What ever happened to old-fashion cash?  We remember, those small paper bills with the pictures of notables long past on them.  They used to be green, but are getting more colorful.  The questions is why use cash when we can swipe our credit or debit cards.

Credit cards were started so people could temporarily borrow to purchase expensive goods today on the promise they would repay the lender with interest in the future.  They were for the collection of goods before we could pay for them.  And the key word here is borrow.

It wasn’t long before borrowers discovered that the cards could also be used for inexpensive goods such as newspapers or cups of coffee.  And it wasn’t long before the lenders discovered that the cards provided more interest income than any other investment type. 

And as credit cards were used more and more, people ignored the balances, and simply charged what they wanted.  The system was perfect for the consumer.  Keep buying goods as if they were free with only an easy payment every month. 

Then lenders discovered they could raise interest rates without consequence.  They also discovered that their debtors were having trouble meeting their agreed-upon payments.  And so the late fee was added. 

We are now all forced to be part of the credit card system.  We must have at least one credit card to get a FICO score, necessary for big-ticket items like new cars and mortgages. 

The problem arises when we swipe away, unaware exactly how much credit is outstanding on our account.  When one credit card gets too near the maximum, we just whip out another one. 

We soon find we can only pay the minimum payment on each card each month.  The trap has been sprung.  How does this happen?  How do responsible people like us get into such a fix?

The brain wants what it wants.

In his book,
The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom
psychology professor Jonathan Haidt compares people’s behavior to a person riding atop an elephant.  The rider represents our rational outlook, newly developed as we became civilized.    The elephant represents our older, primitive attitude.  A complex maneuvering exists between our rational, analytic side and the older, impulsive, primitive side.  When the two sides work together, our brains can accomplish amazing things.  But sometimes, the elephant asserts its dominance and ignores the rider’s rational voice. 

The brain wants what it wants.  And the elephant has learned that wishes do come true as long as the card swipe is approved. 

Payday spending

In today’s recession economy, the credit card bubble is shrinking rather than bursting.  Both lower-price and middle-income major retailers are commenting on the major shift away from credit to cash and debit cards, and the trend toward payday spending.

Interviewed customers reported being unable to purchase even necessities shortly before paydays.  Retailers are reporting spending spurts in the days immediately following normal paydays.   

The last time that happened was around 1991 when the U.S. was entering recession.  In recent years when home prices were soaring, consumers tapped their inflated home equity to fund purchases made with credit cards.  It was a fantasy with no end. 

But it did end with high mortgages and no equity, high credit balances, and in the worst of conditions, no job income to pay off any of it.

Limiting credit 

Facing the decrease in credit card usage, lenders are focusing on monetizing cards to produce the highest income possible for them.  For the many people unable to live without credit, lenders are raising interest rates and late fees as well as other financial trickery to receive the most income from those who have difficulty making their minimum payments on time or at all. 

For consumers who don’t use their cards or pay their full balance every month, lenders are severely cutting credit limits or canceling the account as unprofitable. 

And consumers are receiving fewer credit card offers from all sources. 

The CARD Act

The CARD (Credit Card Accountability, Responsibility and Disclosure) ACT of 2009 taking effect in February 2010, limits lenders from:

• increasing interest rates on existing balances or in the first twelve months of a new account except when the interest is variable, an introductory period ends, or the consumer fails to comply with an agreed-to plan (almost all credit cards have variable rates)
• increasing interest rates based on unrelated account payments (e.g. utilities, other cards)
• failing to review accounts and decrease interest rates to previous levels when reasons for previous increases no longer apply (e.g. creditworthiness)
• mailing monthly statements less than 21 days before the due date
• making significant changes to accounts with less than 45 days notice
• not allowing consumers to ‘opt out’ or freeze the further use of their cards
• double-cycle billing or adjusting finance charges on previous billing cycles
• changing payment dates
• creating late fees if the due date was a weekend or lender changed address within 60 days
• charging fees for consumers to pay by mail, electronic transfer, telephone or other methods
• charging gift card fees such as dormancy fees, inactivity fees or service fees unless fully disclosed prior to purchase or expiring them within 5 years of activation
• charging more than 25 percent of the credit limit in upfront fees for sub-prime cards
• charging over-limit fees without consumer approval to accept the fee in place of credit rejection

Lenders won’t give up

Although the CARD Act attempts to limit lending practices the Federal Reserve labels “unfair or deceptive,” it will not stop lenders from poring over the legislation to find what lawmakers have missed and what is not explicitly prohibited. 

