Huh, that's weird. I fall into the age bracket mentioned in the article, but use a credit card for nearly every single purchase for 1) the fraud protection benefits and 2) points. With the anecdotal group of people I know most people are fine using CCs.
On the other hand, I pay off the statement in full every month, and therefore never have revolving debt that extends beyond 30 days. The article wasn't clear whether or not such credit would have counted in their analysis or not.
Even that - are using credit cards less - is unclear to me. Are there fewer millennials with open cards, or are millennials spending fewer dollars via credit cards (and thereby avoiding debt)?
This. It's really not that hard to do correctly. The fraud protections are much better, at least in my experience in the US, than using debit cards, you get the reward points, and you can "float" expenses over the course of the month, as long as you pay it off every statement - which is nice if you only get one paycheck a month.
I've known both types of people in that age bracket.
Some feel underconfident with credit cards, and avoid them either for self-control or fear of fees and hidden surprises.
Many more have them and use them liberally, but won't carry a balance. It's like a debit card with fraud protection and cash back, which seems pretty popular at all ages.
This. The golden rule is to pay off your "Statement Balance" in full each month, thus accruing no interest month-to-month, but getting the added benefits of a credit card.
When I was young I racked up credit card debt and it was an expensive lesson. Now I use credit cards for everything but never carry an interest-bearing balance. The upside: never at risk with disputes, additional insurance/warranty coverage, free flights/hotels/etc using points, and up to 30-day deferred payment on all purchases.
Personally, I felt the article a bit silly. Especially when I reached the part quoting the PE-firm employee. I can't say that I know a single person who manages their money well that doesn't use credit cards.
IMO, strong financial acumen equates to using any available tools to maximize your output and utility. As long as you spend within your means and do not accrue any interest, credit cards literally give you free [insert rewards program here] for doing what you're already doing day to day.
At my bank, the fraud protection for any card with a VISA logo is identical whether it be debit or credit. Due to that, I never bothered with a credit card. I don't want the ability to spend money I don't have.
I did end up finally getting a credit card (in my mid-30s) not because I want one, but because I wanted a back-up card for when my debit card is out of commission for whatever reason. It's a constant struggle to remember to do transactions on it so it doesn't get closed for inactivity.
Depending on your bank, you may be out the money that's in dispute until the dispute is completed. If your bank decides to spot you the money in dispute while things are figured out, you need to keep in mind that if the dispute isn't decided in your favor that loan will go away, and they will debit your account. If you were cutting things close, you'll end up in overdraft and the financial screwing begins in earnest.
Here's the issue: you're paying for CC transactions anyway (cost gets passed on to consumer), so you might as well try to get some of it back (with reward points, etc.).
I've never understood the credit vs. debit aspect. I know my budget and can easily just not spend more than I can afford. Paying the balance is automatic, so the only difference between using one card or another is that one gives me an e.g. Amazon gift card every couple months.
My wife and I fit into that age bracket, and we also exclusively use credit cards for purchases anywhere we can. Just this morning, on a rarely used card, someone used the card and in about 10 minutes and a few purchases ran up to the limit. If this was a debit card, we would have been out the money in our checking account, and the onus would have been on us to recover that money. Instead, the fraudulent purchases were removed and a new card was issued - this took about 5 minutes, including looking for the card in question to find the number to call.
It was putting my last car's down payment on the credit card that got us enough points to get nearly free ($18 I think) first class tickets for airfare for vacation this year.
but use a credit card for nearly every single purchase
I hope you never end up in divorce or any other sort of court, which will result in your credit card records (and pretty much everything else) being subpoenaed.
I have a credit card but use cash whenever possible. That way, transactions are more likely to be between me and one other party, rather than between me and many, many other parties.
Let me say in advance that I know the system is not perfect, that I know I'm hypocritical for having an iPhone, etc. etc., but I will still note that some level of privacy / anonymity is better than none.
It still boggles my mind how prevalent credit cards are in the U.S. and how almost non-existent they are elsewhere, in particular Europe and Japan where debit cards are used. They don't call them debit cards, but rather cashless payment or what have you. And the merchant fees for these cards are far, far lower than credit cards which makes it even more baffling to me.
ADD: "Without a substantial credit history, it is much harder to take out a home mortgage, for example." Why is this? It's not true in other countries where credit cards aren't used anywhere as much.
I honestly don't understand why they're so popular here either. A debt card is basically the same as paying with cash, because you have the money. With credit, you're still doing the same thing, but you pay later- either way you're still paying the same amount, but with credit, you can fuck yourself pretty easily.
Also, it's because credit cards are so prolific here that it's harder to take out a mortgage, if everyone has a good credit score but you, then you're not going to be at the top of their list.
Fraud protection is required by law. The reason why the protections differ is because of different laws, Fair Credit Billing Act applies to credit cards, and the Electronic Fund Transfer Act for debit cards. The only reason fraud protections would not be identical between credit and debit cards is because Congress doesn't care enough to make them the same, and that might have something to do with being under the boot of the finance industry.
At least in some EU countries, we do call them debit cards, and while the percentage is much lower than in the US, a third of all adults do have (at least one) credit card.
Fun fact, in France we call debit cards "Carte de Crédit" (or carte bleue)
Debit cards there come with the same amount of fraud protection as the credit cards, there's not really a reason to use Credit cards there.
In reply to your ADD: Because in the US, you get a "Credit score"[1] based on your credit history. And when taking a home mortgage, instead of simply asking for your past few years of income proof and other papers bankers in Europe would ask before deciding to give you a mortgage, in the US they rely on that Credit score. And the best way to "build" that credit score is to have a credit history, and the simplest way to have a credit history: use a credit card for a long time and pay on time.
