This article is actually really interesting and has non-obvious findings.
The tl;dr is that it's not mostly due to defaults or for rewards programs.
But rather due to very high operating expenses (4-5% of dollar balances!) driven by marketing.
And also because the lending banks can't diversify. The risk of default is essentially magnified because you can't do anything if the economy turns bad and everybody starts defaulting together at the same time.
I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio. By lowering the default risk significantly lenders should be able to offer loan values closer to car loan numbers than loan shark numbers.
I think people with enough assets to secure such a card might be those less likely to carry a balance, but maybe a lower interest rate would entice them.
>I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio.
What's the difference between that and transferring your credit card balance to your HELOC? You don't pay any interest on credit cards within the grace period on your bill, so this only adds marginal convenience
> I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio.
I would think the overlap between people who need to carry a balance on their credit card and those who have a HELOC (own a property with significant equity) or have a non-trivial stock portfolio, is rather small.
Looking from the outside, it seems that people in the US are always using credit cards as opposed to debit cards, and I don't really see a good reason for that. I have owned credit card in the past, and I could get one easily now, but I don't see any reason to: I have money in the bank, I want to spend it, and I don't need to lend anything.
Why and how does _credit_ becomes the first and default way of payment?
Because credit cards offer better protections from fraud making the consumer not liable. Debit transactions don't have that and they are also linked straight to your account so theres also additional risk where if someone steals the money using your debit information it's just gone.
Most cards in the US have a Visa or MasterCard logo, and transactions made that way have essentially the same legal protections as credit card transactions, but in the meantime, your money is not in your bank account. So other transactions may fail.
With credit cards, it's the bank's money that's missing, not yours.
I'm in Europe and still use my Amex for everything I can.
It has no membership fee, I get 0.5% cashback which is free money, and one time a merchant failed to deliver an order and they gave me back my money within like 10 minutes of me raising a dispute
If I had used my debit card with my normal bank it would probably take a week to resolve, and I'd be the one out of pocket in the meantime
” For debit card transactions, the Electronic Funds Transfer Act (EFTA) applies. While these laws offer some similar protections, knowing the differences is key to understanding why it's safer to use one type of plastic than the other... According to the EFTA, your potential liability for fraudulent debit card transactions is virtually unlimited. You have up to 60 days to report a lost or stolen card under the EFTA. After that, you simply lose whatever money was taken, even funds siphoned from linked accounts.”
You can but while you wait your money is gone, you can't use it. With a credit card it's the bank's money that is missing in the case of fraud or charge back.
Debit issuers are obliged to provisionally credit any disputed amount within at most 10 business days after the cardholder reporting a problem.
That's of course still worse than not being out the money on a credit card, but it's not the dealbreaker many make it out to be, and could easily be amended by regulators if there was any interest in doing anything about the drag on the economy that are inflated card payment fees.
If you are able to pay off your credit card balance each month, you can earn rewards points on every purchase which is money back in your pocket. Even if it seems like a tiny amount, in the long run, you are leaving money on the table using a debit card as opposed to a credit card for most of your purchases.
The big caveat being you MUST pay the balance off each month to avoid paying interest otherwise you are losing money by using a credit card.
At least in Chile, it’s common to have 3 months of interest-free payments offered by the banks, and some stores offer up to 24 months for cards issued by certain banks.
It really helps with one-off costly purchases, like a new device or some stuff for home/garden. I never miss card payments and keep my finances organized, avoiding purchases I can’t pay off monthly.
- Point schemes. Every card has some sort of points system that encourages use. The best programs are often tied to specific products like airlines. Sometimes there are multipliers on specific categories of use like gas or travel. More expensive cards have better points programs.
- Protection. You pay with the bank's money, not yours. This means you have an extra buffer to protect against fraud, and the bank is more incentivized to resolve issues. On the flip side, banks can put pressure on merchants by raising/lowering their transaction rates if they are consistently bad actors.