Fees and hidden calculations that are already being applied include:

• charging inactivity fees for card holders who do not use their cards, including those who have been forced to ‘opt out’ and freeze their use by aggressive term changes (they are prevented from activity and charged a fee for inactivity)
• extending the time period from 30 days to 90 days to calculate variable interest rates based on the highest prime rate in the period
• issuing a base or “floor” rate on which the interest rate will be calculated, even if the prime rate goes lower
• raising fees and removing caps on finance charges for cash advances and balance transfers so the card holder pays the higher of either the percentage fee or the minimum finance charge (can be $20 per transaction)
• calculating and charging late fees based on the card balance
• charging expedited payment fees to avoid late payments
• charging foreign transaction fees for any transaction that touches a foreign bank, instead of just currency exchanges (e.g. a foreign bank can change U.S. dollars to U.S. dollars and charge a currency exchange fee) 

CreditCards.com gives more examples of creative charges.

Retail challenge

Stores are also facing financial challenges with the pressure of controlling their credit accounts from defaults and still making customers feel welcome.  They are tightening credit and still trying to boost sales with moves like purchase discounts if a customer just applies for a card, and interest-free financing and delayed payments on secured purchases. 

Debt to Debit

To avoid going further into debt, comsumers are migrating to swiping their debit cards, with the thought that if it comes out of their checking account, it is not debt.  In 2009, membership in debit card programs increased 45% over the previous year.

And lenders are encouraging consumers to do it by offering debit-card reward programs.

Some banks are offering cash incentives to a narrowly focused segment of consumers.  But less than half of consumers who sign up actually qualify for the cash benefit.  The hooks are in the small print, requiring customers to set up direct deposit, maintain a minimum account balance, and swipe their debit card a minimum number of times per month. 

Direct deposit tends to encourage customers to stay with the bank longer because of the perceived bother to change.  Minimum account balances give the bank the use of the depositor’s money, perhaps without interest.  Using a debit card creates cash flow for the bank from interchange fees.   And having our personal checking account information allows the pitching and cross-selling of more products and services. 

Budget Affordability

We all, I’m sure, feel sorry for lenders and retailers and their financial problems, but we are probably more concerned for our own business of family and home.   It may mean hardships for some, giving up the extra expense items and buying only what we can afford, but our grandparents would be proud of us. 

We may still have to swipe on occasion, but we still have choices of how to use the system to our advantage.  The situation arose because we were unable to see our entire financial picture at once, and how much we owed in total.

Knowing that, we can keep a close eye on our statements, what things are costing us, how much per month we are spending and how much we should spend.  We can avoid and negotiate some fees and leave banks that gouge us, perhaps dealing with smaller banks or credit unions where customers are more than just a number. 

We can begin to stop being victims.

Purchasing big-ticket items like a home or a car or home appliances will still require lender dealings, but once our debts are paid down, our bookkeeping ledger will turn from red to black and that will make us feel wealthier. 

This new way of life will be strange to many, and we may have to resort for a time to payday spending, but paying for a product with our current funds, knowing that it is ours, rather than future funds and sharing ownership with the lender will give us a great sense of satisfaction.

This type of commitment requires a budget.  It doesn’t have to be a to-the-penny budget, but we can set affordability targets and limits on how much we will spend for everything from groceries to holiday gifts.  We can also see the total of what we owe in one place, all at once.    

Remember Christmas clubs and layaway plans?  They were methods of putting aside funds for holidays and gifts.  The good news is that the concept can be applied for any purpose with any steady contribution. 

And to really feel in control, we can pay for purchases and put aside funds in good, old-fashioned cash. 

We can do it.

If you would know the value of money, go and try to borrow some.
–Benjamin Franklin

Old-fashioned Cash