Recently a friend of mine wrote a post Credit Cards – Close ‘em Shred ‘em & Forget ‘em! and it has really got me thinking. In fact for the last two nights I’ve actually dreamed about the post and having conversations about it.
I made my points to Matt in the comments but here is the gist of the position. I understand the desire to break out of bondage and to not be subject to the whims of the creditors. I get that. But in a desire to live life free of that bondage, the goal should be to play the game better, not vanish from the game. Here’s what I mean.
We live in a capitalist society that is fueled through business, big and small. In fact, people are called consumers, their job is to consume. Consumption is what fuels our economy and helps to employ people. Like it or not, our real world financial life is based on our credit score and paying attention to credit and debt.
Some might say that I should be against credit, after all I am the get out of debt guy. Surprisingly, I’m no more against credit than I am against sharp kitchen knives.
Why is it that people can own sharp kitchen knives and not hurt people with them but they can’t manage a piece of plastic? And do we need to either dull all kitchen knives or dispose of them because some hot head stabbed someone with a kitchen knife? That does not seem logical.
Kitchen knife manufacturers make a product that can harm and kill people, and it does. People commit suicide with kitchen knives and they have been used in horrendous acts. So what do we do about kitchen knives? Credit cards and credit has been used in the exact same way.
I worry that when it comes to credit and debt that people miss the point and claim to be powerless victims without some rights and opportunities.
Banks and yes credit unions are in the business to make a profit. That is, to earn more in fees by selling financial services than it costs them to market and sell their product, credit.
So is Citibank evil but the credit unions are more pure in some way? If you believe that you are fooling yourself. The goal of the local credit union is the same as the big bank and as far as bad practices go, credit unions are worse in some ways that the big banks are. Take the practice of holding the clear title to your car until you pay off your credit card. If a big bank did that, people would be all over the banks bitching like a spider monkey on Mountain Dew.
Source: From the tax return of a Michigan credit union.
Credit unions are sold to the public as the friendly Main Street alternative against the big bad Wall Street banks. They are mostly local institutions, that’s true. But so are the local community banks.
People think that since credit unions are non-profit groups that they charge lower rates and don’t make a profit. That is not true. Credit unions make a profit, all non-profit groups do or they go out of business. The point that the general public does not understand is that non-profit does not mean you don’t make a profit, it means you are not taxed on the profit you make. This gives the credit union a competitive advantage over the Wall Street banks and allows them to charge lower margins.
But credit unions issue Visa and MasterCard cards as well. Here are the terms of a credit union from Lansing Michigan.
Source: NuUnion Credit Union
So credit unions, the thought to be more benevolent organizations must certainly not charge late fees, overlimit fees, bounced check fees and all the other fees people label as bad or immoral. But according to the credit union card terms above, they sure do.
I don’t want to get sidetracked on the credit union bit, just wanted to show you that things are not always what you are lead to assume. And besides, the primary goal of the credit union is to guess what, sell credit. That’s where they make their money. It’s in the name. It is a Credit Union.
So is a 10% rate on a credit card more moral than say 29%? Is it the size of the interest rate that makes a financial institution more moral than another? I can’t see that argument. If charging interest is bad then it is bad across the board. Besides, I have Wall Street bank credit cards and pay 0% interest. How? Don’t carry a balance.
And while we are talking about morality. I could not help to ponder on this really big mega church I drove by the other day. It’s expanding and building another cafe and wing for its members. Is an opulent church closer to God than a basic church? Is taking more of members money to build a more stylish church less moral than a church that returns a larger majority of its money to community service? Is having better couches in the lobby more or less moral that better programs that care for people in need or trouble?
Opting Out is Not Opting In to Something Better
Like it or not, and half the people reading this will not like it, shredding your credit cards and falling off the credit grid may make you feel better, but it is painfully not better for you.
Shredding your credit cards, as my friend Matt did, may make you feel better but I still can’t see how it is a wise move. Even with shredding the cards and refusing to use them it actually hurts your future credit score since now you’ve just terminated your valuable credit history that helps to prop your credit score up and make it shine. And that credit score is important because it is used to determine things like car and home insurance rates. Insurers use credit scores as a way to gage risk and thus rates. But that’s another conversation.
Often after a difficult financial moment in life, like bankruptcy. People vow to never play with the banks again because they were “evil” or “immoral”. But it was not the bank that was evil, it was the situation. It’s not the credit card that robs people, it is carrying a balance that becomes subject to the terms and conditions of the bank. Terms I might add that are clearly spelled out, albeit sometimes in fine print, but they are there to read and review. It is the owners manual for your credit card.
Almost every argument about the immorality or evilness of credit cards can be cured with two simple statements, pay your bills early, pay them in full. If you do that, you won’t have an issue. But what if life rears it’s ugly head through accident, illness, divorce or downsizing and you find yourself unable to pay your bills. Well then my friend, you will have some issues and collections will get involved. Do you not think that credit unions have collection departments?
And if collections gets involved, we just need to play a different game. It’s not the end of the world. Trust me, it’s not.
It is not the bank that creates the painful moment. It is the underlying issue that lead to you not being able to pay the bill. It is not the gun that killed the person, it’s the person that pulled the trigger that did. And I’m not a big gun fan but clearly it is not the instrument that causes the pain, the credit card, the kitchen knife or the gun. It is how it is used.
It might be a source of pain, sure, I get that, but railing against the system might make you feel better but will not change the reality of of life in a consumer world, a capitalist world.
The goal here is not to live off the credit grid but to use it wiser, and better.
I remember doing an interview by satellite on a public radio station in Alaska. After a while we took callers. This guy called as was pissed off at Wall Street banks and refused to participate in anything that smelled like big banks or government. He wanted as far off the grid as possible. His issue, he had his $25,000 nest egg in cash in his cabin and it burned down. He wanted to rebuild but since all his worldly money was now ash and he had not used credit in a long time and had no long term credit history, no bank would lend to him.
Credit Card Companies Are Crafty. But You Can Be Also.
Rather than want out of the credit world game, why not just play the game better.
- Don’t close your three oldest credit cards, keep them open but don’t carry a balance.
- Use your cards from time to time. Pay them off at the end of the month.
- Don’t spend money on a card to get a reward point, spend wisely. Spending to get reward points as a justification is no smarter than the woman that told me she smoked a lot to get reward points off the pack to get stuff to give as gifts.
- Don’t pay interest, pay the balance off in full each month.
- Groom your credit to make it the best possible. You never know when you’ll need it.
- Pay attention to your credit score and do what makes sense to keep it pumped up otherwise it can cost you, plenty.
- Don’t care what interest rate your credit card charges you. As long as you are paying the card off it is a 0% rate.
- Don’t fool yourself that living off the credit grid is more moral or responsible than banning kitchen knives. It’s not.