Because obviously paying on time a $100 credit card bill every month is a good indicator on how you'll handle paying a couple hundred thousands loan for your house (/s)
> Because obviously paying on time a $100 credit card bill every month is a good indicator on how you'll handle paying a couple hundred thousands loan for your house (/s)
I think this type of behavioral scoring is actually a great benchmark for determining responsibility. If you can't handle paying off a few hundred bucks here and there, it seems pretty reasonable that you're more likely to default on a far more expensive mortgage.
If all you do is pay a $100 CC bill on time, you will have terrible credit. Credit scores themselves are proprietary but they are largely comprised of the following factors (in no order):
- Having a lot of available credit (usually based on credit score and/or income)
- Not using too much of that available credit (credit utilization, a low non-0% is ideal)
- Different types of credit (revolving credit or CCs, installment loans, etc)
- How long you have had credit (longer is better)
- How many times you have tried to get more credit recently (too many recent inquiries means higher risk)
Credit scores are a measure of how well you can hold multiple types of debt over time and still pay everything. It is not "will so-and-so pay their mortgage?"
> "Without a substantial credit history, it is much harder to take out a home mortgage, for example." Why is this?
In theory, it shows you can pay them back. In practice, I wonder if credit works that way.
My first job was working for a car dealership and, because the salesmen are lazy, they taught me how to read credit reports so they wouldn't have to.
They taught me to ignore the credit number and look specifically at whether somebody has paid off a large sum of money consistently. People who have paid off student loans and never missed a payment were ideal. If they were delinquent once or twice it wasn't a problem, provided it didn't happen consistently.
They didn't care at all about credit card payments unless it was a large amount of debt they had trouble paying off. In other words, credit card debt could only hurt you, it could never benefit you.
I don't know if this was common practice for car dealerships at the time (late 90s), but it certainly contradicted the information I was taught in school about the necessity of using credit cards to establish a credit rating specifically so you could buy a house and a car.
There are a few qualifiers to your mortgage question - good credit history will make it easier to take out a mortgage at the lowest possible interest rate with as little as 20% down and monthly payment constituting as much as 30% of one's monthly income.
If you take out a real estate loan at 40-60% LTV vs consumer-grade 80% LTV, banks will care less about the underlying credit score - their models will tell them they can always repossess and make most (all) of the principal back relatively quickly.
Do the LTVs, interest rates and debt-to-income ratios transfer to those other countries as well? US is known for one of the most lenient and dynamic mortgage market, so those are just some rules to play by if one is optimizing for lowest possible rate.
Boohoo. Millennials don't want to be enslaved by debt and the corporations that profit from it. I've told my kids since they could understand that credit cards are evil and are to be avoided like the plague unless you pay them off religiously every month. I'm glad to see they're listening.
I watched my parents struggle with credit card debt for decades - there's no way I'm going through that. Also, even though I've never had a credit card in my life, I had no trouble getting a home mortgage with a fantastic interest rate. This article smells like it was written directly by the Credit Card Industry, which isn't what I would expect from a reporter that's obsessed with Bitcoin.
This is interesting and I am glad less people are using credit cards. It's really not a good idea for the majority of people in my experience.
I got mine when I was 20 and I've never paid it late or gone over my limit. Most of the time I coordinate my payments with the day I get my direct deposit (I've tried automatic payments, but too paranoid that they might not work!). Discover gives me pretty good Amazon cash back too, so every few months I get enough points to get something small for free or very cheap.
It wasn't until much later that I realized not everyone is like me and most of my peers had a lot of debt accrued over the years. They're definitely dangerous.
Maybe I lack self control but it was really easy to go from paying off $30k in credit card bills every month, to not having that income anymore, to being $30k+ in CC debt.
This is probably a big concern for millennials in particular. The ability to "float" expenses is a nice way to smooth funds across a month, but for people without savings a sudden loss of employment can turn into instant debt.
Surely if you were spending $360,000/year on your credit card, you'd have enough home equity and other assets to refinance that debt. It really shouldn't be on the credit card for long, because CC interest rates are atrocious.
It was basically advertising costs for different pay per click/impression ads. I was basically just doing arbitrage from lead generation to PPC. Though I did get a little frivolous and do some remodeling and got married and put a lot of that on CC. There's probably a vacation in there somewhere too.
I used some of the money to pay off my car and put a downpayment on my house but I still have a negative worth. I didn't really plan this to spam my blog but I wrote about it on the site in my "about me".
Like many other things, it boils down to impulse control.
It's a lot easier to look in your wallet and see how much you have left to spend (and then decide you shouldn't) vs holding a credit card and deciding you can pay for it later.
It's no more dangerous than spray paint is dangerous. If you're prone to be an abuser, avoiding them is probably not a bad thing. But credit cards in themselves aren't the problem: it's about self-regulation.
What's really scary is the fact that many of these individuals don't consider the benefits and rewards of using a credit card -- free flights, cash-back, insurance and extended protection, and best of all it's not your money. You get to hold on to your cash for a month's worth of interest and you get fraud protection.
Credit cards are tool and, just like most tools, should be used with proper awareness and thought-process. None of the examples in the given article are fallouts of "using credit cards", but having runaway debt in the first place.
This article really just emphasizes the fact that we are living in an age of complete lack of personal responsibility and self-control, where you can blame an institution for your inability to spend.
Im willing to bet people don't value fraud protection because they haven't been a victim yet. I keep the number of places that see my debit and checking numbers as few as possible. Plus, the credit card companies themselves don't view fraud the same way or with alarm.
> This article really just emphasizes the fact that we are living in an age of complete lack of personal responsibility and self-control, where you can blame an institution for your inability to spend.
Not having credit cards is one way to control yourself.
The whole "it's a lack of self control" claim is really weird to me.
