Wednesday, February 17, 2010
Just Say No? Fact or Fiction? ABC NEWS NOW Special with Ellie Kay
Revolving credit—largely made up of credit card debt—fell by nearly 20% in November, the largest drop on record, according to the Federal Reserve. Credit card usage is definitely slowing due to less borrowing by consumers as well as banks’ tighter lending standards. Through October, the number of new credit card accounts was down 46% from the same period in 2008, according to Equifax.
The average consumer in America owns five credit cards but there has been a slow emergence of a “no-credit-card” lifestyle among former credit card holders. These “cash only” buyers are convinced their numbers will grow as consumers become increasingly disenchanted with credit card industry practices. Cash-only can be inconvenient, but these consumers say it is worth it. **********
Q. Some of the consumers who have sworn off credit cards say that they are doing it in order to “get back to basics” and their “desire for a simpler lifestyle.” How do you think getting rid of credit cards can help them achieve their goals?
Ellie: I’ve done research on and talked to those families who have downsized, sold their rental property, small businesses or material “stuff” and used that money to pay off most of their debts. They’ve made these radical lifestyle choices in order to go back to the “less is more” worldview in a quest for the simple life. One of these families has a blog, ManVsDebt.com and reading about their experiences is both inspiring and challenging. In fact, our own family has “been there and done that” to a certain extent, when we had a lot of consumer debt and opted to become a one car family for a season. I think that there is an advantage in that you have fewer bills, fewer arguments over money with your spouse and fewer headaches. There is a lot to be said for the simple life—and I’m not talking about Paris Hilton’s “Simple Life” but a more streamlined lifestyle that if free of the trappings of consumer debt.
Q. According to a July 2009 survey by Auriema Consulting Group, 28% of consumers have shifted the way they pay for purchases in the past year with an increase in debit card usage coming at the expense of credit cards. In fact, 46% of consumers surveyed said they believed debit cards helped control their spending. Do you think the increased acceptance of debit cards makes the “cash life” easier to achieve?
Ellie: A decade ago, consumers who didn’t want to use credit cards had two choices: they could carry around a lot of cash or write a check and hold up the grocery store line. I do think that with the increased use of debit cards, we have a situation where you can blend the discipline of paying cash with the convenience of using plastic. Most merchants, including online retailers, accept debit cards if they accept credit cards. Plus, there are other options such as paypal that help those consumers who want to use a debit card instead of a credit card. Since debit cards are broadly accepted I think that the decline in credit card usage is due primarily to a desire by people to get a better handle on credit card spending rather than a rejection of credit cards.
Q. Abandoning credit cards seems to be a much more radical step than using them less. Furthermore, consumers who don’t own a credit card often have a hard time renting a car, among other inconveniences. What are some of the drawbacks of cutting up those cards?
Ellie: Getting rid of all of your credit cards is a radical step that can have a significant impact on your ability to function in a card based society. Not only is it almost impossible to rent a car, but some hotels won’t book a room to travelers who want to pay with a debit card or cash. Those that accept debit cards may place a hold of several hundred dollars in the customer’s bank account, which could cause checks to bounce. Debit cards also provide fewer consumer protections than credit cards. If fraudulent charges show up on a credit card bill, the card holder can refuse to pay them. Federal law limits credit card holder’s liability to $50 of the fraudulent charges and most card issuers have zero liability policies for victims of identity theft. Whereas money stolen from a debt card is immediately removed from the card holders bank account, which means they must fight to get funds reimbursed. All of these drawbacks don’t even begin to discuss the consumer’s ability to develop good credit.
Q. Many consumer experts say that responsible use of credit cards is one of the most effective ways to build a good credit record, how would a “cash or debit card only” approach impact the ability to develop a good FICO score?
Ellie: Personally, I don’t agree with a cash only approach, especially for people in their early twenties who are trying to develop a good credit history in order to get a car loan, rent an apartment or secure lower cost auto insurance—all of these are dependent upon a good FICO score. Not to mention the fact that more and more employers are checking an applicant’s credit score before they consider employing them. The philosophy is: if you can’t manage your own money, why should I let you manage my company’s resources?
I think it's important to stress the responsible use of credit cards. We have several of our children who are now young adults and we coach them in securing a credit card in order to build a good score.
Q. What are some of the guidelines you advocate among first time credit card users so that they can build a score without building consumer debt?
Ellie: If possible, their first card should be secured at the same lending institution where they have a checking account and a savings account. It should have a low limit, such as $500, and be a major credit card rather than a department store card. Then they should follow three rules: First, they should make sure they try to pay off the balance each month and pay it on time. Second, they should never charge more than 30% of the available credit in order to keep the proportionality or utilization aspect of their credit scoring healthy. And finally, if they cannot pay off the full balance, then they should always pay more than the minimum balance due in order to have their score reflect that they are paying down a balance.
America's Family Financial Expert (R)