Credit is Due

"The Plastic Revolution"               
 

Comments

[esb]

The love of debt seems to be an Anglo-Saxon kind of thing.

And the Lord sayeth unto the American people, "Let there be debt."

And the American people respondeth unto the Lord, "And the forgiveness thereof. Amen."

[TigerPaw]

I would submit it's also a generational thing. The generation that grew out of the depression knew not to overextend themselves and to have savings for protection. Their children however .... they have absolutely zero self-control.

[reason]

That is surely not the relevant statistic. I use a credit card only for international transactions (because it gives a good exchange rate). My credit card balance is automatically settled every month.

Locally (in Germany) I use a debit card, because that is what most shops use. My normal account has a costless overdraft range. I don't see the difference. It is just a method of payment.

It is the level of consumer debt that really is the relevant criteria.

[odograph]

Is the old statistic that half of all credit card owners pay off their bill entirely each month still true?

I do, even when I put a couple $K in charity through it.

(starbucks rewards may not make absolute economic sense, but "free" coffee is fun.)

[ken melvin]

Those with low credit rating subsidize those with good credit rating, but that's the American way. Is there a possibility that credit cards will go the way of the dodo, the sub-prime?

[Greg]

Using a credit card is rational because I get 1% back on everything. People who pay cash subsidize my purchases. Including business stuff, my wife and I easily put $25,000 on credit cards every year. That's a free $250 after tax.

And it's completely free because I pay it off every month and never pay interest. Also, my loss exposure is only $50 if the card is lost vs. 100% of any money in my wallet. Since I usually carry $100 to $200, it's measureable.

reason has it right; it's not the credit card charges but the credit card (and all debt) balances carried over the billing cycle that really matter.

[nocountry]

Shouldn't this be put in the context of per capita incomes?

[ken melvin]

True, those who pay cash subsidize them, too, but they are often also those with low scores.

[Gerard MacDonell]

Reason, a little thought experiment proves that your sitch coud not possibly explain the credit card balance outstanding. Imagine the volume of debt that would accrue if everyone spend all their paycheck on credit cards and then paid it down at the end of the month. In that world, the average balance would be half the monthly income, or 1/24 of annual income. But it is much higher.

If I were you, I would have led with "Japan looks best on this metric, and we all know what a success they are."

[odograph]

I should add a caveat to the rewards card thing. I pay my card completely each month, but it used to be no biggie to go on vacation and pay bills when you get home. The penalty for a few days was small. Now you get not only a whammy on that payment, but on my card, you have to pay interest on current purchases from day one. I watched it to see how long it would shake out (I didn't call and try to weasel out of it), and it took two months to get back to normal.

There was actually something in the fine print that talked about "if there was a penalty or interest in the previous month" that looked like it could be self-reinforcing and go on forever.

I gather this is part of the new pattern by credit card companies to go aggressively for fees and place less weight on interest.

So anyway ... I guess now we should all be net-connected, and pay our bills from wherever ... even if that changes the nature of "vacation."

[reason]

Gerald McDonald
What are you talking about? Did you read my comment? I was merely questioning whether the level of credit card spending was a very interesting statistic.

[reason]

oops sorry... Gerald MacDonell - I probably just started a clan war.

[reason]

oops again Gerard! I really must be more careful with strangers. Remembering names is not my strength.

[denise]

Odograph - re what you said, here's a story. I called my credit card company to report my card stolen. I was told they would be sending me a form that I needed to fill out, get notarized and return within 5 days of receipt, otherwise I would be responsible for fraudulent charges. When I told them I was leaving on a 3-week trip the next day, they suggested that if it was important to me then I should postpone my vacation. Nice, huh?

[Brad Holden]

I guess I am not surprise how many people did not click through the graphic to the original link.

Russia, for example, has twice the Credit Card spending per capita of the US, South Korea has more credit card debt as a fraction of GDP than the US, and credit card defaults in Mexico doubled last year.

So much for it being an Anglo-Saxon or generational thing.

