The oldest payment method in civilization is making a strong comeback. No, not gold (that’s for another post). Rather, the concept that if you are going to buy something, you’re going to have to pay for it. Consumers are shifting away from the “borrow and buy” mentality back to the “cash and carry” model which has been used for civilizations.
If back in the day, you didn’t have the money to pay for merchandise, then you went without. Not the norm anymore, given all the plastic in our wallets. Believe it or not though, consumer credit is still a relatively recent phenomenon – for how much longer we have to ask? To answer that, we’ve got to understand the history.
The first modern consumer credit cards were developed only 60 years ago (in the 1950’s) with Diners Club, followed by American Express, then Bank of America (“BofA”) with their BankAmericard (which is now Visa) close behind. In an effort to capitalize on the “all-purpose credit card”, companies started dropping preapproved credit cards to unknowing consumers. BofA, for example mailed over 60,000 preapproved cards to folks in Fresno, California, although those consumers never asked for them. Others again followed suit, and the next thing you know the scams started - people are stealing credit cards out of mailboxes, consumers are getting billed for cards they never knew they had, and a black market began in stolen credit cards and identity theft.
Things got a little better in the 70’s, when Congress began regulating the credit card industry. For starters, they banned the practices of mass mailing active credit cards to those who had not requested them (some of whom were even dead). However, not all government regulations have been so consumer friendly. In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted restrictions on the amount of late penalty fees a credit card company could charge. Deregulation has also allowed very high interest rates to be charged. In an effort to get consumers to use, award points programs were promoted and in the decades since, using a credit card has become so universal that paying with cash has become passé. Check your wallet, how much cash do you carry around these days?
Want to buy a new car, the dealer down the street will give you a lease. Tired of your old television? Get 10% off by opening a Best Buy credit card. Two hundred dollar steak dinner at Ruths Chris? Charge it. Kindle? iPhone? Christmas? Whip out that plastic card, and justify it with all those great points you’ll get.
While it makes sense to charge it at the time, because you know you’ll pay the charge off that month or in a few months, what happens when suddenly you can’t, and you’re forced to make only the minimum payment? You may find yourself, like many people in this economy, charging necessities like gas, groceries and utilities to your credit cards, further exacerbating your debt load.
In 2008, the average credit card debt in America of households was $10,679 (and likely higher in 2009). If some of these households now can only make minimum monthly payments, they could be looking at 30 years to pay off that balance, and in the end they will have paid about $15,000 in interest alone. Check out Bankrate.com’s calculator and see for yourself.
Note – In the current economy, banks are paying only about 1% in interest for borrowing your money, but charging as much as 29% when you borrow their money.