Looking from the outside, it seems that people in the US are always using credit cards as opposed to debit cards, and I don't really see a good reason for that. I have owned credit card in the past, and I could get one easily now, but I don't see any reason to: I have money in the bank, I want to spend it, and I don't need to lend anything.
Why and how does _credit_ becomes the first and default way of payment?
Because credit cards offer better protections from fraud making the consumer not liable. Debit transactions don't have that and they are also linked straight to your account so theres also additional risk where if someone steals the money using your debit information it's just gone.
If you are able to pay off your credit card balance each month, you can earn rewards points on every purchase which is money back in your pocket. Even if it seems like a tiny amount, in the long run, you are leaving money on the table using a debit card as opposed to a credit card for most of your purchases.
The big caveat being you MUST pay the balance off each month to avoid paying interest otherwise you are losing money by using a credit card.
- Point schemes. Every card has some sort of points system that encourages use. The best programs are often tied to specific products like airlines. Sometimes there are multipliers on specific categories of use like gas or travel. More expensive cards have better points programs.
- Protection. You pay with the bank's money, not yours. This means you have an extra buffer to protect against fraud, and the bank is more incentivized to resolve issues. On the flip side, banks can put pressure on merchants by raising/lowering their transaction rates if they are consistently bad actors.
- Card holder benefits. Often cards have extra things like car insurance for car rentals built into the card. They also give you access to a cash line of credit in emergencies.
- Builds credit. If you don't have other major debts like a mortgage or car loan, your credit score can be low, because the banks rate unknown borrowers as risky. Consistent credit card usage alone can give you a medium-high rating, so when you do need to borrow for a home, you can get a better rate. This is a bit of a racket overall, but its better than a random banker judging you based on their personal bias.
If you pay off your card in full every month, the only cost is the yearly fee, which varies by card, my current one is a mid range card for $50/year. Usually you need to spend a few hundred to thousand a year for the benefits to outweigh the cost. That said, this whole system preys upon those who don't pay every month/don't their card enough to benefit from it.
I was taught credit cards were dangerous, and stayed away from them for years. I'm glad I never racked up debt when I was younger. But as a responsible adult, they are a boon.
Credit cards have better consumer protection than debit cards.
You are on the hook for like $50 max of fraudulent credit card, and like $500 of fraudulent debit. If you don't catch debit in time, you might be liable for all of it.
At least in the US with the regulations here, there is no good reason to ever use a debit card. Credit cards are superior in every way.
Paying by credit card gets you:
A 0% loan for 4-6 weeks. Not huge but it's free money.
Better fraud protection (similar, but better; look it up)
A firewall between fraud and your bank account (fraudulent charges never hit your bank account balance, unlike debit cards where the money is gone and you get refunded later)
Cash back or points or other benefits. Not huge but it's free money.
This blog has a great post on how credit card systems work, and I think it goes a long way to explaining how CC's became so popular in the U.S. in particular:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.
At the individual level, leaving 2% or more of cashback and an interest-free loan of at least a month on the table is just a bad economic decision.
At the aggregate level, it of course costs everyone dearly, since the cashback is ultimately just paid for by consumers anyway – minus generous issuer profits.
They offer more protections for the purchaser than a debit card with no direct additional cost as long as the bill is paid in full. They also often provide additional incentives like some percentage cash back.
On top of protections, rewards, etc., you're gaining the time value of money.
You shouldn't be keeping your savings in the bank, you should be keeping them in investments. When I charge something to my card, it's an average of 45 days until it gets debited from my bank account. That's 45 days that money can be in investments and profitable.
It doesn't matter much over just one or two months (and will be swamped by the direction of the market anyways), but over a lifetime it adds up.
Don't ever pay now when you can pay later, if you can invest your money during that gap.
Because it builds credit, and most credit cards these days have points/cash back programs, the caveat being you have to be very diligent about budgeting and ensure you pay the balance off in full every month.
Historically it's explained as rapid inflation. IMO also due to being pre-Internet tech. Credit card "payments" can be completed offline and batch processed.
I don't use credit cards for the credit; in fact mine are completely paid for every statement. They are used for the customer protections and other provided "free" benefits. If some scummy or outright scam-y thing is charged to my Amex, I know I will have Amex on my side. If my card is stolen, Amex will refund any fraudulent charges and overnight me a new card; I probably won't get my debit card overnighted, though they will probably refund the fraud. The other thing is credit card points, which are essentially a benefit paid for by credit card processing fees charged to businesses. Many cards also offer access to "private" airport lounges. And other benefits I'm forgetting off the top of my head.
