Can I tell you something?
I got my first credit card back in 1977 when I was a busboy at Abernethy’s restaurant in Portland, Oregon. It was a Visa card, which was new on the banking scene, and the only reason I was approved for it was that I gave my bank a security deposit equal to the modest credit limit granted, which if memory serves was $250. One example validating the old Bob Hope joke that, “a bank is a place that will lend you money if you can prove that you don’t need it.” Slowly but surely over the next year or so, I was able to win their trust by paying my bill on time without fail and I was eventually issued an unsecured card, albeit with the same modest credit limit.
I attained the position of waiter the following year and thanks to the increased income was approved in 1982 to carry the prestigious American Express card, which I felt at the time completed my journey to adulthood.
The fact that the company required outstanding balances be paid off at the end of every month did nothing to curb my enthusiasm for using it in the hopes of impressing whomever I was dating or conducting business with. But really what is the point of having a so-called credit card if you can’t live well beyond your means? Never mind that you are piling up massive debt, and because you are only able to make a small minimum payment each month the bank accrues massive amounts of interest by charging usury rates.
But that’s not what I wanted to tell you.
Exuberantly named ‘charge cards’, used to make purchases on account at specific stores, have been in use since the late 1800s.
But the first true credit card – the Diners Club – came into existence in 1950 because a guy named Frank McNamara was dining out one evening and forgot his wallet, which led him to hatch the idea for a cashless form of payment.
No word on whether Frank had to spend time in the dish pit that night, but he was obviously on to something, and the concept soon took the banking world by storm. Not to mention consumers.
Carte Blanche, capturing in its name the essence of rampant consumerism untethered to fiscal reality, first appeared in 1958 along with American Express, and soon thereafter the Bank of America issued its cleverly named BankAmericard. That unassuming little piece of plastic achieved widespread popularity with banks and retailers both in the U.S. and abroad, and in 1976 the ubiquitous cards united under the flag of Visa, still sporting the popular and patriotic red, white, and blue design.
And really, what could be more American than buying shit with money you don’t have?
Master Charge cards made the scene in 1966 – later rebranded grandiosely as the Mastercard – and that rounded out the roster of big-name credit pushers.
Authorities have lost count but today there are an estimated 1,500 different credit cards available in the U.S. More than eight in ten Americans have at least one credit card in their wallet or purse, representing over 600 million individual credit card accounts with the average avid consumer having four. There are also more than 1.2 billion debit cards in circulation but those spend money we actually have, so I don’t want to talk about them.
To help you understand the extent to which America has embraced deficit spending, and how rapidly we’ve careened from pennywise to profligate, consider that in 1970 only half of all Americans had a credit card, and as late as 1980 the average debt per person was only $500. By 1990 that personal ball and chain had become about $3,000, and it now stands at a whopping $5,595. Total credit card debt in the United States has more than doubled since 2000, and as of this writing burgeoned to $1.21 trillion.
The most popular card in use today is Visa with 312 million cardholders and an annual sales volume of $6.5 trillion. To put that in perspective it’s enough cash to buy ExxonMobil, McDonald’s, and Coca-Cola, and still have enough under the credit limit to charge a nice pair of Jimmy Choo shoes.
Mastercard is next with 266 million cards and $2.7 trillion in sales, followed by American Express with 48 million cards and $1.1 trillion. Bringing up the rear is Discover with a mere 61 million cards issued and a paltry $200 billion in sales.
But that’s not what I wanted to tell you either.
There are now several distinctly different types of credit cards, broadly defined as either unsecured or secured, rewards or no rewards. As I mentioned before, my first card was secured, which is an excellent way for young people in particular to get started building a credit history and getting their FICO score above zero. That’s assuming mom and dad are willing to give them the deposit. The good news is these cards almost always have no fees attached. Because they already have your money. ‘Student cards’ are similar, often secured, and available to people with low or no credit as long as they are – you guessed it – full-time students.
Anachronistic ‘charge cards’ still exist which represent an account at a specific store or chain, but usually the monthly balance has to paid in full, so these are not true credit cards. A cousin of the charge card is the ‘store card’ which offers not only credit but additional discounts if you shop at stores of theirs or select partners.
