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Imagine this: A world without credit
A credit card cut
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Kai Ryssdal: This being a recession and all, conventional wisdom says we ought to be living within our means -- not buying things we can't afford and definitely not buying them on credit. In fact, what do you suppose would happen if consumers got rid of their credit cards? Just cut 'em up and switched to cash only. Marketplace's Sean Cole explored a world without credit cards -- hypothetically, anyway.
SEAN COLE: Before we get into what would happen if a lot us stopped using credit cards, we should probably ask whether that's likely.
JAMES CHESSEN: Cause I don't really think it is.
James Chessen is chief economist for the American Banking Association and, of course, a big champion of credit cards. He says we have to distinguish between people who just dip their toes in the river of credit every month, and those who are drowning in it.
CHESSEN: Fifty-six percent of cardholders don't ever revolve any balance, so there's absolutely no reason why they would stop using it. They're using it for convenience.
Actually, there is a reason. Some of these cardholders are getting fed up with the banks that issue their cards. People like Mary Grace Dembeck.
MARY GRACE DEMBECK: These were the two letters that I got sent. Now the day that I . . .
Mary's a painter and children's book author and grandmother in Connecticut. The letters she showed me were both from credit-card companies. One of them was shutting down and closing her account. She felt kind of bad for them. The other said it was raising her annual percentage rate, out of the blue.
COLE: So what did you think of that.
DEMBECK: Oh, I was incensed, you know? Because I'm automatic pay, so I've never missed a payment.
And she's been trying to get off the plastic anyway. She's got four or five cards and lately she's looked at them as little enemies, tempting her to over-shop.
DEMBECK: I tried to go out the other day without any credit cards at all, 'cause I think that when I reach that I'll be a success.
COLE: So you're literally trying to leave home without it.
DEMBECK:I am.
Which brings us back to our original question, what if a lot of Americans, out of anger, or out of necessity, or just because they feel like it, decide to switch to cash.
ROBERT MANNING: Well, it's incredibly disruptive to the entire national economy.
This is Robert Manning, the guy who wrote "Credit Card Nation."
MANNING: I mean, the more cash that flows through the system, the more personal attention to money flows, the less fees the banking system will get, the higher the . . .
He talked like this for two minutes straight. And it was interesting. He managed to wind his way from the economic impact to this vision of a total cultural shift.
MANNING: Forcing people to save and plan, and by the time they actually save and plan to purchase an item, they may decide that they really don't need it. I mean, it will be a complete transformation of American society.
And you know how often those happen. Manning says a lot of people still expect things to go back to normal, so why change their habits.
Of course, it's not like America was always a credit-card nation. Used to be cash was the only option. And some people are still living that way.
People like the legendary country singer Wynonna Judd. For a long time, she was a real spendaholic -- says she lost her fortune at one point. And then she cut up her credit cards.
WYNONNA JUDD: When I go into Target or any of these stores, I pull out my little money envelope, and I hand it over to the girl, and she kind of looks at me like, "You're Wynonna Judd. Where's your, you know, platinum-plated credit card that says the fabulous touring Wynonna Judd of love?"
The money envelope is a thing with her. It has to have bills of every denomination, including a couple hundreds all facing the same way. She was ready to whip out one of the hundreds the other day, at Starbucks of all places. But she stopped herself.
JUDD: And I'm thinking, "Wait a minute, whoa, whoa, whoa, whoa, time out. What am I gonna do with this, this coffee press? I don't press coffee!" And I just remember thinking this is really ridiculous.
COLE: And do you feel like it's because you're carrying around that envelope of money instead of a credit card that you're able to do that?
JUDD: I think so.
So Starbucks loses a sale. Wynonna Judd can still live with herself. It's a mixed bag, this cash-only proposition. And again, there's no telling how many potential Wynonna Judds or Mary Grace Dembecks are out there, trying to leave home without it. Or why they might choose to. Sitting with Mary in Connecticut, I re-read the letter that made her incensed. It actually said they were raising her cash-advance rate.
DEMBECK: OK, so I've never taken a cash advance.
COLE: So you wouldn't really have to worry about this.
DEMBECK: So I shouldn't have gotten upset with them in the first place?
COLE: Maybe.