Additionally, having high credit limits, low usage, and older accounts improves credit scores for loans/etc.
No interest is charged if there is no balance carried statement-to-statement, so why bother with silly debit pins and such.
That's how it becomes the default way of payment; it's not really "credit".
Because wages are insufficient. Credit fills the gap to survive. Half of bankruptcies in the US are from medical debt, for example. In 2023, approximately 36.8 million Americans, or 11.1%, lived below the poverty line. ~50% of Americans carry a balance, and the average U.S. household with credit card debt has a balance of around $6,065.
This article is actually really interesting and has non-obvious findings.
The tl;dr is that it's not mostly due to defaults or for rewards programs.
But rather due to very high operating expenses (4-5% of dollar balances!) driven by marketing.
And also because the lending banks can't diversify. The risk of default is essentially magnified because you can't do anything if the economy turns bad and everybody starts defaulting together at the same time.
I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio. By lowering the default risk significantly lenders should be able to offer loan values closer to car loan numbers than loan shark numbers.
I think people with enough assets to secure such a card might be those less likely to carry a balance, but maybe a lower interest rate would entice them.
>I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio.
What's the difference between that and transferring your credit card balance to your HELOC? You don't pay any interest on credit cards within the grace period on your bill, so this only adds marginal convenience
> I wonder if there is a market for secured credit cards with low interest. Maybe backed by a HELOC or stock portfolio.
I would think the overlap between people who need to carry a balance on their credit card and those who have a HELOC (own a property with significant equity) or have a non-trivial stock portfolio, is rather small.
Let’s just say you’re a wealthy consumer with a million dollars in the bank. You’d still buy things with a credit card, why?
1. Purchase protection (insurance)
2. Chargeback protection
3. Rewards either points or “cash back”
4. Merchants hardly ever give cash discounts anymore, credit card fees are baked into the price of everything so you’re going to pay for the advantages above and receive nothing in return, plus have the burden and liability of carrying cash.
Merchant side.
1. CC fees are high so we add 3.5% to the retail price of everything. Someone pays cash? Good, a small bonus.
2. Merchants are being charged the same for “debit” cards which allow electronic payments from bank accounts, coming with the same chargeback risks and fees as a CC.
So what the heck assume the worst for every transaction.
How to fix this. Does it need fixing? If the gov is going to push everything to electronic payments, you might as well get the rewards.
The trap, if you’re not paying off your balance every month, the rewards are nothing and the interest rate is crippling.
1. For the consumer, paying off the balance due at the last minute gives you an interest-free loan on your spending for an average of 6 weeks. Let's say you spend $1000 per month. At 5% interest, that saves you about $30 a month.
2. It gives you an itemized list of what you spent.
It reminds me of an article long ago that explained how Amazon could make money selling items at cost. a) they get paid by the customer right away b) they don't pay the vendors for 90 days. Thus, Amazon gets paid interest for 90 days on the volume of business they do, which is very large.
Not many people seem to understand the time value of money, certainly it isn't taught in school. It's not just about mortgage interest rates. It's everything that involves money.
Cash isn't necessarily cheaper for merchants. They have to deal with depositing it, there's a risk of theft during transport, employees are more likely to steal it, there are losses from counterfeit money, and it might take longer to process the transaction.
Cash is not the bonus you think it is. Few have calculated the risk of robbery, (both employee and otherwise) counterfeit money, miscounting, and all the time spent counting and recounting cash. Having been mananger of a fast food in a previous life just my time to count cash was 1% of gross income and the other clerks similar - divided over each customer.
Related to charge backs, it's a security wall between theft and your actual cash. FCBA covers credit cards but not debit cards. While many banks will work to resolve fraud, your cash will still be locked up during that time.
These are available on debit cards as well. (Both by law, i.e. Regulation E, and both Visa and Mastercard requiring issuers to provide zero liability policies to consumers.)
> 3. Rewards either points or “cash back”
Which consumers more than pay for themselves – all consumers, including those paying cash.
I also hate having to carry a brief case of money around.
Seriously though while the purchase protection is nice, so is the ability to cancel a lost or stolen card. And if course the cats is slightly smaller than one million dollar bills
If everyone suddenly developed self-discipline with money over night, the need for credit cards would disappear. Emergency use? replace emergency credit card with emergency savings and a bit of self discipline. Buy now pay later? wait until later.
Because credit cards are a scammy middleman that has dug their nails deep into the political and financial worlds that lets them bully merchants into using them while pretending to be a benefit to consumers. In reality they just drive the price up for everyone, and then push a few percentage of the markup they pocketed onto consumers to appear useful. Consumers lose in paying higher prices, merchants lose by money being siphoned away to a 3rd party.