I don't stock my house with junk food, because I'd rather use willpower once at the store than constantly in my living room. Am I supposed to feel weak-willed for making the simpler choice?
I guess you can argue that people are giving up a lot and ought to find the willpower to get those benefits, but for that you need to argue that they're actually giving up a lot.
Otherwise, it's just as you say: these are people who are controlling their spending and not blaming institutions.
I used to do that. Then I married someone who absolutely will not stop stocking the house with junk food, no matter how often I ask, beg, or demand that they stop. We have at least managed to compromise on always hiding it from me and never explicitly telling me that it's there.
(But even so, I'd prefer not to be forced to buy garbage out of the household funds against my will.)
So from that metaphorical perspective, using credit cards for "the benefits" is a lot like buying a dozen glazed doughnuts, just for their smell. So you occasionally open up the box, take a whiff, and close it again, throwing them out and replacing them as necessary to replenish the odor. But sooner or later, you're going to take a bite.
Credit is best used for durable goods that produce value, or at least depreciate more slowly than the interest rate of the loan--an American household's primary car, for example. Instant consumer gratification is just not a wise use of credit, no matter how many sugary sprinkles it has on top. And that's exactly what credit cards are mainly used for--as financial junk food. Most people buy the credit doughnuts, actually eat them, and get fat.
So good job to those that can go their entire lives whiffing free doughnut smells, but some people have to arrange their lives such that they don't even drive past the doughnut shop in the morning. It's just a different kind of self-control to avoid temptations in the first place.
> It's just a different kind of self-control to avoid temptations in the first place.
This is exactly it. We all use both kinds of self-restraint, but it's still worth arranging external forces to support the kind of self-control you find easier.
I've used credit cards, and taken on debt, but always with a clear plan in mind (metaphorically, I drove to the donut shop intending to eat one?) It's been for large purchases (primary car) and some time-convenience things that came without interest (washing machine).
If I were seriously worried about spending into debt without a plan, I probably wouldn't keep credit cards, or would keep 1-2 low limit cards. As it happens, I don't struggle much with that issue, but we all use mitigation in places where we do struggle, and I see nothing with it.
The way it works is that credit cards charge merchants ~3% per transaction. They don't allow merchants to charge proportionately more for CC transactions over cash transactions. Since it's business suicide not to take cards, everyone just charges a few percent more across the board. So basically everyone without a good card is getting fucked over, but if your card has a rewards program you can at least get some of that 3% back.
The way it REALLY works is that the merchant charge % varies per card. The higher paying cards have higher merchant fees. What this does is incentivize the card holder to get a card with even better payouts, which results in even higher merchant fees. Card holders with high perks are freeloading off those who use cards with fewer perks, or none like cash or debit card users.
It's a huge externality. If it were the law that merchants had to make the card holder pay their own fees, this whole perverted system would go away. The only way it works the way it does is because EMV contractually requires merchants to obfuscate the true cost from the consumer.
One thing that even people who consider themselves financially savvy (e.g. those who pay off the credit cards in full each month rather than carrying a balance) often fail to realize is that credit card companies are middlemen; the fees they charge the merchant -- typically around 3% of each transaction -- ultimately get paid for by someone, and that someone is you.
If we all were less beholden to our credit cards, and/or the public and retailers were more comfortable with higher prices for credit card purchases, we might see cash prices go down. The savviest among us would probably lean more on cash for smaller purchases and reserve credit cards for only big-ticket purchases (because of the transaction/purchase protection benefits).
In an ideal world, sure, but as it stands today, purchasing an item for $5, $50, or $5000 is the same cost regardless if you pay cash, debit, or credit.
Does it suck that a small business can't accept cash at a discount if they accept credit, due to merchant rules? Yes, I'm sure it does, but as a purchaser, I can get rewards for using a piece of plastic vs paper money?
I acknowledge and agree with the principle though -- no single snowflake.
Cash isn't necessarily cheaper for merchants once you factor in thefts and handling costs. But I've found that some small merchants are willing to give a 1-2% cash discount if you ask.
You have to handle cash and all the negatives that come with that.
Using ATMs (finding one, avoiding fees, navigating the myrian of poorly designed UIs) and carrying large amounts of cash is a major inconvenience compared to carrying 1 piece of plastic. No incentive to rob people either if they don't have anything but easily replaceable credit cards.
Having a digital trail for yourself also simplifies budgeting and record-keeping tremendously.
That is probably the only reason why I use credit cards. Make no mistake your paying for those perks, they are just hidden in your everyday purchases. About 15 years ago I got tired of trying to negotiate cash discounts (usually only for larger purchases), and became a loyal discover card user. So, now i'm part of the problem, and the banks are very happy to keep it that way, because they are also making a percent or so on every purchase I make...
The good news is that gas stations offering a few cents off a gallon, small restaurants, etc that have built in cash discounts seem to be more common now than they were just a few years ago.
For a free $200 flight (on the low end), you'd need to spend (on the bottom end, with an exceptionally good 3% rewards number) 200 / 0.03 = $6667, on whatever stupid categories your credit card has for the 3%. Just how much money do you think most millenials have?
Look up ''churning'' which is the pursuit of mega signup bonuses in order to magnify the rewards. I've earned >1 million points and miles through this method in the last few years, easily $10k+ worth of travel, although I keep it up now more so because it has become a fun hobby and I enjoy it.
There are also articles describing the risk of churning, and that hardcore churners may be damaging their credit reputation by being seen as unprofitable.
I'd think of it in the sense that if you're going to spend that money over whatever length of time anyways, might as well get the $200 flight out of it as well.
That's basically my attitude.(And I also have a fair bit of reimbursed spend.) You can also get credits that are effectively cash (e.g. on Amazon) or even actually cash. They're usually theoretically worth less than the airline miles or hotel points but are a lot easier to use efficiently.