- Card holder benefits. Often cards have extra things like car insurance for car rentals built into the card. They also give you access to a cash line of credit in emergencies.
- Builds credit. If you don't have other major debts like a mortgage or car loan, your credit score can be low, because the banks rate unknown borrowers as risky. Consistent credit card usage alone can give you a medium-high rating, so when you do need to borrow for a home, you can get a better rate. This is a bit of a racket overall, but its better than a random banker judging you based on their personal bias.
If you pay off your card in full every month, the only cost is the yearly fee, which varies by card, my current one is a mid range card for $50/year. Usually you need to spend a few hundred to thousand a year for the benefits to outweigh the cost. That said, this whole system preys upon those who don't pay every month/don't their card enough to benefit from it.
I was taught credit cards were dangerous, and stayed away from them for years. I'm glad I never racked up debt when I was younger. But as a responsible adult, they are a boon.
You have to be responsible though. If you can’t deal with your money that way, don’t get one. Even if you are responsible, don’t get the most credit you can. I have enough for monthly expenses and a bit extra for emergencies.
Why not get as much as you can? The extra headroom might be handy for some unforseen expense, and in the mean time it makes your utilization ratio better.
Also, there's an addition benefit for high-credit-score credit card users: they get occasional offers for "0% interest" (with typically 3-5% upfront fees, which are in fact a fixed interest) loans, which become ordinary credit card loans (~20% interest) after 12-18 months.
Even though it isn't actually 0% interest, even 5% is an amazing credit interest rate.
Credit cards have better consumer protection than debit cards.
You are on the hook for like $50 max of fraudulent credit card, and like $500 of fraudulent debit. If you don't catch debit in time, you might be liable for all of it.
It's $0 for both credit and debit, under Visa and Mastercard "zero liability" rules.
Even under Regulation E, it would only be $50 as long as the issuer is notified within two days of losing your card, and $0 for other types of fraud (e.g. unauthorized use of your card number online) if reported within 60 days of receiving the corresponding monthly statement.
At least in the US with the regulations here, there is no good reason to ever use a debit card. Credit cards are superior in every way.
Paying by credit card gets you:
A 0% loan for 4-6 weeks. Not huge but it's free money.
Better fraud protection (similar, but better; look it up)
A firewall between fraud and your bank account (fraudulent charges never hit your bank account balance, unlike debit cards where the money is gone and you get refunded later)
Cash back or points or other benefits. Not huge but it's free money.
This blog has a great post on how credit card systems work, and I think it goes a long way to explaining how CC's became so popular in the U.S. in particular:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.
> Credit cards are a powerful tool that many people do not use correctly.
If everybody were "using them correctly", issuers would be bankrupt. The fact that they're not should tell you that there's at least one winner other than the never-balance-carrying cardholders.
> Credit card issuers fight to attract those high income bracket spenders.
Correct, and everybody pays for this (very expensive) fight, one way or another. The fact that some people come out ahead does not make them a good deal in the median case.
> And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this.
It would be a lot less money, but issuers would make money off of credit cards even if every single person in the world paid their bill in full every month. They would distinctly not be bankrupt.
They could probably adapt, but they'd have to really streamline their operations. I doubt there would be as many paper ads in the mail, airport lounges, bonus cashback categories etc.
At the individual level, leaving 2% or more of cashback and an interest-free loan of at least a month on the table is just a bad economic decision.
At the aggregate level, it of course costs everyone dearly, since the cashback is ultimately just paid for by consumers anyway – minus generous issuer profits.
They offer more protections for the purchaser than a debit card with no direct additional cost as long as the bill is paid in full. They also often provide additional incentives like some percentage cash back.
On top of protections, rewards, etc., you're gaining the time value of money.
You shouldn't be keeping your savings in the bank, you should be keeping them in investments. When I charge something to my card, it's an average of 45 days until it gets debited from my bank account. That's 45 days that money can be in investments and profitable.
