Cutting Up Our Credit Cards

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Cutting up credit cards is a classic solution to the temptations of easy credit, but as Americans have become more and more reliant on plastic, there's been a resurgence of interest in swearing off credit entirely. The Atlantic's own business blogger Megan McArdle took the plunge, embracing the cash-only plan espoused by David Ramsey, as she explains in a magazine article here. But she has doubts that going plastic-free would work for everyone. Should the government try to nudge people away from credit cards? Here's the discussion, as the online commentators ponder recession lessons:

  • Credit Card Companies Don't Want You to be Responsible  Mike Konczal cocks an eyebrow at Visa's personal finance lessons from the pages of the Atlantic, and points out a fundamental fact that should make us all a little wary:
Credit card companies refer to those who pay off their loans in full as 'freeloaders' and 'deadbeats.' As opposed to eras with usury caps, where credit card companies had to be more diligent with how they lent money, the credit card company's profit model can be, and is, focused on consumers that are in over their heads running large balances at high interests. And as opposed to those eras, the relationship is severely more adversarial as a result.
  • Debit Cards Not Perfect Either  At Mother Jones, Kevin Drum notes that even debit cards are guilty of obscene rates: "overdraft fee," he says, is just another name for "short term loan" for times when you don't realize your account is low. He thinks the government should regulate.
  • 'Adverse Selection' Now in Credit Cards  Ezra Klein is worried. The Washington Post blogger explains that as Americans sour on debt, credit cards, and high fees, "the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words." So the problem is that "the people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again."
  • Adverse Selection Good, Credit Cards Bad   Finance blogger Felix Salmon is just fine with the cycle of adverse selection. "Credit cards are useful payment devices, but atrocious borrowing devices," he says, and ideally everyone would be "us[ing] charge cards for transactional purposes, and personal loans for credit purposes. The way we're going to get there is, essentially, by taxing the stuff we want less of--and that means increasing the interest rates and annual fees on credit cards"--precisely what Klein is talking about.
  • But Don't Legislate That  The Atlantic's Megan McArdle, who tried a strict no-card regimen in preparation for an article about debt, isn't so sure. She's a fan of her new anti-plastic life, but doesn't think "personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect--if your car breaks down and you can't get to work, you don't really want to wait until the bank approves your personal loan to get the car fixed." In short, even in lower income brackets, "there are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off." The conclusion? Anti-credit card and anti-debt legislation might not be the best idea.

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