There are also many bespoke cards designed and marketed for specific kinds of customers or uses.
As you would expect, ‘balance transfer’ cards target people carrying large balances and lure them into a financial web by offering a lower interest rate than they are currently paying, although often not for long. Similarly, ‘no annual fee’ cards are designed to attract customers burdened by high annual or even transaction fees, and ‘intro cards’ with a very low or 0% APR for a very limited amount of time are attractive for some, but in reality, only a good deal if you plan on buying a hot tub and paying it off after the first soak.
The new breed of card I really want to talk about is ‘rewards cards’. These are all true credit cards, but now big companies and banks secure customers by offering rewards based on their level of spending.
Some cards offer cash rebates for buying everyday items, and these are known unsurprisingly as ‘cash back’ cards. ‘Travel rewards’ cards add miles to the holder’s frequent flyer programs, and others simply accumulate points which can be used to redeem goods, services, and travel with participating partners. This incentive system is employed for not just personal credit accounts, but businesses may now also take advantage of the largesse.
Wait a minute. This is great, right? What could possibly be bad about getting rewarded for spending money you’d spend anyway? Good question.
But the better question few stop to ask themselves is why in the world would financial institutions and major retailers engage in such munificence, giving you something that doesn’t benefit them in any way, and in fact reduces their bottom lines? The answer of course is they wouldn’t, and they don’t.
For starters, cash comes back only for what constitutes a qualifying purchase and there’s sometimes an annual limit, miles awarded can expire or have fees attached to redeem them, and they often can only be used on off days and at off hours, and points never seem to be good at the stores and restaurants you actually want to shop or eat at. And navigating the online systems to track and claim rewards can be as easy as finding the Northwest Passage.
But the driving force behind these rewards cards is of course financial. And since banks collect merchant fees of 2-3% on every transaction which in many cases offset the cash back, miles, or points, they also know the carrot of collecting rewards drives spending and card usage, ergo they’ll collect more fees.
But the real reason the suits in the C-suite sleep easy at night is these rewards cards come with higher interest rates, and they slumber in the certitude that most cardholders rarely if ever pay off their monthly balances in full. And the cherry on the rewards sundae is that some people apparently leave large balances of cash unredeemed which the banks – hold onto your hats – also make money off of.
Don’t get me wrong. For the parsimonious and fiscally responsible among us who manage their money well and never carry credit card balances beyond the end of the month, these rewards cards are a gift from the grift gods who run the banks. Take the cash and miles and points and give yourself a round of applause. But if you’re among the multitudes paying $60 a month in interest to get $30 cash back then you need to take a remedial math course and stop thinking that you’re getting rewarded. You’re getting screwed.
But what I really wanted to tell you is this.
The famous aphorism “virtue is its own reward” is attributed to various great ancients, notably Socrates, Seneca, and Cicero, but whoever has the byline it still rings true. Sadly, far too many people see no material gain from being virtuous and consequently fail to reap the reward. If virtue could be redeemed for two round-trip tickets to Hawaii it might be different.
I still have my American Express card 44 years later, which gives me reward points for most of my spending, although it’s disappointing that 10,000 points only gets me a $100 gift card at Banana Republic, Benihana, or Best Buy.
And I may be the last of the Americans to carry a credit card that offers me no rewards whatsoever, which I use only when some moronic merchant won’t take my American Express. Pro tip: raise your prices slightly but never refuse a customer who wants to buy your goods and services.
You may want to be seated for this, but I pay for a lot of my purchases with cash, and how quaint is that? And despite the fact my crumpled banknotes and pocket change are ‘legal tender’, meaning by law must be accepted as payment for goods or services, I have now lived to see the day that is no longer the case. Some retailers already refuse to accept cash payments at all, and some are charging customers a premium if they do. There are even ‘reverse ATMs’ now in service that will convert your cash to plastic. For a fee of course. But I digress.
However I pay for my goods and services, if my form of payment is accepted I buy them because I want or need them, not because I am chasing the chimera of financial gain and get cash back or miles or points.
My less cynical yet very materialistic take on the old adage is that I like to buy shit, and I for one feel the act of shopping is its own reward.
Thanks for listening. Talk soon.