As another comment suggested, there are also a lot of games that you can play churning credit cards--as well as playing gift card games. My personal take on those though is that you really have to keep on top of introductory offers, using gift cards, etc. or you can easily end up in the hole. It's also essentially a hobby. Once it becomes work, it's probably not worth it.
Just on groceries that is a free flight every couple years. Of course I also buy clothing, phone bill, car repairs, birthday presents... In short, I charge almost everything. I'm going for the 1% cash back not the points, but to me it seems normal to be getting back more than $100 every year. Note that I do not carry a balance. Everything in that list is something I do anyway, and I have the cash sitting in my back account (so I should probably add another buck to the $100 above for interest in my bank accounts)
Note that you have to be able to control yourself. If you ever carry a balance the math fails.
There is no such thing as free. I think your comment emphasizes the fact most credit card users think these kickbacks really are free, when they cost everyone a lot more money in the form of 2-5x higher fees for every transaction.
A month's worth of interest? At 0.1% per year these days? Please.
In the USA there is no chip and pin, the whole system is based on trust. Therefore, having credit cards exposes you to fraud. Some people may prefer to not have that attack vector to live within their means on a debit only account. Also some people may prefer to just look after their stuff and not bother with insurance and other financial products. With this mentality the benefits of a credit card are about as much use as 70's style Green Shield Stamps. For the generation not able to get on the property ladder much of the consumerism that goes with it is irrelevant.
That doesn't protect you from fraud, given how little personal information you need to open a credit card account. In fact without checking your credit reports you might not even realize you have an account fraudulently opened in your name.
Umm? There is chip and pin, it's every debit card. They used to be swipe and pin, but since pretty much all cards have been replaced with chip, it's now chip and pin.
Credit cards in the U.S. are chip and sign, which is the dumbest piece of crap decision by the card issuing industry. Even though I have chip on both credit and debit cards, they become chip and sign when used in Europe. It's f'n hilarious being in a grocery store where the clerk is like "oh you have to sign, umm let me go find a pen" because it's that rare.
I think the whole chip thing is stupid. We're 20 years late to the game. We should have just skipped it in favor of a more solid contactless system rather than spend all this money changing over to something arguably obsolete already.
The monetary benefits of credit cards aren't very convincing unless you spend a fair bit. For most millennials, cash back is a few hundred dollars a year and monthly interest is approximately zero.
I'll grant, though, that the ability to contest transactions is huge. Most people I know have used it, many to the tune of hundreds or thousands of dollars. Just knowing that in the case of fraud or bad business practices you aren't trying to reclaim already-transferred cash is value enough for me.
> This article really just emphasizes the fact that we are living in an age of complete lack of personal responsibility and self-control,
I'm not in the age group the article is talking about, but... not having a card in my pocket that lets me spend money I don't have is my exercise of self-control.
Your attitude is so strange. The way I control credit card debt is by not having a credit card. That is the self-control you're lamenting the lack of.
In the UK, there's all sorts of consumer protection when you use a credit-card - essentially, the credit-card company takes on liability for suppliers' failings.
E.g. If you book a holiday on your credit card, and the travel company goes bankrupt, your card provider refunds you.
For the most part, those protections simply don't exist if you use a debit-card.
This is something I fall squarely into. I've avoided debt like the plague, preferring to live a few years behind the tech curve in electronics and using older cars and such. I do use a debit card a decent amount however, for better and worse. I'd much rather operate within my means, than spend my entire life chasing something I can't actually afford.
edit:
I will be looking into getting a credit card decently soon so I can build credit for things like a house, but at 22, I can say I'm glad I don't have to worry about that hanging over my head in the future.
The use of credit history and score to determine worthiness in all sorts of purchases is a horrible construction that must be destroyed. I got a credit card for no reason other than to build score; I've never spent money I didn't have in my life (which seems responsible to me!) but I still have to go through this silly rigmarole of purchasing and then paying off to prove to future agencies that I'm responsible.
The whitelist-type system of building a credit score in the USA just seems weird and invasive to me. Here in Germany you have something more like a blacklist: You pretty much have a good credit score by default and only get a bad score by not paying bills or not paying back debt on time. I have a perfect credit score in Germany despite never taken any debt in my life.
The article mentions several times that student loans are putting a lot of people off more debt. Then it says they'll have no credit history when it comes time to buy a house or car.
What about all the student loan payments they're making? That's certainly a credit history, esp. if you miss a few.
Over half of my credit report are student loans. All of them are paid and closed, years before their original term (probably still in the future as of now).
In the UK, student loan payments (at least, those issued by and owed to the Student Loans Company - an official government-owned body for student loans) are not reported or recorded to any credit rating agencies.
No kidding. Even new cars have 0% financing, but an even better deal is buying a newish used car. But this whole article sounds like it was written by the finance industry as if millennials are irrationally scared (i.e. spooked). I'm increasingly not liking this article!
And amusingly, the best credit cards for those purchases are almost always obtained during the purchase.
An appliance purchase at Sears comes with 60 months of 0% interest if you open a card - it's debt, but not necessarily irresponsible. Using a normal card to debt-finance the same thing is far less responsible, and I'm not really sure what the article was trying to claim there.
While I realize it may lead to less (reckless) spending, this is probably a good thing. Certainly my generation overused credit cards, and many of us learned painful lessons from it. I sure did, though even now I have a somewhat cavalier attitude towards the plastic.
Sure, there are lots of benefits to credit cards if you have the discipline to use them to your advantage. But most people don't have that discipline, and the banks try very hard to loosen what discipline you do have.
As an American living in Europe I find the different attitudes to credit cards over here very interesting.