It doesn't matter much over just one or two months (and will be swamped by the direction of the market anyways), but over a lifetime it adds up.
Don't ever pay now when you can pay later, if you can invest your money during that gap.
Yep, even if the credit card didn't offer any rewards or protection, I would still use them because I'm billed a nonzero number of days after the charge happens. And that's an interest free loan, where I can instead earn interest. If your credit card balance is $5000, and you only have to pay it an average of 30 days after the purchases are made, well... The 30 day T-bill rate is currently 4.38%, so putting that $5000 into the safest, most liquid investment available for 30 days will yield $18.25, which is much better than cash or a debit card where you are immediately charged.
Because it builds credit, and most credit cards these days have points/cash back programs, the caveat being you have to be very diligent about budgeting and ensure you pay the balance off in full every month.
40% do pay off every month. Not a majority but still a large number. We don't have numbers for those who normally pay them off but once in a while miss - that might be significant.
Historically it's explained as rapid inflation. IMO also due to being pre-Internet tech. Credit card "payments" can be completed offline and batch processed.
I don't use credit cards for the credit; in fact mine are completely paid for every statement. They are used for the customer protections and other provided "free" benefits. If some scummy or outright scam-y thing is charged to my Amex, I know I will have Amex on my side. If my card is stolen, Amex will refund any fraudulent charges and overnight me a new card; I probably won't get my debit card overnighted, though they will probably refund the fraud. The other thing is credit card points, which are essentially a benefit paid for by credit card processing fees charged to businesses. Many cards also offer access to "private" airport lounges. And other benefits I'm forgetting off the top of my head.
Additionally, having high credit limits, low usage, and older accounts improves credit scores for loans/etc.
No interest is charged if there is no balance carried statement-to-statement, so why bother with silly debit pins and such.
That's how it becomes the default way of payment; it's not really "credit".
Because wages are insufficient. Credit fills the gap to survive. Half of bankruptcies in the US are from medical debt, for example. In 2023, approximately 36.8 million Americans, or 11.1%, lived below the poverty line. ~50% of Americans carry a balance, and the average U.S. household with credit card debt has a balance of around $6,065.
You're assuming these consumers of credit card products can pay off their cards (transactors) when the data shows, broadly, that the consumer is stressed financially. Consumers are relying on credit cards because they cannot afford not to (revolvers).
From what I've read (not your links), roughly about 40% of Americans with credit cards don't carry a balance month to month. That's not most, but it is many. Which is what was said:
> MANY folks carry zero credit month to month
Even if 40% is 10x too high, and I'm pretty sure it isn't, 4% of all credit card holders is still a hell of a lot of people. As far as I can tell you haven't actually contradicted the claim.
You are still looking at a minority to define a universal trend.
Some consumers may be stressed. That doesn't explain why credit cards use has dominated across all income ranges for decades.
It seems like you are trying to shoehorn a pet issue into an unrelated question.
Edit: you still seem to be missing the question. It isn't why credit debt is so high. The question is why so many people use credit cards. What you are saying may be true, but it is answering it an entirely different question.
>People would use debit cards if they had the funds.
This is the part that simply isn't true. The rich use credit cards too. Less than half of credit card owners carry a balance from month to month.
> The higher cost of everything from housing to high-tops to haircuts are a major culprit. Although inflation has moderated since it peaked in June 2022, Americans—particularly lower-income families—are relying more on credit cards to cope with the sticker shock.
> “They used credit card debt to supplement their incomes to maintain their purchasing power,” says Mark Zandi, chief economist at Moody’s Analytics.
> A few years ago, low interest rates plus a host of pandemic-era programs—stimulus payments, enhanced food stamp benefits, pauses on student loan payments and eviction proceedings—made this new math work for families’ budgets. But those financial supports have been discontinued, and for borrowers who were barely treading water financially, these programs couldn’t have been eliminated at a worse time.
