Lifetime Habits
Last fall, I received an email from a long time credit card industry employee. I ended up corresponding with the author, and ultimately, I posted my interview with the insider as a three part series on this blog.
I would like to revisit one aspect of the conversation:
JSteele: In my experience, there seems to be three kinds of credit card customers, 1. the “deadbeats” that I described (like myself) who always pay their balance in full, on time. 2. The trapped revolvers, who you described, who often pay the minimum, and sometimes late fees and over the limit fees. 3. A small number of people in between who occasionally carry a ba`lance, but pay it off in a few months. Would you say this is accurate? Do you know what the approximate percentage of each is among Americans? Do you think these are lifetime habits, or are a significant number of people move between groups?
Insider: I would believe that the 3 groups are basically lifetime habits, with some minor switching around on people’s part when their situation changes. FYI – I don’t carry a balance, but if we are out of work, I will have to carry a balance to make ends meet.
One of the realities I am faced with when writing for this blog, is that I am writing for multiple audiences. I would love to convince everyone to join me in the “deadbeat” club, paying off all of their balances in full, on time, and every month. I would also love to convince people to drink in moderation, and never use drugs. I don’t think I could be completely successful in either effort.
Credit Card Use Is A Lifetime Habit
As the great financial planner Yoda once said, “Once you start down the path to the dark side, forever will it dominate your destiny”. You won’t become Darth Vader if you carry a balance on your credit card, however, it will always be very difficult to get out of that habit in the future. First, there is the obvious financial difficulty of paying off a debt later, if you don’t have money for it now. This is compounded by all of the interest you will be paying on all of your charges, from the moment you make them. As I have pointed out so many times, people who pay their balance in full are really getting a free loan from their credit card company for up to 50 days. Their charges do not accrue interest if they are paid in full, while anyone with a balance is paying interest from day one of every purchase. This will not change when the Credit Card Bill of Rights goes into effect next year.
Lately, I have come to realize that the financial difficulties in becoming a “deadbeat” are not as challenging as the psychological hurdle it takes to go from being a “revolver” to a “deadbeat”. It is so easy to spend money when you know that you only have to pay for a fraction of the purchase at the end of the month. It is so easy to rationalize or dismiss the reality that you will have to pay that small sum every month for a long time. It is even easier to forget that, ultimately, that purchase will cost you far more than the price on your receipt. It is also very difficult the quantify the cost off all of the interest you are paying from day one on all purchases, once you fail to pay off your balance in full.
Once you put all of the problems with carrying a balance in the back of your mind, you are left with the habit of just charging everything. For many people, reward cards make it so much worse. They make you feel as if you are actually getting something back. The reality is that if you are not paying your balance in full, and on time, every month, your reward card is a foolish waste of money. I hate to be so blunt, but the interest you are paying will far exceed the value of even the best reward. I can show you the math, but trust me, you are being had.
How Do You Jump From Being A Revolver to Being a Deadbeat
Frankly, I can’t offer you a quick fix solution. First, I am not an expert in addiction, which revolving debt seems closer to being than a true financial problem. There are no shortage of web sites offering tips on spending less and saving more. I think the problem is deeper than that. It goes to the heart of the human composition that allows habits like gambling, drinking, and drugs to thrive and flourish. When those impulses are channeled to constructive activities, you can achieve tremendous success in sports, business, or the arts. When your unbreakable habits and rationalizations affect your finances, the results are tragic. People using credit cards as a method of finance are forfeiting massive amounts of their income over their entire lives.
It is not as sad as drug addiction, but considering how hard people work, and how much time people spend away from their families to earn money, it is depressing.
