Credit Cards: Not Dead Yet

Dan Gross has a piece in Slate entitled "The Death of the Credit Card Economy". It tells a plausible and compelling story: As credit-card companies slash credit lines, so are consumers cutting back on their spending.

Gross quotes Dan Ariely as saying that "if it's more difficult to get credit, it might make people feel more pain of paying and therefore spend less" -- and there's no doubt that it is now more difficult to get credit.

But the actual evidence for this "pain of paying" is hard to come by. Reports Gross:

The tightening of credit is forcing more people to confront these uncomfortable choices. In the second quarter, credit giant MasterCard reported that the gross dollar volume, or GDV, of credit charges processed in the United States rose just 0.7 percent from 2007, while the GDV of debit charges rose 15.8 percent.

Gross could easily have used those figures to make exactly the opposite case:

So far, there's little evidence that people are spending less money on their credit cards, or that they're reluctant to pay for goods directly out of their bank accounts. Despite credit lines tightening up, the gross dollar volume (GDV) of credit card charges in the US, as reported by MasterCard, actually rose by 0.7% in the second quarter of 2008. Meanwhile, consumers are going on a rampage with their debit cards, with GDV there soaring by almost 16% year-on-year.

The truth is surely somewhere in the middle. Once you strip out gasoline sales from that credit-card GDV, the number will surely turn negative, even before accounting for population growth and other consumer-price inflation. But the willingness of people to move spending onto their debit cards from their credit cards does make it seem as though Gross's theory has yet to be proven in practice.

I'm also not a fan of switching statistical horses midstream, as here:

In 2007, according to the National Association of Realtors, 45 percent of first-time homebuyers put no money down, and the median first-time homebuyer financed a massive 98 percent of the purchase. But no-money-down mortgages, like Rudy Giuliani's presidential candidacy, began fading in late 2007 and largely disappeared in the cruel winter of 2008. No wonder existing home sales fell 13.2 percent in July from last year while new home sales plummeted 35.3 percent.

The first two statistics -- about downpayments -- refer to first-time homebuyers. The second two statistics -- about home sales -- refer to all homebuyers. In order to make sense of these figures, we really need to know what's happened to the proportion of home sales to first-time buyers over the past year. Alternatively, give us the home-sales figures for first-time buyers, or the downpayment figures for homebuyers in aggregate. As it is, this kind of writing risks sounding like a politician massaging figures to his own ends.

Comments

[Trader Man:]

Once people figure out that Debit card are BAD, then this argument is a mute point. Always remeber, with Credit Cards you are using SOMEONE ElSES money, with a Debit Card it's instantly out of you checking account.

2008 Sep 02 03:38 PM

[anastos:]

That possibly could be the dumbest thing I've ever read. Why is paying for something with your own money bad? Why is paying someone else 10-20% interest to use their money good?

2008 Sep 02 04:33 PM

[Hoser:]

Because, anastos:

a) You get that money interest free IF you pay it off every month. That's what I do.

b) You get reward points or cash back.

2008 Sep 02 05:37 PM

[John C. Lee:]

I met this lady yesterday that has a stack of 21 credit cards wrapped in a rubber band. has to carry a file folder in her purse that shows the balance of each card so she knows which card to use now.

2008 Sep 02 08:19 PM

[tuskagee:]

Visa and MasterCard are transaction processors (i.e. networks). They don't issue any credit debt.

2008 Sep 03 06:34 AM

[tipalia:]

I am 110% with Hoser, that s what smart people are doing.Ever heard of OPM anastos? Other s People Money, use it wisely and you will be rewarded .Wisely means don t spend more that you can afford and always pay on time the balance owed. My wife and have been travelling once a year using the free air miles and thanks to my discipline or should I say thanks to the lack of discipline of others.
Tipster

2008 Sep 03 10:01 AM

[sumosama:]

Great article which points out the subtleties (sic) of making things that sound the same BE the same in the mind of the reader. Lies, damn lies and statistics.

2008 Sep 03 11:16 AM

[kingeggie:]

If you pay off your cc ballance every month, why do you need OPM? A debet card costs nothing and you only spend what you have.It works for me.

2008 Sep 03 01:05 PM

[Trader Man:]

Anastos,

I work in the Payment Solutions area FOR OVER 12 YEARS, I would NEVER use a DEBIT CARD. If you use your Credit Card WISELY, then you pay 0% and get rewards. If you run into an issue with a purchase you DISPUTE it, and your money is STILL in your own checking account...
Maybe you should gain / gather / buy a little intelligence before you open your wallet.

2008 Sep 03 01:24 PM

[tipalia:]

kingeggie you are rather naive to think that debit cards cost nothing.Obviously you do not have a lot of control on your finances. and I bet you your bank loves you.

2008 Sep 03 05:02 PM

[GovaNerd:]

Someone correct me if I am wrong, but the credit card companies process and profit from debit cards as well as credit cards. Investing in (most) credit card companies was to invest in the card technology and the naturally inflation hedged business model which collects a percentage of each transaction.

2008 Sep 03 05:59 PM

[mrbill for V:]

GovaNerd: Visa & Ma do not issue credit they collect a transaction fee because everyone knows this there is a short term growth problem, but hold on there is something on the horizon that will shock you. Do the research and profit.

2008 Sep 03 07:18 PM

[tipalia:]

mrbill would you be kind enough to share with us what s on the horizon that is supposed to shock us?

tipster

2008 Sep 03 07:27 PM

[mrbill for V:]

User138602 since your question is not respectful let me answer it this way. Starting Tomorrow in selected cities you will be able to point certain cell phones at a coke machine and a coke will come out and processed through Visa. But you already knew this didn't you.

2008 Sep 03 07:59 PM

[tipalia:]

mrbill in what way that my question was not respectful? I really do not understand your joke if it is one.Anyway I saw stranger people before nothing surprises me any more.

2008 Sep 03 09:53 PM

[dick black:]

cc are better because by law they offer you protections for your purchases.
by using a debit card you open yourself up to having the wrong amount taken out of your account with difficulty getting it returned

2008 Sep 04 07:08 AM

[mrbill for V:]

Footnote: Credit cards and Debit cards are similar in liability> If you report the unauthorized use within 30 days your max liability is $50.00

2008 Sep 04 02:52 PM

[jason783:]

I work for a large regional bank, and based on how they direct customers to use their cards (more rewards for those that use credit cards as compared to those that use a debit card), I would assume that they make more revenue from a credit card purchase (ie. processing fees, interest, etc.). To me if the bank is making more money then I am probably making less.
And they idea that you pay it off every month means nothing because I do the same thing every month with my debit card with no risk of not being able to make a payment as I didn't spend it unless I had the cash.
The best way to avoid any problems in regards to dispute with a debit card and the delay in having the cash returned (which I have never had this issue and have used a debit card for several years) is simply don't run your checking account balance down to 0 and always have a emergency fund to fall back on. Common sense that anymore is not that common.

2008 Sep 04 10:49 PM

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2008 Sep 11 07:22 AM

[Total Credi...:]

Dan Gross made some good points; however, people will always be using credit cards. People love to get rewards from every day expenditures, and in today's economy, for example, getting cash back on their gas purchases is particularly attractive to consumers.

2008 Sep 11 09:25 AM

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2008 Sep 14 12:47 PM

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2008 Sep 14 12:48 PM