Just Say No To Credit Cards

We evidently seem to be experiencing some controversy surrounding credit cards this week. My wife is generally in favor of having one. On the other hand, I am not. Since this is an issue in which reasonable people disagree, I wanted to make my thoughts plain.

Generally speaking, you should pay off your credit card debt, get rid of your cards and switch to using a pay as you go system with a check card. Why should you do this? There are four compelling reasons.

1) Industry Sleaze:

The credit card industry engages in some seriously sleazy business practices. Theses are well known, so I’ll just briefly recap them here: fraud, confusing contract wording, failure to fully disclose arbitrary fees, universal default, abusive fees, abusive and deceptive interest calculations, repeated and confusing changes in due dates. These are just a few, but the list is endless. What makes these worse is that the fees are generally not disclosed by the industry, this suggests they are intentionally designed to fleece borrowers. Fair lending means that both parties know ahead of time what the deal is. The credit card industry does not lend fairly and that is sleazy.

2) Perks That Aren’t:

A lot of smart people, my darling wife included, choose credit cards for the perks they offer. These perks include cash back, airline miles, discounts on gas, etc. However, what many people don’t realize is most of these perks come with strings attached. For example, if you have a rewards card, you’ll pay a higher annual fee or interest rate. If you don’t believe me check out the AP story. Basically, there’s no such thing as a free lunch.

Some people argue that they can successfully pay off their balance every month and still get the rewards. To be entirely fair, some people can do this. However, MOST don’t. According to the 2004 Survey of Consumer Finance, 58% of households with cards DON’T pay them in full. Even those who are successful in paying off their balances may slip up on occasion. When they do, there are plenty of fees waiting for them.

3) Hype:

People seem to be under the impression that credit cards are needed for two things: 1) helping build your FICO score and, 2) getting hotel room or rental car. I hate to break it to our readers, but you don’t need a credit card for either of these.

In terms of building your credit, its true that responsible use of a card can improve your FICO score. But for that matter, so can paying your power or phone bill. As regards getting a hotel room or rental car, all you really need for these is one thing: money. The notion that you need a credit card is nonsense. If our readers can show me a law which requires this, then I will retract that statement. But otherwise, you’re buying into hype if you think you need a credit card to build your FICO or rent a car.

4) Paying Interest:

This is worst part about having a credit card. For people who do carry a balance, and this is most of us, real rates of interest put the mafia to shame. According to the supreme court, the real rate of interest includes both interest charges AND fees. Sometimes these can get super high.

For example, assume you have a $100 balance at 29%, and you apply a $39 late fee. The effective interest rate is therefore 68% ((100*.29)+39). Add another 50$ fee and you can easily drive the effective interest rate beyond 100%. Who need Tony Soprano when you’ve got Citigroup?

Lastly, its been my own personal experience that running up credit card debt is bad for your financial health. I’ve felt the bite and have seen colleagues in the same situation. Having given the matter some thought, I would conclude by advising our readers pay their credit card debt, get rid of their cards and start using a check card. The downsides to credit cards simply aren’t worth the hassle.

Best,

James