Credit card rates are high because they can be, if you need financing you have nowhere else to go except perhaps a payday lender or other hard money source. This is why there is recent talk of capping interest rates at 10%. People would use debit cards if they had the funds, they don't, which is also why overdraft fees were a source of billions of dollars in fees for commercial banks.
Let’s just say you’re a wealthy consumer with a million dollars in the bank. You’d still buy things with a credit card, why?
1. Purchase protection (insurance)
2. Chargeback protection
3. Rewards either points or “cash back”
4. Merchants hardly ever give cash discounts anymore, credit card fees are baked into the price of everything so you’re going to pay for the advantages above and receive nothing in return, plus have the burden and liability of carrying cash.
Merchant side.
1. CC fees are high so we add 3.5% to the retail price of everything. Someone pays cash? Good, a small bonus.
2. Merchants are being charged the same for “debit” cards which allow electronic payments from bank accounts, coming with the same chargeback risks and fees as a CC.
So what the heck assume the worst for every transaction.
How to fix this. Does it need fixing? If the gov is going to push everything to electronic payments, you might as well get the rewards.
The trap, if you’re not paying off your balance every month, the rewards are nothing and the interest rate is crippling.
1. For the consumer, paying off the balance due at the last minute gives you an interest-free loan on your spending for an average of 6 weeks. Let's say you spend $1000 per month. At 5% interest, that saves you about $30 a month.
2. It gives you an itemized list of what you spent.
It reminds me of an article long ago that explained how Amazon could make money selling items at cost. a) they get paid by the customer right away b) they don't pay the vendors for 90 days. Thus, Amazon gets paid interest for 90 days on the volume of business they do, which is very large.
Not many people seem to understand the time value of money, certainly it isn't taught in school. It's not just about mortgage interest rates. It's everything that involves money.
> 1. For the consumer, paying off the balance due at the last minute gives you an interest-free loan on your spending for an average of 6 weeks. Let's say you spend $1000 per month. At 5% interest, that saves you about $30 a month.
Saves you versus... taking a 5% loan for the 6 weeks? You need to actually invest the money versus paying the credit card to earn interest. The average consumer is not walking around picking up pennies in front of a steamroller trying to get $30/month with clever interest rate arbitrage.
> Not many people seem to understand the time value of money, certainly it isn't taught in school
Realistically a person will take out loans for like 4-5 transactions in their life where this actually matters. House, car, student loans, maybe a small business. If you look at personal finance advice they usually use the "snowball method" of simply paying down the highest-interest debt first and reducing expenses.
> taking a 5% loan for the 6 weeks? You need to actually invest the money versus paying the credit card to earn interest.
And I do. I don't have any actual money. It's all invested. I look for ways to borrow money at a lower rate and invest it at a higher rate.
> Realistically a person will take out loans for like 4-5 transactions in their life where this actually matters.
Every time you buy something with a credit card, you take out a 0% loan for 6 weeks.
If you pay attention to what a bank does, if the bank hands you a check for borrowed money, they start charging you interest immediately. If you pay off the loan by handing them a check, they charge you interest until the check clears. I.e. the bank works the float both ways.
The pennies add up.
If you're not aware of this for a large transaction, the other party surely is and is taking advantage of you.
A few years ago, it was commonplace for late night TV to run seminars that I call "Make Money By Real Estate Scamming". I decided to watch one and see how it went. The presenter presented a series of transactions that ended up netting the buyer $15,000. It was complicated, so I set about figuring just how the $15,000 from nothing came about. It turns out it hinged on giving the sucker a bond that paid $X upon maturity in lieu of paying $X today. The $15,000 was the interest on the time to maturity. The complications were all about hiding this.
For example, I'll get flyers in the mail offering mortgages for an absurdly low teaser interest rate for the first year, and after the first year the interest rate goes above market. I carefully read the contract. If there's no prepayment penalty, I'll get the loan. A year later, I refinance and pay off the first mortgager.
I asked my loan officer "why do they do these contracts?" He laughed and replied they were playing the odds - the vast majority of people are too lazy to refinance, or didn't read the contract.
