Long a coming of age ritual, applying for and receiving one’s first credit card introduces its holder to the wonderful world of consumerism as well as to fiscal responsibility. In fact, credit card ownership places third after the internet and cell phones as the most important ‘possessions’ millennials can have. (And rates fourth after their first post-college job as an a watershed event.) In this article we’ll explore the history of the credit card, its pros and cons as well as its continued value to U.S. consumers.
By definition, a credit card is a wafer thin slice of plastic designed to fit in your wallet. It serves to identify the owner’s creditworthiness and authorizes that person to charge items and services to an account. The holder is billed monthly and the debt may accrue interest if not paid in full by a stated date. While today just about anything can be purchased ‘on the card’, this was not the case when credit cards originated about a century ago in the roaring ‘20s. Back then credit cards were created primarily for the ease and security of business travelers who did not want to carry large amounts of cash or their checkbook to cover meals and lodging expenses. So their issuers were oil companies (gas stations), restaurants, and hotels/motels.
Purchasers were billed directly by the individual companies. As you can imagine, reconciling a business trip was an exercise in frustration. While being mugged or robbed was no longer a concern for business travelers, in exchange they had to wait for as many as 20 bills or more to arrive in their mailbox before they could tally and submit their expense accounts to their employer. It was a waiting game and chore that got old fast. By the 1970s, credit card processing received a welcome update. Banks got into the act. It was now the banks who issued the credit cards to their depositors and received all the merchant invoices. These were compiled into one monthly bill sent to the user. One bill, one invoice, one check or (by the 1990s) one funds transfer (per credit card) into the issuer’s account.
Every year about ten million new consumers enter the credit market place by applying for their a credit card. Also, according to Gallup, the average American over age 21 has 3-5 credit cards although about a third of us do not have any. While many carry this fact as a badge of honor and a sign of being credit savvy, the number of credit cards an individual has does not compromise their credit score. In fact, Experian and other credit rating services view more available credit as a sign of creditworthiness. However, outstanding debt that exceeds a third of your available credit will lower your score.
Use Credit Wisely
As with many innovations, there are few fail safes and personal discipline and fiscal responsibility are not inherent in most consumers. In other words, there is a temptation for those with large amounts of available credit to buy more than we can afford (the internet makes it all too easy to shop online) and swiftly run up debt. That’s great for banks which survive by extending credit to those deemed worthy (i.e. able to repay over a given period of time). Not so much for those of us who live too far beyond our means.
As we wait on the grocery line we’ve all caught a glimpse of another shopper’s open wallet full of slots containing ten credit cards or more. And we’ve thought: either they are rich and very credit worthy (in which case why are they buying their own groceries), or each card offers a different premium such as a low APR, no annual fee, cash back, travel miles, or the user has run up considerable debt and just pays the minimum amount required each month.
In the ideal world of the 1950s, it was projected that as we progress in life our annual salaries would increase by a percentage comparable to the prime rate, or at least higher than the rate of inflation. In recent decades however, that has not been the case due to economic downturns and other unforeseen issues and expenses. These include buying a house, starting a family, supporting elderly parents, a catastrophic health event, accident, etc.
At those times many of us turn to our credit cards to offset expenses. Which is acceptable provided that the interest rate is sufficiently low or it is a card that does not charge interest for a stated term. Too much debt has produced trust issues among spouses and partners (or should we say, ‘mistrust issues’?). This can lead to monitoring the other’s spending habits which, if discovered, can damage relationships. All the more reason to curb out-of-control spending habits and credit card misuse.
Benefits to a High FICO
According to the Federal Reserve Bank of New York, one very positive statistic concerning credit card use is the fact that fiscally solvent consumers (those with a high FICO) represent almost 80% of our Nation’s credit card users. This means that for most of us, having a credit card is a modern life necessity, whose ownership is not taken lightly. For the rest, it is important to live whenever possible within one’s means and learn to separate needs from wants to avoid mismanaging credit and accruing a debt load that makes the important aspects of life, travel, family, vacations, a home, a car, difficult to obtain or manage.
It is especially easy for couples to overspend if they do not consult with each other before making a major purchase. For those in over their head with out of control spending habits, there are credit management organizations, and even 12-step programs to assist in reining in their spending and reestablishing control. Primarily these organization assist to lower interest payments, offer advice on how to create a household budget and tips to stick with it.
What does the future hold for credit cards? Over half of us believe that we will become a ‘cashless society’ within our lifetime dependent entirely on electronic payment systems including credit cards. Europe is already moving towards this end and here in the States just look around you. Many municipalities do not accept cash evidenced by toll plazas with overhead scanners that have recently replaced toll booths and toll collectors. In many suburban towns, coin-op parking meters have been replaced by those that only accept credit or debit card payments. Transit systems including the subway are moving to swiping plastic or scanning a cell-phone app.
In Washington, lawmakers have debated following in Canada’s footsteps and eliminating the penny. Transactions would just round up to a nickel thereafter. Payment innovations such as Apple Pay and BitCoin make payment as easy as waving your cell phone at a scanner and daily more and more consumers join this movement for the convenience it provides. Economists at Harvard and Citicorp concur that the move to a paperless society will be optimal for businesses and consumers alike. So it is a brave new economic world we are facing- one where toll collector jobs have become obsolete while the need for encryption and cybersecurity professionals grows exponentially. Judiciously monitored, the convenience that credit cards provide consumers enables an improved quality of life. And the options to improve our fiscal lives just seem to get better and better with time!