In 2006, American consumers rang up billions in credit card transactions. Thus, there is little doubt that credit cards make an enormous contribution to the overall vitality of the US economy. However, whether or not credit cards are "good" for the average consumer is far more debatable.
As a long-time credit card user, I can attest that credit cards do appear to offer a variety of advantageous features and services. For starters, credit card transactions are becoming ever more convenient and commonplace (Ritzer, 1995). One need hardly be a visionary to foresee a day when electronic transactions render greenbacks effectively obsolete. Also, whereas cash carriers tend to lose a bundle whenever their wallets are stolen, credit card holders generally experience only minor inconvenience. Individuals need only alert their financial institutions and, once notified, lenders are usually only too happy to replace lost cards and assume responsibility for all illicit transactions. By the way, those benefits extend to all credit card customers--even for those who do not subscribe to pricey credit protection programs. How's that for service!
Yet, appealing as those special advantages may sound, there is, of course, a downside to credit card spending. Largely due to their ease of use, as well as the illusion of affluence that they propagate, credit cards induce users to spend extravagantly (Schor, 1998). Studies have revealed that consumers often splurge anywhere from 12-18% more when purchasing with credit cards than when paying with cash. While such impulse spending is certain to make retailers' hearts flutter, for card holders the consequences are much less desirable. Quite simply, the more that consumers use credit cards, the more likely they are to fall deeply into debt. During 2006, credit card use soared to record levels and, predictably, so did accompanying levels of debt, climbing to a staggering $880 billion (http://www.federalreserve.gov/Releases/g19/current/). That works out to over $8,000 in debt for every card-carrying American.
Onerous as such financial burdens may be for card holders, for credit card companies skyrocketing consumer debt translates magically into expanding profit margins. Given the exorbitant interest rates that they charge, usually ranging somewhere between 5-15% over the prime rate, credit card companies reap the greatest gains from customers who remain perpetually mired in debt (Rummel, 2004). This is a point that is worth repeating: the longer that customers extend the life of their loans (typically by electing to make minimum monthly payments), the greater the profit margin for credit card companies. Indeed, in keeping with the upside-down logic of credit card finance, customers who dutifully pay their entire credit card balances each month are referred to derisively throughout the industry as "deadbeats."
In 1981, when Ronald Reagan ascended to the presidency, he was disturbed by the fact that Americans were saving only a very small percentage of their annual income. For a conservative who had witnessed the Great Depression firsthand, Reagan viewed frivolous overspending as a recipe for economic disaster. To his credit, Reagan called upon Americans to spend less and save more. Unfortunately, in the years since Ronald Reagan trumpeted the virtues of fiscal conservatism, the United Stated has embraced a diametrically-opposed "consumer society" logic (de Graaf, et. al., 2002): spending, regardless of savings or ability to repay, is viewed as the paramount indicator of economic vigor.
Yet, in spite of the consumer society's glorification of profligacy, there is mounting evidence that Americans have become dangerously overextended. Take, for example, the burgeoning sub-prime mortgage crisis (Kerr, 2007). Unfortunately, alarming as the financial warning signs may be, there isn't much indication that consumers, or their debt-loving society, are in a hurry to change. In an era when the national debt stands at approximately $9 trillion, and annual budget deficits remain in excess of $200 billion, (http://www.federalbudget.com/) should we be surprised when average Americans display a similar penchant for overspending?
In a consumer society, the only logic that "makes sense" is to spend, spend, spend... Beguiling as that economic philosophy might be, it does lead to fairly predictable consequences: debt, debt, debt. Fortunately, there are other sources of wisdom to which we may appeal that run counter to prevailing logic. Although the very suggestion smacks of heresy in the context of a consumer society, the surest route to economic security is to embrace the wisdom that Ronald Reagan imparted a generation ago: save now and spend wisely later.
Who knows? Farfetched as such an idea may sound, if enough Americans embrace a fiscally responsible lifestyle, maybe our representatives in Washington will be shamed into doing likewise.
de Graaf, John, David Wann, and Thomas H. Naylor, 2002. Affluenza: The All-Consuming Epidemic. San Francisco: Berret-Koehler Publishers.
Kerr, Duncan, 2007. �US Treasury Poised to Unveil Sub-Prime Mortgage Plan.�Financial News Online US, 03 Dec 2007. http://www.financialnews-us.com/?page=ushome&contentid=2449312502
Ritzer, George, 1995. Expressing America: A Critique of the Global Credit Card Society . Thousand Oaks, CA.: Pine Forge Press.
Rummel, David, 2004. The Secret History of the Credit Card. PBS Frontline. Boston: WGBH. http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/
Schor, Juliet B., 1998. The Overspent American: Why We Want What We Don't Need . : New York: Perseus Books.