Credit cards have only been around since the 1950s, but in a short period of time, they have transformed how we think about money. Today, 47% of us carry credit card debt. Often that debt is not insignificant – with the average being over $6K deep.
So how did we get here? This infographic showcases some of the predatory practices by the credit card industry and shares a few helpful tips on what you can do to avoid living in the debt spiral that credit cards create for us.
Please share this forward on your social media channels or your website (if you have one). Let’s strive to pull this nation out from under debt.
Let’s dive deeper into credit cards…
A brief history of credit cards
In 1950 the Diner’s Club card hit the US. The card was meant for entertainment and travel and users needed to pay the balance off in full. Within the first year, 42,000 people held one of these cardboard cards.
This was before the days of a credit score. In those days, giving access to borrowing was subject to the discretion of an individual loan officer. They judged each borrower based on “character”. That’s a really lovely 1950s way to say “middle-class white men”. Women generally didn’t qualify for cards without a male co-signer.
It wasn’t until the 1970s that the Consumer Credit Protection Act added protections against discrimination based on gender, race, or other shitty things. At this point, the industry had grown rapidly and had seen the profit in offering revolving credit – the ability to hold on to a balance at the end of the month.
The 1980s saw the rise of the credit score. FICO officially launched in 1989. This allowed for computers to decide who got credit and who didn’t, rather than random dudes sitting behind desks.
These days, with mobile payments, the card isn’t even necessary anymore. Especially with the Covid pandemic keeping people at home, eCommerce has ballooned as has the ability to tap your phone and magically pay for anything.
How credit cards affect our brains
Access to a credit card taps into two different parts of our brains that condition us to spend more. The first is our rewards system.
A recent study out of MIT found that paying with a credit card lights up our brain’s reward system. We buy something and we’re hit with a flood of dopamine. Just to be clear, that’s the same brain chemical released when people do cocaine.
On the other end of the spectrum, we disconnect ourselves from the pain of paying. When you pay in cash you register that you’re losing something. You automatically tap into the opportunity cost of buying one thing over another. When you pay with cash studies have shown that you light up the region of your brain that registers emotional pain.
You can read more about behavioral economics and spending here.
Thus, your brain urges you on when it comes to paying with cards as opposed to cash, where we have the brakes on.
How credit card companies exploit these natural systems
The answer to this question could take a whole book, but the biggest factor comes in the form of your monthly bill. The monthly minimum payment is designed to play into reducing the pain of paying. You can spend $1000/month and yet your bill might only be $40. That doesn’t hurt much does it? So you spend another $1000. Before you know it, the minimum is all you can afford to pay.
Now you’re in a debt spiral, constantly paying the interest on your spending rather than the balance. Interest rates can balloon all the way up to 24%. That means that for every dollar you spend, you owe your credit card issuer a quarter.
So how did we get here?
Credit card companies know your spending habits. They use that data to segment users into transactors and revolvers. Transactors pay their balances in full at the end of every month. Credit card companies don’t like them.
On the other hand, revolvers are great for business. They carry a balance along with them, paying interest every month. As a whole, we pay over $100 BILLION in interest every year in the US. That’s a huge transfer of wealth from the many to the few.
Credit card companies will target us based on our spending behavior in order to maximize our potential to carry debt month to month. This could come in the form of reward points for spending a certain amount or in a low introductory rate. Or any other myriad ways of getting you into debt.
If you want to feel really uncomfortable, read this McKinsey report advising credit card companies on how to target various spender profiles.
Should I just pay cash?
I’m guessing at this point you may be asking yourself this question. This brings us to the final shitty thing about credit card companies that I’ll call out. These companies charge a transaction fee to every store every time you swipe.
Since cards are so ubiquitous at this point, these fees have transferred over to the consumer. These fees can go as high as 3.5%. You may notice that many stores don’t accept American Express – that’s because they have notoriously high transaction fees.
If you pay with a credit card, you’re paying for the convenience of doing so when these fees result in overall higher prices. You’re also receiving reward benefits, like free flights. If you’re paying cash you’re paying for someone else to utilize that convenience and access those rewards. It’s estimated that each card using household receives $1,133 from cash users every year.
Well, then wtf should we do?
- Knowledge is power. Most of us are stuck in this credit card game, but no one told us the rules. It’s like being handed a baseball bat, but you don’t know that the bases are there to let you score.
- Don’t let your card choose you. We all get those offers constantly, in the mail, in email, through our bank, or just even trying to buy a pair of socks. Don’t bite. Do your research so that you get a card that works for you. Your goal is to maximize rewards and minimize your chances of carrying balances month to month. That goal is counter to credit card companies’ goals.
- Pay your balance at the end of every month. For some, it will take some time to get here, but if it’s an option for you ignore the minimum payment and pay that sucker off. You can laugh your way to Paris on a free flight you didn’t even pay interest on.
- If you hold a balance on your card know that you have options. Start by calling your credit card company to see if they’ll lower your rates. They may say no, but always worth a shot! You can also take advantage of the system by doing a balance transfer to a low introductory rate card. This is what I did, then I set up minimum payments so that by the time that introductory rate is over, I’ll be at a $0 balance. I also cut up the card, so there’s no chance of me using it.
Don’t beat yourself up if this all doesn’t go perfectly for you. The game was designed to keep you in debt. Celebrate your progress and let any slip-ups go. No one’s a financial robot, getting all of this perfect.