The Decline of Credit Cards

Ezra Klein, on what he considers a vicious cycle in credit cards:

The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.

I’m not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we’re going to get there is, essentially, by taxing the stuff we want less of — and that means increasing the interest rates and annual fees on credit cards.

Sometimes this is going to happen in an underhand and less-than-honest way: Odysseas Papadimitriou has a great blog entry on how Bank of America (BAC) is denying that introducing a $50 annual fee constitutes a repricing of its credit cards, for instance. But the big move, away from credit cards and towards alternate means of payment and sources of credit, is surely to be welcomed.

The sad aspect to all this is that millions of people hold large credit card balances and have no ability to refinance them with personal loans, or even any particular notion that such a thing might be possible. They’re going to be harmed by this move. But over time, if things go right, their numbers will naturally dwindle, and we’ll be left with a much healthier system of consumer finance.

Comments

[Nettligent]

Life is too short and never let these crooks trap you with buying cycle. Cut your credit cards and only keep one or getting ATM/Visa card.

2009 Nov 11 07:15 PM

[jstratt]

Excellent viewpoint!

Unfortunately most of the people that I see today are unable to control themselves.

Old thinking: Expensive Cars, boats, motorcycles, RV's or huge homes... prosperous

New Thinking: probably broke

2009 Nov 11 08:35 PM

[Moon Kil Woong]

Anything that gets people to realize what they are spending at the point of sale and not spend what they don't have is a good thing in the long run. Asia runs on cash and debit cards and it shows.

2009 Nov 11 11:02 PM

[fwi]

I absolutely agree with the author and the comments that consumers need to spend within their means and not rely on high cost credit cards. And as terms get tighter, this will happen across the board. But I am having a hard time squaring this secular trend that I hope is getting traction with the exuberance in Wall Street for retail stocks. The XRT is near a 52 week high.

2009 Nov 12 01:12 AM

[La Marque]

Many of those newly using debit cards are forcing themselves to live within their means - good for them. Ezra Klein just sees part of the big picture. Most people who have the good credit have been using debit cards all along while also using credit cards and paying them off in full every month.

2009 Nov 12 09:40 AM

[casey00001]

Felix: Its interesting that you think people should not spend beyond their means which is a correct line of thinking in my opinion, however you have absolutely no problem with the current administration spending way beyond the Government's means. Please explain?

2009 Nov 12 10:06 AM

[knight]

Please dont single out this current goverment but almost all the goverments of the past has done this as well. If America really wants change they need to vote for Ron Paul. Its to bad he will never win.


On Nov 12 10:06 AM casey00001 wrote:

> Felix: Its interesting that you think people should not spend beyond
> their means which is a correct line of thinking in my opinion, however
> you have absolutely no problem with the current administration spending
> way beyond the Government's means. Please explain?

2009 Nov 12 03:31 PM

[notsosmart]

people actually think they are entitled to a vacation trip.they have used the roof over their heads to pay for these trips.i dont feel sorry if they end up living in their car or a tent. if i did not have the cash for a trip i did not go.there was a world before cr cards.it should return.

2009 Nov 12 03:51 PM

[User 299387]

shorter Felix Salmon.

Anytime government runs a deficit I pick up my pom-poms and scream rah-rah-rah....

If an individual runs a deficit I tsk tsk tsk....

2009 Nov 13 12:12 AM

[Marcus Aurelius]

One of the things a personal finance talk show host I listen to always cautioned people against doing was to take out equity on the house and use that to pay off or down credit cards. It is silly & foolish to convert unsecured credit to secured credit. Back in the real estate boom days that was easy & tempting to do after all we would often hear about getting these loans up to 110% of the house value.

More often than not, according to this host, people would then re-run the cards up.

His typical advice was to cut them up or put them in a bag of water and store in the freezer and pay them off with the paycheck or checks.

Now, the later approach is the only one open to people.

2009 Nov 13 12:57 AM