It’s a magic word. If you haven’t seen The Graduate, well, you oughta. In the film, “plastic” is the whispered key to all things good.
Welcome to the land of Credit Cards. They unlock good things magic-word-like; and bad things Pandora-like.
And like a gun, it’s not the credit card that can make your life miserable – it’s… you.
OK, story time. You’re Mildred, prototypical little old lady. Blue-ish hair. Champion meatball maker of Des Moines. Your family reunion is ‘round the corner and you want to treat the entire crew to dinner at Outback’s. About 15 daughters, sons, sisters, brothers, uncles, cousins, etc. are coming. At what you guess will be about $25 a head (and most of your family has one head; the people from Chernobyl County will be staying in Russia this year), that’d be over $600 plus tip plus a little extra for crazy Uncle Robert’s bottomless wineglass.
So you figure that the damage will be maybe $800. But, alas, you live in a time before credit cards - so you need to take enough cash to cover the dinner.
And here’s where bad things happen to good people.
Walking down the sidewalk, you turn the corner and wham! a scarved non-union mugger yells “Stick ‘em up”. In a flash, your purse is gone…and so is the $800 you put in there to pay for dinner. All gone. Lotta meatballs… poof.
In many small ways, credit cards make life easier by making money instantaneously available to spend on the things we need and want.
They save us to a large extent from being mugged a la Mildred. They make it super easy to pay for a movie, a #13 with fries, or to pay the cell phone bill online. You don’t even have to go inside to pay for gas. And, it’s a pretty safe feeling when you have a credit card in your pocket when you leave on a road trip; you know you can handle it if your car dies in the middle of the desert on the way to Burning Man or if your engine seizes up just after you head out for Florida. And to top things off, you can earn cash-back rewards by using credit cards.
But here’s the thing – credit cards are not just a good idea. They aren’t even just a very good idea. They are an ABSOLUTE MUST. No, someone isn’t going to break down your door with the butt-end of a shotgun and physically force you to mail in your Capital One application. It isn’t technically illegal to be without one. But maybe it should be. It’s true that having a credit card is a big responsibility, but it is one that you can’t afford to shirk. If you haven’t built up good credit, it’s going to be nearly impossible to convince a landlord that you’ll be able to make rent every month, and you may not get to sign the lease on that gorgeous first apartment you’ve fallen in love with. You’ll have to get a co-signer to buy your first car, and there’s nothing that creates family tension like getting in a wreck and slaughtering your grandfather’s credit rating. Good credit will help you find employment, lower your insurance rates – even get other credit cards with low rates. So don’t assume that you’re just going to be good with money and live off that wad of cash you keep hidden in that shoebox in your closet. Yeah… we know about it.
Now that that matter is settled, back to how these babies work.
Most credit cards companies reward you for using their card by offering cash-back on what you buy. You spend the money, they give you a small percent back. You spend the bucks, they take a little off your balance. In the same way, some credit cards use reward-points. You spend the money, you earn some “points” that you can then use to buy stuff from their catalog.
But credit cards are not just pretty pictures on plastic. There is a dark side to credit cards as well – the companies who issue them (i.e. banks) are ravenous financial predators scavenging for their next meal.
And for good reason.
Credit card companies are associations – just groups of marketing agents – owned or controlled by banks. The banks are owned by…you. The public. Investors. And investors want to make a good financial return on their investment, right? Duh. So banks—by nature of who they are, and who owns them and the demands of their shareholders—go after …you.
They look you up. And they hunt you down. They send you a zillion offers by snail mail (5 billion were sent in 2011 – more than all the Big Macs eaten, and potentially more lethal). They flash at you non-stop from banner ads and highjack you as you pass through sites like Google or Yahoo; always telling you how priceless their card is. Priceless! Credit cards are the exact opposite of priceless. Other than loan sharks (the guys with baseball bat wielding collectors) they’re the most expensive way you can borrow money—yes, borrow, because that’s what credit cards are, quickie loans – which you have to pay back at the end of each month or be charge super high interest or “rent” on that money.
Using a credit card costs several times in “rent” as much as a car loan from your local bank or a student loan to pay for college tuition. And is often ten times more expensive than what your parents pay on their mortgage. Using a credit card to pay for tuition can make a college education cost tens of thousands of dollars more.
Understandably, banks are desperately eager to give you a credit card because they make money by loaning you money. They earn “rent” on what you borrow. And they want to make piles and piles of money from you, from now until death do you part.