But she's still going to switch to cash only, she says. Using the cards feels likes she's getting something for nothing. And using cash hurts, but at least it feels real.
I'm Sean Cole for Marketplace.
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There is a game called Bux ("your money game") which demonstrates not only the spending of cash, but the making of cash as well. We tried once to play it using credit and every player ended up in the hole.
Chris, thank you for your candor and honesty.
Charles
Then there is, of course, the root of much of the credit problem: why the bail outs of the banks backfired and the consumers once again are getting the shaft. Nothing in the bailout specified how banks must use the money, so they are using it for day to day operations, plus are sitting on the bad properties they now don't have to sell. They'll just wait a few years until they can double their profit. So none of the bail out money goes to where it was intended -- to help consumers and if and when the banks decide to dole out some monies through credit, consumers get stiffed with the rising credit card interest rates. I just did a straw poll of neighbors who were refinancing - all with golden credit and good incomes - and the lenders are putting them through hell and unnecessary delays. Same old, same old. What a system.
I will use a CC for convenience. I pay my balance every month. I get 2% cash back from Schwab. When that stops or they ask me for an annual fee greater than a few months of cash back, I will say buh-bye. I do worry that I spend a bit more than I would if I wrote checks for more things. Cash and checks hurt more - which is a good thing. But why should I pay cash and essentially subsize the plastic users. Prices at retailers should reflect cash discounts - like Amoco used to do for gasoline.
I have some friends who are really good at living within their means, and they got those BankOne Rewards cards for their regular purchases. They earned enough credits to get two free plane tickets to Hawaii by just using the cards to buy groceries, gas and hardware store purchases. Of the interest was ridiculous, but they paid it off every month.
I was rather disturbed by Market Place encouraging the use of credit cards when there are so many better alternatives for paying for a purchace, like cash or debit. Why is Dave Ramsey one of the only people who encourage people to get out of debt.
Money does not go away when you don't pay for items on a credit card. If you earn money and live you spend money. If you save money you can make purchaces without buying on credit. Reporters are writing about how people are defaulting on credit cards etc. This would not be a problem if those same people had been fiscally responsible with their personal finances. If they had an emergency fund they would not imediately go into forclosure on a mortgage if they lost their job.
When can we start teaching personal responsibility and personal finance? Budget is not a four letter word, why is a plan bad?
I would use debit cards. I would lose to much cash on the ground if it was money. However, I would lower my daily authorization on my debit card to $750 this way, I can still use it on weekends and holiday's. I think we are going to see a shift back to Cash and debit cards and less credit cards despite the risk associated with both. If you use debit cards, make sure you have online banking. This way if you card get comprised, you can catch it faster. I still think the economy can handle the shift. You might even see some merchant start taking check again.
At the end of his report, Sean Cole states, "It's a mixed bag, this cash-only proposition. And again, there's no telling how many potential Wynonna Judds or Mary Grace Dembecks are out there, trying to leave home without it."
Actually Sean, there is a way to tell how many potential Wynonna Judds or Mary Grace Dembecks are out there. Just check the ratings for Dave Ramsey's daily syndicated radio talk show which boasts over 4 MILLION listeners. You obviously aren't familiar with him otherwise, you would have interviewed him instead of Wynonna Judd for this story.
Dave Ramsey is the leading talk show host/financial guru who advocates operating your household on a cash only basis. He's written several books and has a whole seminar series devoted to what he appropriately calls "Financial Peace". He is well kknown among his followers for financial quips such as "don't even try keeping up with the Joneses - they're broke!"
Operating on a strictly cash basis is a contrarian lifestyle in this consumer driven, buy-now-pay-later mentality environment that we've grown accustomed to. But we're now seeing, on a massive scale, the wreckage that has been caused by decades of collectively living beyond our means. I sincerely hope that the reporter Sean Cole and Marketplace don't make the mistake of marginalizing the concept of living on and within a budget. It certainly cannot be any worse that what we've been doing thus far.
This is all true. If you carry around only cash then you will never have debt and you certainly don't have to pay interest if you pay cash. But as soon as you start cutting up your credit cards you might as well kiss your credit score good bye. My dad cut up $56,000 worth of credit cards and his credit score went from 830 to 610. Without debt you have to credit score and without a credit score you can't get financing for anything, including mortgages.
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