Once I bought a new car, and they offered 0% financing after we agreed on a price. I asked, why would they offer 0% financing? The dealer said the terms of the contract were if you are late on a payment, you get hammered with interest. I said sure, I'll take the loan, and set up an automatic payment plan.
This is all basic stuff. The credit card thing is mostly just for practice.
> You need to actually invest the money versus paying the credit card to earn interest. The average consumer is not walking around picking up pennies in front of a steamroller trying to get $30/month with clever interest rate arbitrage.
They should be. Interest bearing checking is out there. No real danger there. It's not glamorous, but depending on how much interest you're getting, paying with tommorow's dollars for today's purchases gets you about 0.4% off (based on bad math of apy is 3.25% * 45 days / 365 days in a year; I know this isn't the right way to use an APY, but you can also find better interest checking than my credit union)
Cash isn't necessarily cheaper for merchants. They have to deal with depositing it, there's a risk of theft during transport, employees are more likely to steal it, there are losses from counterfeit money, and it might take longer to process the transaction.
Cash is not the bonus you think it is. Few have calculated the risk of robbery, (both employee and otherwise) counterfeit money, miscounting, and all the time spent counting and recounting cash. Having been mananger of a fast food in a previous life just my time to count cash was 1% of gross income and the other clerks similar - divided over each customer.
Related to charge backs, it's a security wall between theft and your actual cash. FCBA covers credit cards but not debit cards. While many banks will work to resolve fraud, your cash will still be locked up during that time.
These are available on debit cards as well. (Both by law, i.e. Regulation E, and both Visa and Mastercard requiring issuers to provide zero liability policies to consumers.)
> 3. Rewards either points or “cash back”
Which consumers more than pay for themselves – all consumers, including those paying cash.
The UX for chargeback protection is not quite the same, though.
Say someone commits fraud and charges $1000 to my credit card. All that happens is 1. Some time later, I see the charge on my list of other charges, and 2. My bill is $1000 higher this month, which I dispute. Some time later, the CC company confirms it's fraud and the $1000 (and the interest) disappears from my bill.
Say someone commits fraud and charges $1000 to my debit card attached to my checking account. Between the time the fraud happens and the time the bank confirms its fraud (or otherwise restores the funds per their fraud-reporting policy), my bank account balance is now $1000 lower. Maybe some checks start bouncing. Maybe I needed that $1000 for an upcoming purchase, and it's not available for a short period of time. Yes, the numbers will all eventually be correct, but it's mayhem in the mean time.
I also hate having to carry a brief case of money around.
Seriously though while the purchase protection is nice, so is the ability to cancel a lost or stolen card. And if course the cats is slightly smaller than one million dollar bills
The PayPal debit card lets you choose a 5% cash back category every month. Gas, restaurants, and a few other I don't remember. It's a much better deal than most of the credit cards I carry.
I have never known a vendor that charges more based on credit card types.
The reason that companies are willing to pay higher credit card exchanges for Amex is because Amex users on average are bigger spenders.
But even Chase Visa cards that transfer to Hyatt hotels and you can get 3x back for groceries (by paying with grocery store app so it counts as “online groceries) you’ll get more than 5% cash back.
Then there is the whole r/awardtravel hacks of getting cheaper flights by transferring points to partner airlines like booking Delta domestic flights via AirFrance.
That’s because every vendor who chooses to accept American Express raises their base prices by 4-5% instead of 3-4%.
It has absolutely nothing to do with how much American Express cardholders spend and everything to do with what they charge vendors and some vendors or their payment processors accept Amex, or you don’t have a choice.
I know this because my firm accepts American Express and they are absolutely not our biggest spenders, but our downstream processors force us to raise prices.
If everyone suddenly developed self-discipline with money over night, the need for credit cards would disappear. Emergency use? replace emergency credit card with emergency savings and a bit of self discipline. Buy now pay later? wait until later.