For instance in Germany I had a Visa and now I have a MasterCard, at a big fancy bank, and both are automatically paid in full from your account on the first of every month. It might be possible to run up debt on a credit card in Germany (or it might not) but it's not the default action like it is in the US. No "click here to pay the minimum."
Also, lots of places won't even take credit cards in Germany. Like Ikea for example. Instead these places will take your "EC card" which is like an ATM card in the US, i.e. a direct debit from your account.
While the Germans are notoriously paranoid about debt -- hyperinflation will do that to you -- some other countries are more freewheeling. In Hungary most people don't have credit cards, but lots of places (including Ikea!) accept them.
(Slightly complicating this whole story is the fact that in Europe most debit cards are also Visa or MasterCard, which I assume is transparent at the point of sale.)
However, back in debt-averse Germany, unsecured personal credit is much easier to obtain, at much better rates, than in the US. So if you're gainfully employed and you really need to buy that used speedboat to set the Spree on fire, they've got you covered.
The credit card acceptance in Germany is changing quickly right now, even the discounter chains like Aldi and Lidl who were cash-only just 15 years ago have been accepting contact-less VISA and MasterCard payments for around a year now.
EU came down like a tonne of bricks on max fees that the banks/processors are allowed to charge - those are no longer eating the profit off razor thin margins those chains had
Notably, the suggestion that "it's fine if you pay off your card every month" or "loans are sensible if you get good rates" only holds for people with some kind of faith in stability.
With a stable job and some savings, paid-off credit cards and zero-apr loans are great tools. If you're worried about losing the job and barely making rent (like many millennials are) then even 'safe' debt becomes troubling.
It might also be that many are un-/underemployed compared to where they want to be, and have been for years. They don't see their economic fortunes ever improving much.
The credit for these individuals has shifted from cards to student loans. Paying your student loan on or ahead of time does give you great credit history, in time for your first mortgage
I can identify with this. As a 30 year old, I have never and don't ever see myself owning or using a credit card. The experience of my parents struggling with debt for most of my childhood remains emotionally powerful, even against the opportunity cost of not using credit cards.
I am willing to to take extra precautions against fraud and lose the cashback I otherwise would earn, if it means never inviting potential credit card debt.
The closest I have is the approximation supplied by my credit union (Alliant). Currently it sits at ~660, having fallen from ~740 when I finished paying of my student loans. At the moment I am counting on saving more than the standard 20% for a future home purchase, in order to minimize the impact of my lower credit score on a worse mortgage interest rate.
thanks! That's interesting that you took such a hit from having your loans paid off. I know that has an effect, but that totally dropped you out of prime territory. When shopping for your mortgage, you may want to see smaller mortgage brokers who would be able to give you a slightly better deal versus going to a larger bank. Good luck!
This post is a great example of complete misunderstanding of CC basics and as a result - an irrational fear of "all things financial"
If you're so afraid you might lack self control that you will spend more than your monthly income, get a card with a limit that's 1/2 of your income. Simple as that.
This country is structured around using debt as your leverage, as both business and consumer. Not to utilize that and tout it as somehow virtuous or prudent is, in fact, just ignorant at best.
There's a lot of confusion around how these cards work and what these statistics measure.
In this article they are talking about the sum of all balances on credit card accounts. Technically all of this money is borrowed, even if, as some commenters say, you "pay in full every month." You're just only getting charged interest after typically 30 days. Using terms like "revolving debt" to describe interest charges is imprecise, as is describing payments on interest-bearing debt as "paying late." Interest is interest, and debt is debt.
How do credit scores distinguish debt from interest from defaults, the inability to pay interest (sometimes principal)? It doesn't matter. Before Lending Club hid them, the variables that were strongest correlated with borrower race and borrow age were most correlated with default on loans. But debtors who accrue interest via credit cards and pay it are the most desirable, because obviously they are the debtors who make money for the creditor. The fastest way to get the best credit card offers is not to pay off your balance in full before interest is accrued; instead, accrue some interest and pay it off. Then you become Mr. Credit Card Offer, Eater of Spam Mail.
I think a lot of aversion to credit cards (and borrowing generally) is just financial illiteracy. Universally people conflate debt and interest. They get dinged by the horrible experience of forgetting to pay once, even if the total interest paid was less than 0.1% of their expenses in a year. Put another way, if you gave me access to low interest debt, of course I'd take it... And open a bank!
The real scam is mortgages. Financial illiteracy makes people minimize monthly payments instead of "finance charges," one of the most precise (broad and well defined) but poorly understood terms on a mortgage. There are millions of wealthy suburbanites paying 30 year mortgages with finance charges equal to nearly half the value of the home—a 50% markup for the privilege of lower monthly payments.
> Jason Towner, a 32-year-old who works at a private equity firm, cut up his last credit card, from Capital One, in 2010. He did not have any unruly debts, but he had just watched his father and sister close the family furniture store after a bank cut off their credit line in the middle of the financial crisis.
I can't understand this mindset. A bank refuses to extend a business line of credit, so you... cut up a credit card? It's hard to imagine two things that look related but have less to do with each other in actuality. I would expect an PE professional to know that.
The idea that credit cards are bad is rooted in a fundamental misunderstanding of what they are and how to use them to your advantage.
It's not that credit cards are inherently bad, but that they are dangerous/risky if you personally struggle with impulse control.
The examples do seem to be decently unrelated, but we also don't know the full story, so there could be a relating factor. Or the reporter could just be using two stories of "credit" that tied together.
They highlight a 25-year old (arguably fitting the Millenial archetype) that "uses her Southwest Airlines Rapid Rewards card to collect points she says she uses for plane tickets to visit her family in California."
Which is it? Are we using credit cards more, or are we spooked by them and using them less?
