies.  They also prohibit the merchant from offering a discount to customers who pay with cash.  This means that the merchants must raise their prices across the board to all customers in order to recoup the transaction fees they pay to credit card companies.  This results in cash customers, who are disproportionally poor, paying more than they should.  The money is then paid to the credit card companies in the form of transaction fees, and some of that money is used to give rewards (i.e., cash back, bonus points, etc.) to credit card users, who are disproportionally wealthy (or at least not poor).

Baker does a terrific job in telling the whole story in more detail in his blog post.  I encourage you to check it out.  It’s just one more reason why I hate credit card companies.