There are other considerations that need to be fixed first. Fraud protection has historically been stronger for credit cards than other means of payment in the US. Likewise cash back vs not.
Fraud protection is inherently better for credit cards, because you haven't spent your money. The bank has spent the money, and you don't have to pay the bank if someone defrauded the bank. So the bank has every incentive to get the money back. Not so with debit. You spent your own money.
That cash back is basically a scam. It's paid for by the credit card processing fees - fees which are charged to merchants and ultimately get passed on to the customer in the form of higher prices. Some merchants even tack on explicit ~$3 transaction fee for credit card purchases, to cover transaction costs.
So the cash back is just a partial refund on your credit card processing fees.
Or get the best of both worlds: buy now and always pay off your full credit-card bill so you never pay interest and get, in effect, a free short-term loan.
I've made thousands of dollars in cashback and rewards from my credit cards without ever paying a cent in interest. That's the main value proposition of credit cards for people who never carry a balance.
I have operated under this model for about 10 years now as well. But there was a recent Atlantic article that gave me pause: those rewards are exactly the results of credit card companies’ usury, extracting money from other people.
It just doesn’t seem ethical to me (for my parameters) any more. :-/
They're pretty handy just as a form of payment. I've never once carried a balance and never paid a cent of interest to a credit card company, but I use credit cards for basically all of my spending. I get back ~$1000/year in rewards, plus all the convenience of having plastic whenever I want to spend, recurring billing, dispute resolution, fraud prevention, etc.
I'd argue that this suggests another hypothesis that the article only partially considered: high interest rates are a cross-subsidy to attract the 40% of credit card users who never carry a balance, and the 40% of credit card users who never carry a balance are a marketing expense to normalize credit card use and make the 60% who do think it's completely acceptable to spend without a thought. I get literally thousands of benefits from the credit card company, and I don't pay a cent. That money has to be coming from somewhere, and I'd bet that it's coming from the 60% of consumers who pay usurious interest rates.
If you read the whole article, you would learn that it is actually coming from you, via the merchant. Which means you are likely paying higher prices. Now you pay the higher prices either way for the most part, so you may as well enjoy the kickback^W rewards.
I'm aware of merchant transaction fees, but they're insufficient as an explanation. Just run the numbers. Say that a hypothetical consumer spends
$10K/year. The person who carries that as a balance will pay $2700 at 27% interest, plus $300 from the 3% transaction fee, for a total of $3000, and they might get $200 as cashback. The person who doesn't carry a balance will pay $300 and get $200 as cashback. It's pretty doubtful that all the other services a credit card company provides - fraud detection, chargebacks, billing, recurring payments - cost < $100/year. Maybe if you never submit a chargeback and your card never gets stolen, but at best we're looking at them breaking even on their non-balance-carrying customers and making all their profits off the customers that carry a balance.
When you're providing a service to one group at or below cost and making all your profits off another group or another service, that's the definition of a cross-subsidy, even if you do get a token amount of revenue off the first group.
> I'm aware of merchant transaction fees, but they're insufficient as an explanation. Just run the numbers.
I don't have to run the numbers, because I read the article where they did the actual research with real numbers, not your back of the envelope estimating, and they came to the opposite conclusion:
| This leads to our second hypothesis: High interest rates are
necessary to recoup the high cost of rewards. However, our
analysis shows this is not the case. Rewards expenses are
more than fully covered by banks’ interchange income—fees
collected from merchants based on purchase volume. On
average, interchange income amounts to 1.82 percent of
purchase volume, while rewards expenses are 1.57 percent.
Chargebacks in particular are eaten by the merchant, not the credit card company, unless the merchant puts in the effort to show that the chargeback is incorrect or fraudulent.
Credit cards offer rewards which are really beneficial to people that properly use them.
In my country, credit cards are safer because they offer better fraud protection mechanisms than debit cards.