I know I'm the cynic but I find this more telling as how millennials are incapable of self control. I love using credit cards vs physical money. I also dislike the direct access to my bank account that a debit card provides. I think credit cards place a very good level of security and consumer protection if used responsibly.
Surprising that the article equates less credit card debt to less usage of credit cards.
Its possible that people became more responsible and started paying off their balances while also using their credit cards?
The article would make any sense if it also mentions the total credit limit and the ratio of revolving debt to credit limits.
I for one, am glad that I'm comfortable with using credit cards, applying for new ones, and pay off statement balance all the way. That way, I'm getting good money back, while the spooked credit card avoiders are paying more for the same stuff :)
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[ 2.9 ms ] story [ 187 ms ] threadOn the other hand, I pay off the statement in full every month, and therefore never have revolving debt that extends beyond 30 days. The article wasn't clear whether or not such credit would have counted in their analysis or not.
"more recent data has also suggested that millennials are using credit cards less than people of a similar age did in the past"
Some feel underconfident with credit cards, and avoid them either for self-control or fear of fees and hidden surprises.
Many more have them and use them liberally, but won't carry a balance. It's like a debit card with fraud protection and cash back, which seems pretty popular at all ages.
When I was young I racked up credit card debt and it was an expensive lesson. Now I use credit cards for everything but never carry an interest-bearing balance. The upside: never at risk with disputes, additional insurance/warranty coverage, free flights/hotels/etc using points, and up to 30-day deferred payment on all purchases.
Personally, I felt the article a bit silly. Especially when I reached the part quoting the PE-firm employee. I can't say that I know a single person who manages their money well that doesn't use credit cards.
IMO, strong financial acumen equates to using any available tools to maximize your output and utility. As long as you spend within your means and do not accrue any interest, credit cards literally give you free [insert rewards program here] for doing what you're already doing day to day.
That is the power & utility of a credit card.
I did end up finally getting a credit card (in my mid-30s) not because I want one, but because I wanted a back-up card for when my debit card is out of commission for whatever reason. It's a constant struggle to remember to do transactions on it so it doesn't get closed for inactivity.
I've never understood the credit vs. debit aspect. I know my budget and can easily just not spend more than I can afford. Paying the balance is automatic, so the only difference between using one card or another is that one gives me an e.g. Amazon gift card every couple months.
I hope you never end up in divorce or any other sort of court, which will result in your credit card records (and pretty much everything else) being subpoenaed.
I have a credit card but use cash whenever possible. That way, transactions are more likely to be between me and one other party, rather than between me and many, many other parties.
Let me say in advance that I know the system is not perfect, that I know I'm hypocritical for having an iPhone, etc. etc., but I will still note that some level of privacy / anonymity is better than none.
ADD: "Without a substantial credit history, it is much harder to take out a home mortgage, for example." Why is this? It's not true in other countries where credit cards aren't used anywhere as much.
Also, it's because credit cards are so prolific here that it's harder to take out a mortgage, if everyone has a good credit score but you, then you're not going to be at the top of their list.
Typically cash back credit cards also have (especially) egregious interest rates for carrying a balance month to month. And some have a fee.
Cards without cash back typically have lower (but still very high) interest rates.
So, why should I use one over my credit cards automatic 1% (or more) in cash back?
If I want cash equivalent, I use cash...
https://www.consumer.ftc.gov/articles/0213-lost-or-stolen-cr...
Debit cards there come with the same amount of fraud protection as the credit cards, there's not really a reason to use Credit cards there.
In reply to your ADD: Because in the US, you get a "Credit score"[1] based on your credit history. And when taking a home mortgage, instead of simply asking for your past few years of income proof and other papers bankers in Europe would ask before deciding to give you a mortgage, in the US they rely on that Credit score. And the best way to "build" that credit score is to have a credit history, and the simplest way to have a credit history: use a credit card for a long time and pay on time.
Because obviously paying on time a $100 credit card bill every month is a good indicator on how you'll handle paying a couple hundred thousands loan for your house (/s)
[1]http://www.myfico.com/crediteducation/whatsinyourscore.aspx
I think this type of behavioral scoring is actually a great benchmark for determining responsibility. If you can't handle paying off a few hundred bucks here and there, it seems pretty reasonable that you're more likely to default on a far more expensive mortgage.
- Having a lot of available credit (usually based on credit score and/or income)
- Not using too much of that available credit (credit utilization, a low non-0% is ideal)
- Different types of credit (revolving credit or CCs, installment loans, etc)
- How long you have had credit (longer is better)
- How many times you have tried to get more credit recently (too many recent inquiries means higher risk)
Credit scores are a measure of how well you can hold multiple types of debt over time and still pay everything. It is not "will so-and-so pay their mortgage?"
In theory, it shows you can pay them back. In practice, I wonder if credit works that way.
My first job was working for a car dealership and, because the salesmen are lazy, they taught me how to read credit reports so they wouldn't have to.
They taught me to ignore the credit number and look specifically at whether somebody has paid off a large sum of money consistently. People who have paid off student loans and never missed a payment were ideal. If they were delinquent once or twice it wasn't a problem, provided it didn't happen consistently.
They didn't care at all about credit card payments unless it was a large amount of debt they had trouble paying off. In other words, credit card debt could only hurt you, it could never benefit you.
I don't know if this was common practice for car dealerships at the time (late 90s), but it certainly contradicted the information I was taught in school about the necessity of using credit cards to establish a credit rating specifically so you could buy a house and a car.
If you take out a real estate loan at 40-60% LTV vs consumer-grade 80% LTV, banks will care less about the underlying credit score - their models will tell them they can always repossess and make most (all) of the principal back relatively quickly.
