Plastic Money​—Is It for You?

A CALIFORNIA man, known by some as “Mr. Plastic Fantastic,” amassed a collection of 1,265 valid credit cards. Granted, this man hardly represents the average credit-card holder. However, it is widely acknowledged that the credit-card phenomenon has become a well-established feature of modern Western society.

American Demographics states that in 1986 almost three-quarters of U.S. households had one or more credit cards. There are over 25,000 different credit cards available in the United States alone. Oil companies, retail stores, and airlines issue their own cards. In 1991, Americans held 232 million valid MasterCards and Visas, the two most popular cards.

The so-called plastic-money industry is also growing in Europe, sparking intense battles among rival banks and credit companies for the patronage of eager consumers. The total number of valid credit cards worldwide is well over a billion! Why this abundance of plastic money? Who benefits the most from its use? What are some of the dangers and problems that credit-card holders face? ☞

Who Benefits?

Banks and credit-card companies earn substantial profits, not only from the fees​—including annual membership fees, late-payment fees, over-limit fees—​but also from the high interest they charge on the money owed them. But, of course, they cannot profit from finance charges unless credit-card holders incur sizable debts. In the United States alone, millions have obligingly spent themselves into perpetual debt. About 75 percent of American credit-card holders have outstanding balances on their accounts, for which they must pay exorbitant interest each month. The average American credit-card debtor owes over $2,000 on his monthly account.

In his book The Credit Jungle, Al Griffin observes that the “15 to 20 percent of cardholders who do pay their statements in full as soon as they get them do not contribute a dime to the bank’s operations.” He adds that “the other 80 to 85 percent of the cardholders make a credit card plan the most profitable operation the bank has. A modest-sized $10 million bank card operation can gross a $1.8 million profit per year.” In 1990 the U.S. bank with the largest share in the credit-card business made almost $1 billion in profit from its consumer operations, mainly its credit-card subsidiary.

Beware of the Dangers

There is a dark side to these small pieces of plastic. For example, have you ever received a telephone call from an obscure company informing you of a prize you’ve just won? Many have. To get your gift, all you have to do is answer some basic questions. But then the caller asks for your credit-card number. Why? Because in reality you have won no gift. Such a caller just wants your credit-card number so that he can make mail-order or telephone purchases on your account.

There are several types of credit-card fraud, costing hundreds of millions of dollars each year. And even when this problem does not directly affect you, if you have a credit card, you are probably paying for such scams through higher fees and interest rates.*

The real danger in credit cards lies in the hardships and suffering that come if you fall deep into debt. The Credit Jungle notes that “countless people who are able to resist the temptation to buy luxurious goods and services they can’t afford when paying cash, are totally helpless to resist temptation when they have a credit card in their hands. Many a family eats beans for a couple of weeks after paying for the lobster dinners charged on the credit card the previous month.”

But more than your eating habits can suffer if your debts consume a major portion of your income. The book Credit​—The Cutting Edge reports that “on the average, Americans spend approximately 75% of their income each month repaying loans, debts, and credit cards.”

Sadly, for too many consumers, a credit card is, not a gateway to economic paradise, but a slippery slide to long-term debt and anxiety. American consumers, for example, have in recent years been piling up credit-card debt, which has resulted in more credit-card delinquencies, defaults, and bankruptcies. In 1990, U.S. consumers owed a total of $3.2 trillion on credit cards, car loans, and mortgages! The average household owed about $35,000 and paid about $3,500 a year in interest.

Not surprisingly, personal bankruptcies have soared. In 1990 a record 720,000 Americans filed for bankruptcy, nearly a 17-percent increase over 1989. In 1991 this number went up to 800,000, and in 1992 the new record was 971,517 personal bankruptcies.

Some who find it difficult to control their use of credit cards have chosen to get rid of them. On the other hand, many are able to make wise use of credit cards without unnecessarily complicating their lives.

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