Credit Cards Going Extinct? We Don’t Think So My Business Blog

Credit Cards Going Extinct? We Don’t Think So

Okay, okay, we usually don’t hesitate to declare credit cards dead (Five Futuristic Ways to Pay without Credit Cards and Death of the Credit Card Signature) but our musings are more like utopian “what-ifs” from the distant future, like colonizing Mars or transitioning to a no carbon economy. But the Alpha Consumer blog over at USNews&WorldReport is serious about shorting the credit card industry, but not because of technological advances. Instead, Kimberly Palmer cites five reasons why credit card companies won’t survive that have more to do with consumer attitudes and market temperatures. We’re not sure how convinced we are. Let’s take a look at Palmer’s reasons:

The End of Low Rates

Especially introductory rates. Alpha Consumer touts a stat that says that average credit card interest rates have bumped up from 14 to 16.8 percent in the last two years and laments the end of lengthy zero percent APR periods. These higher interest rates and shorter introductory periods make credit cards less useful, argues Alpha Consumer. Perhaps this is true, if you were primarily using credit cards to consolidate debt via balance transfer. But there is a more important change heralded in by the CARD Act that might make balance transfers more viable today than they were before the across the board interest rate hike. That would be the stipulation that credit cards must allow you to pay off high interest balances first. In the past, the scheme went like this:

You transferred $3,000 or so of debt from one credit card to a new card with a 6 month 0% APR period.
Meanwhile, you racked up about $1,000 in normal credit charges at an interest rate of say, 13%.
After 6 months, your introductory period ends and your transferred balance starts accruing interest at 19.99%.
However, not a single dollar of your credit card payments would go towards paying down that 19.99% percent balance until you completely eliminated your normal credit card debt from purchases.

This scheme vastly expanded how much you wound up paying on your transferred balance and effectively nerfed the perks of an introductory rate, which until now, was mostly just a marketing ploy.

True, it has become more costly to carry a balance in general. But we don’t think it’s prohibitively expensive…yet.

Lower Limits, Higher Bars for Credit

Credit cards aren’t being shelled out indiscriminately to any Joe or Jane with average credit, poor credit or no credit anymore. And if they are, they’re getting a smaller credit line and less perks. Again, this seems to be a correction in the system, rather than a death knell. Credit card companies are realizing that they can’t squeeze money out of someone if they don’t have any money to extort and we’re all a little bit more savvy about subprime today than we were pre-recession. Credit still remains an integral part of the lives of those who can afford it, however. Those are the people who are financing cars, houses and college educations and they will still find value in carrying a credit card to establish and build credit in anticipation of those big ticket items.

Debit and Cash on the Rise

Debit card sales have climbed 21 percent from 2008 to 2009. More people are paying with cash, according to recent surveys. But, as Alpha Consumer points out, this is because consumers are trying to reduce their debt during an uncertain job market.

Our take: there’s less credit to go ’round (as established above) because, let’s face it, there’s less money to go ’round period. Buyer confidence is down and credit ratings are even worse, as many of us are defaulting, missing payments and refinancing to make ends meet. But we won’t be in a recession forever (hopefully). The swing towards cash and debit is more of a reflection of the economic times than the end of the credit card era. Once jobs and credit limits start to rise again, so too will credit activity.

The CARD Act Restricts the Industry’s Most Profitable Tactics

No more arbitrary rate hikes and sneaky chains of over-the-limit fees, thanks to Obama’s credit card bill of rights. Plus, one of the industry’s most profitable niches – low income individuals inextricably mired in debt (and therefore fees and finance charges) – is shrinking as many are declaring bankruptcy, defaulting or otherwise dropping like flies. Alpha Consumer says that it’s very possible that the credit card industry just might not be profitable enough to make it work.

We won’t disagree that the credit industry isn’t as profitable as it was yesterday. But it’s still got a lot going for it. Namely, interchange fees (which can be levied on debit cards, too), variable interest rates (which is basically license to arbitrarily hike rates) and a growing base of big spending, luxury cardholders who pay hefty annual fees in exchange for perks and pampering. In fact, even mid-tier cardholders are seeing the return of the annual fee.

The real losers here are the cardholders who enjoyed a glut of rewards at the expense of less fortunate cardholders who wound up paying hundreds or thousands of dollars in fees simply for being poor. Without those profits, the free stuff has already come to a screeching halt for most cardholders.

The industry will figure out a way to get theirs – they just have to figure out who to get it from.

Consumers are Getting Smarter

I, personally, like this argument, but only because it’s so flattering. The idea here is that we’ve all grown a little bit wiser after getting battered by the economic downturn and our own personal finance flubs so now we’re playing our cards right. This generation, as they say, will be akin to the generation that survived the Great Depression who wound up hoarding money in their mattress and saving and reusing Lipton tea bags in spite of their six figure incomes. A consumer revolution is on the horizon, one where we are too smart to become hobbled by crippling credit card debt.

Or is it?

Stock market speculation didn’t die when the stock market crashed in 1929.(See: Dot-com era, subprime mortgage crisis)

Accounting fraud wasn’t expunged from the Earth after Enron. (See: WorldCom, Bernie Madoff, Tyco International)

And it’s highly unlikely that carrying credit card debt – responsibly or otherwise – will go the way of the Pog and the slap bracelet. There are always new generations to repeat the mistakes of their predecessors. And there will always be the temptation to borrow beyond your means.

What do you think? Are credit cards going extinct? Or is this just a symptom of a rough economy? Let us know in the comments.

Img c/o Dan4th

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