[RW]

The double-edged sword of credit cards is that they do provide an edge even w/o a cash-back feature because they provide float; funds are not withdrawn immediately. A few weeks isn't much over a single billing cycle but the amount of interest earned on deposited cash before paying off the monthly charge does compound nicely over time, particularly if major purchases are scheduled at the beginning of the cycle rather than the end.

The other edge of the sword of course is that benefit can be lost in an instant due to ruinous interest rates and penalties should you ever (and that means ever) carry a card account balance and/or be late with a payment.

To bring that back more-or-less to topic, interest rates and other embellishments to the consumer debt apparatus have morphed into something of a monster; from "insurance" (extended warranties) to "pay-no interest until" (embedded interest) purchases to standard consumer loans with penalties and fees attached in the fine print, the entire project of (increasingly) long-term and typically full-recourse liability taken on to temporarily acquire (usually rapidly) depreciating assets strikes me as simply ruinous.

Dancing around that machinery works fine until a bit of bad luck or a moment's inattention causes a sleeve or cuff to catch in one of the gears and then it's full credit due right now and you'll have to give everything you've got as fast as you can to pull your arm or leg out before the rest of you is taken. I think there are probably a lot of citizens out there who do not realize they are participating in that dance.

We appear to have entered an era in which financial corporations have gained an astonishing degree of power over ordinary citizens.

[Winslow R.]

As we shift from cash (gov money) to credit (bank money) we should start to examine the effect on the nation-state.

Government's purpose is to govern, and in particular to economics, to govern the market. One tool that this is accomplished is through issuing currency.

As we shift from cash to credit, the identity of the market regulator shifts. With cash we'd use the court system to resolve conflict, with credit we call a 1-800 number and as a last resort use government courts.

With globalization and international transactions, we use banks that have the ability to create computer representations of sovereign currencies and thereby become the international arbiters of disputes (an international government).

[reason]

Winslow,
as a resident of the Eurozone, I would see that as somewhat more nuanced. The nation-state is just one in a whole quasi-hierarchy of government and quasi-governmental institutions. I expect this process will continue.

[reason]

Winslow,
don't take that personally. Americans, don't realise how unusual their situation is. Imagine that live in Luxembourg, and you get a completely different perspective.

[Winslow R.]

Luxembourg is a tax haven that can only flourish because other countries are not. Are there ways to dimish the ability of tax havens to bleed off income from other nation-states? Why not tax the use of the medium of exchange rather than the activity?

I think you're saying Europe has gone further down the road of replacing the nation-state with a more international issuer of currency.

http://en.wikipedia.org/wiki/European_Central_Bank

Given they also have a political body represented by the EU

http://en.wikipedia.org/wiki/European_Union

the ability to distinguish who holds power over the ability to issue currency is still apparent.

I see BASEL II as a, so far, failed attempt to maintain political control over the currency of exchange. I don't think a dictatorial, monopoly provider of currency is optimal.

I know we are headed in the direction of a universal currency issued by international banks. This idea is being pushed by many economists funded by international banks.

Just think the idea should be debated while we still have a choice. Why should a secretive, independent body have the ability to control the flows of the medium of exchange?

[cm]

The about only reason I use a credit card is because of convenience; it is impractical for me to carry a coin purse (I'm not wearing a jacket most of the time in my local climate).

Enough business processes are optimized towards cards (I gave up on -- these days only marginally -- cheaper gas stations for the inconvenience of standing in line, and after getting a "cash back" card that gives a percentage on gas).

The one notable exception is restaurants where I rather leave cash than waiting for the back-and-forth with the card.

[piglet]

Brad: "I guess I am not surprise how many people did not click through the graphic to the original link.

Russia, for example, has twice the Credit Card spending per capita of the US, South Korea has more credit card debt as a fraction of GDP than the US, and credit card defaults in Mexico doubled last year."

Er, you should have actually read the captions. The figure you cite for Russia is for 2011 (amazing how well informed they are at FP), and it refers to debit and other plastic cards. The graphic also says that Americans have 5 credit cards per capita on average, whereas Russians have "5.9 people per card".