Good credit is like a golden key to the city. A good credit score gets you access to apartments, mortgages, and sometimes even jobs. A bad credit score will follow you around like a bad stench that you can't wash off.
I don't own a credit card. At age 25, I've made the conscious decision to avoid getting one since I was 17, when I opened a student bank account and began receiving credit card offers in the mail. Every time I'm tempted toward one, a distinct memory comes back to haunt me: my parents sitting at the kitchen table, trying to even up with their credit card bills. I remember how my mother turned to me and warned me about how dangerous they are. She carefully taught me not to spend money I don't have, and I always figured that with a debit card I'm basically constrained to stick to this program. But with a credit card, I open a Pandora's box of someone else's money.
I'm not in a majority. Seventy-eight percent of consumers own a credit card, and the average cardholder has 3.5 credit cards. But credit card usage is falling, particularly in this economic crisis, and card companies are reporting drops in customers. Many consumers are now wary of company practices exposed by the financial meltdown -- and are looking to simplify finances by paying off (and staying away from) debt.
Yet ever since I opened my first bank account, I've been repeatedly told -- by the financially dumb and savvy alike -- that I have to get a credit card in order to have good credit. And there is an unmistakable undertone to these admonishments that I'm naïve if I don't. It doesn't matter that I've never missed a payment on anything in my life. I pay rent on the first; I pay my electric bill when it comes in; I make every payment to my student loans ahead of schedule. But when my credit score is stacked up against someone who has 3.5 credit cards, I look less responsible because there is less proof of my ability to meet financial deadlines.
As our colleague Josh Rosner has pointed out, credit cards should really be called debt cards, since that is what you get when you open an account -- debt. Any money spent with a credit card is money you immediately owe to someone else. Credit cards are designed to give a false sense of wealth and then hit you with a load of fees. Rosner notes that it all began in the late 1970's, when consumers moved from charge cards to revolving debt issuance. This changed the consumption patterns of the whole country. Now, the average credit card debt is about $3,700 per adult, or $7,400 per household.
And opening the account is the easiest part. As New Deal 2.0 contributor Elizabeth Warren has repeatedly noted, most people can't even understand their contracts, and the fees can easily gobble up your savings. Hence Warren's fight for a Consumer Financial Protection Agency as an essential part of financial reform -- it promises to make contracts actually readable, so that people know what they're getting themselves into. It will also reign in the wild west of deregulation that credit cards now exist in. Warren has been making this argument since way back in 2007, when she pointed out that credit products fall through regulatory cracks (as opposed to toasters and microwaves that could never put consumers at so much risk). With stricter regulation will come better products and innovation in the consumer's interest. Credit cards will no longer be subject to a patchwork of state regulations, leading to a race to the bottom, but one uniform rule. Interest rates will be regulated. And rules will have real enforcement behind them. With these changes, credit cards could evolve to work for the consumer, rather than functioning as a financial booby trap.
But what if I want to live without debt cards altogether? Because I've made the choice to stay away from these dangerous cards and live within my means, I'm blocked from certain activities. Renting and buying houses or apartments is just one of those. There are a number of much smaller things that I'm excluded from -- that add up. For instance, some car rental companies don't let you pay with debit cards; you can only pay with a credit card. The MTA in New York City won't let me buy a refillable Metrocard without TWO credit cards on file (it's hard to get your bank to issue you two debit cards). And God help you if you don't have a Visa or Mastercard logo on your debit card -- at that point it's practically useless. Society is rigged in favor of owning a credit card, and it takes some real maneuvering (or just plain exclusion) to stay away from them. While grassroots campaigns such as Move Your Money are speaking out against predatory credit card policies, I have yet to see a movement to undo the deep connection between consumers and credit cards. (Although if anyone knows of one, I'd love to join it!)
We've constructed a world in which the risky choices have been turned into the reasonable ones. While financial reform will hopefully curtail the risks banks took with their own money and put limits on what credit card companies can do, we could use some restructuring of society to decentivize personal risk taking. We shouldn't reward -- nay, expect -- people to sign up for credit cards at age 18. We should reward prudent decisions. That would take some serious change.
Bryce Covert is Assistant Editor at New Deal 2.0.