Credit cards make it easier to spend money in foreign currencies. I’ve faced issues when trying to pay with a local currency debit card abroad, but I never have faced that issue with a cc. Then, I can just pay my credit card with local currency.
Most of these issues are solvable for sure. But as of today, credit cards are way more reliable than debit cards. At least for me.
I think credit cards do have very valid use cases today.
For better or for worse, we've just lived through several decades of rock bottom interest rates.
Sure, you ask someone who's 60 or 70 years old, they'll tell you debt is slavery, you'll end up paying back twice what you borrow, and if you're out of money at the end of this month and you take out a loan you'll be even worse off at the end of next month leading to a spiral of debt. Being disciplined with money is crucial to your family's wellbeing. Because they lived through periods of incredibly high interest rates and saw that stuff happening first-hand.
You ask a 40 year old, though? For most of their adult lives interest rates have been below 1% as the economy staggered from one financial crisis to another. Their lived experience is that buying a car on credit has almost no downsides, you certainly don't end up paying 100% more, you pay perhaps 5% more to get the car 2 years earlier. Even college-educated folk who operates spreadsheets for a living could convince themselves it was better not to pay off their mortgage, better to put that money into the stock market.
It remains to be seen how modern attitudes towards debt will respond to non-zero interest rates. I hope it doesn't go too badly...
Yeah, except the sale for whatever you buy may expire before "later" comes. You'd save more money purchasing now and paying off the credit card a week or two later in that case. It's not always as simple as you describe.
So pass and wait for a sale to occur when you actually have the money. Since you save overall, you only have to go through the pain of waiting just once, hopefully in your youth. After that, your savings on the last purchase (in not paying interest) pays for the next purchase, every time, given the same purchasing habits.
I don’t live in America but here we don’t use credit cards but we have micro loans and people overwhelmingly sign those for things they absolutely do not need.
I mean, I certainly don't need credit cards, but given the marketplace, they're often the least expensive and the most convenient way for me as a purchaser to pay for a lot of things.
They're certainly not the least expensive way for the merchant, but unless they pass the merchant "discount" as a line item, it doesn't make sense as a purchaser to use anything else. And even then, I think my current card involves the issuer paying me to use it, beyond the discount (4% cash back, but I think merchant fees top out closer to 3%). There's also the delay between time of charge and when the statement is due, although I think the merchant's receipts are also delayed.
US Bank Smartly. Gotta open a savings account, and hold $100,000 combined balances across savings/checking/investment for your household. And have to deal with US Bank.
Because credit cards are a scammy middleman that has dug their nails deep into the political and financial worlds that lets them bully merchants into using them while pretending to be a benefit to consumers. In reality they just drive the price up for everyone, and then push a few percentage of the markup they pocketed onto consumers to appear useful. Consumers lose in paying higher prices, merchants lose by money being siphoned away to a 3rd party.
Credit (and debit!) cards solve the trust problem of online shopping and as such are vital to competition: I know I can get my money back if I don't receive good or services anywhere; if that weren't the case, I'd probably only shop at a very small number of highly trusted merchants.
Credit cards, in the US implementation where the issuer collects ~2% from the merchant and pays their cardholder a kickback from that, are both a cost to cash payers and very inefficient in general, but that's not the only way of doing things. The EU capped interchange fees at 0.3%/0.2%, for example, and purchase protection is still available just like before.
This is slowly changing, but will take time as merchants switch to accepting instant payments ("pay by bank"). My understanding from the merchants my org interfaces with is they are surcharging credit cards to drive spend to cheaper rails (when available).
(if ACI, FiServ, or Jack Henry processes your payments today, you can accept instant payments without much more effort, inquire with them if interested)
The tl;dr is that it's not mostly due to defaults or for rewards programs.
But rather due to very high operating expenses (4-5% of dollar balances!) driven by marketing.
And also because the lending banks can't diversify. The risk of default is essentially magnified because you can't do anything if the economy turns bad and everybody starts defaulting together at the same time.
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