Do the LTVs, interest rates and debt-to-income ratios transfer to those other countries as well? US is known for one of the most lenient and dynamic mortgage market, so those are just some rules to play by if one is optimizing for lowest possible rate.
I got mine when I was 20 and I've never paid it late or gone over my limit. Most of the time I coordinate my payments with the day I get my direct deposit (I've tried automatic payments, but too paranoid that they might not work!). Discover gives me pretty good Amazon cash back too, so every few months I get enough points to get something small for free or very cheap.
It wasn't until much later that I realized not everyone is like me and most of my peers had a lot of debt accrued over the years. They're definitely dangerous.
That just sounds like an exorbitant amount of money to me, maybe because I'm not in a developer salary bubble.
You would almost have to be partying/shopping full time in order to rack up a $1000 daily bill.
I used some of the money to pay off my car and put a downpayment on my house but I still have a negative worth. I didn't really plan this to spam my blog but I wrote about it on the site in my "about me".
It's a lot easier to look in your wallet and see how much you have left to spend (and then decide you shouldn't) vs holding a credit card and deciding you can pay for it later.
Credit cards are tool and, just like most tools, should be used with proper awareness and thought-process. None of the examples in the given article are fallouts of "using credit cards", but having runaway debt in the first place.
This article really just emphasizes the fact that we are living in an age of complete lack of personal responsibility and self-control, where you can blame an institution for your inability to spend.
Not having credit cards is one way to control yourself.
I don't stock my house with junk food, because I'd rather use willpower once at the store than constantly in my living room. Am I supposed to feel weak-willed for making the simpler choice?
I guess you can argue that people are giving up a lot and ought to find the willpower to get those benefits, but for that you need to argue that they're actually giving up a lot.
Otherwise, it's just as you say: these are people who are controlling their spending and not blaming institutions.
(But even so, I'd prefer not to be forced to buy garbage out of the household funds against my will.)
So from that metaphorical perspective, using credit cards for "the benefits" is a lot like buying a dozen glazed doughnuts, just for their smell. So you occasionally open up the box, take a whiff, and close it again, throwing them out and replacing them as necessary to replenish the odor. But sooner or later, you're going to take a bite.
Credit is best used for durable goods that produce value, or at least depreciate more slowly than the interest rate of the loan--an American household's primary car, for example. Instant consumer gratification is just not a wise use of credit, no matter how many sugary sprinkles it has on top. And that's exactly what credit cards are mainly used for--as financial junk food. Most people buy the credit doughnuts, actually eat them, and get fat.
So good job to those that can go their entire lives whiffing free doughnut smells, but some people have to arrange their lives such that they don't even drive past the doughnut shop in the morning. It's just a different kind of self-control to avoid temptations in the first place.
This is exactly it. We all use both kinds of self-restraint, but it's still worth arranging external forces to support the kind of self-control you find easier.
I've used credit cards, and taken on debt, but always with a clear plan in mind (metaphorically, I drove to the donut shop intending to eat one?) It's been for large purchases (primary car) and some time-convenience things that came without interest (washing machine).
If I were seriously worried about spending into debt without a plan, I probably wouldn't keep credit cards, or would keep 1-2 low limit cards. As it happens, I don't struggle much with that issue, but we all use mitigation in places where we do struggle, and I see nothing with it.
It's a huge externality. If it were the law that merchants had to make the card holder pay their own fees, this whole perverted system would go away. The only way it works the way it does is because EMV contractually requires merchants to obfuscate the true cost from the consumer.
If we all were less beholden to our credit cards, and/or the public and retailers were more comfortable with higher prices for credit card purchases, we might see cash prices go down. The savviest among us would probably lean more on cash for smaller purchases and reserve credit cards for only big-ticket purchases (because of the transaction/purchase protection benefits).
Does it suck that a small business can't accept cash at a discount if they accept credit, due to merchant rules? Yes, I'm sure it does, but as a purchaser, I can get rewards for using a piece of plastic vs paper money?
I acknowledge and agree with the principle though -- no single snowflake.
You have to handle cash and all the negatives that come with that. Using ATMs (finding one, avoiding fees, navigating the myrian of poorly designed UIs) and carrying large amounts of cash is a major inconvenience compared to carrying 1 piece of plastic. No incentive to rob people either if they don't have anything but easily replaceable credit cards. Having a digital trail for yourself also simplifies budgeting and record-keeping tremendously.
The good news is that gas stations offering a few cents off a gallon, small restaurants, etc that have built in cash discounts seem to be more common now than they were just a few years ago.
As another comment suggested, there are also a lot of games that you can play churning credit cards--as well as playing gift card games. My personal take on those though is that you really have to keep on top of introductory offers, using gift cards, etc. or you can easily end up in the hole. It's also essentially a hobby. Once it becomes work, it's probably not worth it.
Note that you have to be able to control yourself. If you ever carry a balance the math fails.
A month's worth of interest? At 0.1% per year these days? Please.
Credit cards in the U.S. are chip and sign, which is the dumbest piece of crap decision by the card issuing industry. Even though I have chip on both credit and debit cards, they become chip and sign when used in Europe. It's f'n hilarious being in a grocery store where the clerk is like "oh you have to sign, umm let me go find a pen" because it's that rare.
I think the whole chip thing is stupid. We're 20 years late to the game. We should have just skipped it in favor of a more solid contactless system rather than spend all this money changing over to something arguably obsolete already.
I'll grant, though, that the ability to contest transactions is huge. Most people I know have used it, many to the tune of hundreds or thousands of dollars. Just knowing that in the case of fraud or bad business practices you aren't trying to reclaim already-transferred cash is value enough for me.
Also, nobody in the article was blaming credit cards for lack of ability to spend.
I think this trend is just a reflection of how badly credit cards have worked out for a sizable portion the previous generation.
I'm not in the age group the article is talking about, but... not having a card in my pocket that lets me spend money I don't have is my exercise of self-control.
Your attitude is so strange. The way I control credit card debt is by not having a credit card. That is the self-control you're lamenting the lack of.
E.g. If you book a holiday on your credit card, and the travel company goes bankrupt, your card provider refunds you.
For the most part, those protections simply don't exist if you use a debit-card.
edit:
I will be looking into getting a credit card decently soon so I can build credit for things like a house, but at 22, I can say I'm glad I don't have to worry about that hanging over my head in the future.
That actually sounds like a fantastic method for a lending agency to determine who is responsible and who is not.
But the lending agencies say "responsible" when they mean "profitable for us", so I can see how someone might get confused.
It's a form of signaling.
What about all the student loan payments they're making? That's certainly a credit history, esp. if you miss a few.
UK student loans are effectively invisible.
Saving up enough to buy items like without going into extremely high interest credit card debt is responsible consumerism.
An appliance purchase at Sears comes with 60 months of 0% interest if you open a card - it's debt, but not necessarily irresponsible. Using a normal card to debt-finance the same thing is far less responsible, and I'm not really sure what the article was trying to claim there.
Sure, there are lots of benefits to credit cards if you have the discipline to use them to your advantage. But most people don't have that discipline, and the banks try very hard to loosen what discipline you do have.
As an American living in Europe I find the different attitudes to credit cards over here very interesting.
For instance in Germany I had a Visa and now I have a MasterCard, at a big fancy bank, and both are automatically paid in full from your account on the first of every month. It might be possible to run up debt on a credit card in Germany (or it might not) but it's not the default action like it is in the US. No "click here to pay the minimum."
Also, lots of places won't even take credit cards in Germany. Like Ikea for example. Instead these places will take your "EC card" which is like an ATM card in the US, i.e. a direct debit from your account.
While the Germans are notoriously paranoid about debt -- hyperinflation will do that to you -- some other countries are more freewheeling. In Hungary most people don't have credit cards, but lots of places (including Ikea!) accept them.
(Slightly complicating this whole story is the fact that in Europe most debit cards are also Visa or MasterCard, which I assume is transparent at the point of sale.)
However, back in debt-averse Germany, unsecured personal credit is much easier to obtain, at much better rates, than in the US. So if you're gainfully employed and you really need to buy that used speedboat to set the Spree on fire, they've got you covered.
[edit: grammar]
I don't know if it was coming of age during a banking crisis or huge student loans or expensive housing or what.
But obviously if you're unsure about your future earning potential you'll be more hesitant to rack up future obligations.
With a stable job and some savings, paid-off credit cards and zero-apr loans are great tools. If you're worried about losing the job and barely making rent (like many millennials are) then even 'safe' debt becomes troubling.
I am willing to to take extra precautions against fraud and lose the cashback I otherwise would earn, if it means never inviting potential credit card debt.
If you're so afraid you might lack self control that you will spend more than your monthly income, get a card with a limit that's 1/2 of your income. Simple as that.
This country is structured around using debt as your leverage, as both business and consumer. Not to utilize that and tout it as somehow virtuous or prudent is, in fact, just ignorant at best.
In this article they are talking about the sum of all balances on credit card accounts. Technically all of this money is borrowed, even if, as some commenters say, you "pay in full every month." You're just only getting charged interest after typically 30 days. Using terms like "revolving debt" to describe interest charges is imprecise, as is describing payments on interest-bearing debt as "paying late." Interest is interest, and debt is debt.
How do credit scores distinguish debt from interest from defaults, the inability to pay interest (sometimes principal)? It doesn't matter. Before Lending Club hid them, the variables that were strongest correlated with borrower race and borrow age were most correlated with default on loans. But debtors who accrue interest via credit cards and pay it are the most desirable, because obviously they are the debtors who make money for the creditor. The fastest way to get the best credit card offers is not to pay off your balance in full before interest is accrued; instead, accrue some interest and pay it off. Then you become Mr. Credit Card Offer, Eater of Spam Mail.
I think a lot of aversion to credit cards (and borrowing generally) is just financial illiteracy. Universally people conflate debt and interest. They get dinged by the horrible experience of forgetting to pay once, even if the total interest paid was less than 0.1% of their expenses in a year. Put another way, if you gave me access to low interest debt, of course I'd take it... And open a bank!
The real scam is mortgages. Financial illiteracy makes people minimize monthly payments instead of "finance charges," one of the most precise (broad and well defined) but poorly understood terms on a mortgage. There are millions of wealthy suburbanites paying 30 year mortgages with finance charges equal to nearly half the value of the home—a 50% markup for the privilege of lower monthly payments.
I can't understand this mindset. A bank refuses to extend a business line of credit, so you... cut up a credit card? It's hard to imagine two things that look related but have less to do with each other in actuality. I would expect an PE professional to know that.
The idea that credit cards are bad is rooted in a fundamental misunderstanding of what they are and how to use them to your advantage.
The examples do seem to be decently unrelated, but we also don't know the full story, so there could be a relating factor. Or the reporter could just be using two stories of "credit" that tied together.
They highlight a 25-year old (arguably fitting the Millenial archetype) that "uses her Southwest Airlines Rapid Rewards card to collect points she says she uses for plane tickets to visit her family in California."
Which is it? Are we using credit cards more, or are we spooked by them and using them less?
Its possible that people became more responsible and started paying off their balances while also using their credit cards?
The article would make any sense if it also mentions the total credit limit and the ratio of revolving debt to credit limits.
I for one, am glad that I'm comfortable with using credit cards, applying for new ones, and pay off statement balance all the way. That way, I'm getting good money back, while the spooked credit card avoiders are paying more for the same stuff :)