[+] [-] golergka|1 year ago|reply
Why and how does _credit_ becomes the first and default way of payment?
[+] [-] Enginerrrd|1 year ago|reply
[+] [-] skadamou|1 year ago|reply
The big caveat being you MUST pay the balance off each month to avoid paying interest otherwise you are losing money by using a credit card.
[+] [-] dexwiz|1 year ago|reply
- Point schemes. Every card has some sort of points system that encourages use. The best programs are often tied to specific products like airlines. Sometimes there are multipliers on specific categories of use like gas or travel. More expensive cards have better points programs.
- Protection. You pay with the bank's money, not yours. This means you have an extra buffer to protect against fraud, and the bank is more incentivized to resolve issues. On the flip side, banks can put pressure on merchants by raising/lowering their transaction rates if they are consistently bad actors.
- Card holder benefits. Often cards have extra things like car insurance for car rentals built into the card. They also give you access to a cash line of credit in emergencies.
- Builds credit. If you don't have other major debts like a mortgage or car loan, your credit score can be low, because the banks rate unknown borrowers as risky. Consistent credit card usage alone can give you a medium-high rating, so when you do need to borrow for a home, you can get a better rate. This is a bit of a racket overall, but its better than a random banker judging you based on their personal bias.
If you pay off your card in full every month, the only cost is the yearly fee, which varies by card, my current one is a mid range card for $50/year. Usually you need to spend a few hundred to thousand a year for the benefits to outweigh the cost. That said, this whole system preys upon those who don't pay every month/don't their card enough to benefit from it.
I was taught credit cards were dangerous, and stayed away from them for years. I'm glad I never racked up debt when I was younger. But as a responsible adult, they are a boon.
[+] [-] jwiz|1 year ago|reply
You are on the hook for like $50 max of fraudulent credit card, and like $500 of fraudulent debit. If you don't catch debit in time, you might be liable for all of it.
[+] [-] jjav|1 year ago|reply
Paying by credit card gets you:
A 0% loan for 4-6 weeks. Not huge but it's free money.
Better fraud protection (similar, but better; look it up)
A firewall between fraud and your bank account (fraudulent charges never hit your bank account balance, unlike debit cards where the money is gone and you get refunded later)
Cash back or points or other benefits. Not huge but it's free money.
[+] [-] rybosworld|1 year ago|reply
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The highlights in my own words:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.
[+] [-] lxgr|1 year ago|reply
At the aggregate level, it of course costs everyone dearly, since the cashback is ultimately just paid for by consumers anyway – minus generous issuer profits.
[+] [-] thfuran|1 year ago|reply
[+] [-] mjamesaustin|1 year ago|reply
So Americans are forced to use credit cards and enrich the companies offering that service, because using a debit card carries risks.
[+] [-] crazygringo|1 year ago|reply
You shouldn't be keeping your savings in the bank, you should be keeping them in investments. When I charge something to my card, it's an average of 45 days until it gets debited from my bank account. That's 45 days that money can be in investments and profitable.
It doesn't matter much over just one or two months (and will be swamped by the direction of the market anyways), but over a lifetime it adds up.
Don't ever pay now when you can pay later, if you can invest your money during that gap.
[+] [-] goodoldneon|1 year ago|reply
[+] [-] forestgreen76|1 year ago|reply
The problem is, most people don't do that.
[+] [-] numpad0|1 year ago|reply
In this day and age? Inertia?
[+] [-] diamondlovesyou|1 year ago|reply
Additionally, having high credit limits, low usage, and older accounts improves credit scores for loans/etc.
No interest is charged if there is no balance carried statement-to-statement, so why bother with silly debit pins and such.
That's how it becomes the default way of payment; it's not really "credit".
[+] [-] floatrock|1 year ago|reply
Overdraft fees hit harder than interest
[+] [-] unknown|1 year ago|reply
[deleted]
[+] [-] ponector|1 year ago|reply
In EU rewards are shit, and the only reason to keep credit card is to be able to rent a car during summer vacation.
[+] [-] toomuchtodo|1 year ago|reply
Credit cards are expensive short term financing.
https://www.healthsystemtracker.org/brief/the-burden-of-medi...
https://www.stlouisfed.org/on-the-economy/2024/may/which-us-...
[+] [-] crazygringo|1 year ago|reply
The tl;dr is that it's not mostly due to defaults or for rewards programs.
But rather due to very high operating expenses (4-5% of dollar balances!) driven by marketing.
And also because the lending banks can't diversify. The risk of default is essentially magnified because you can't do anything if the economy turns bad and everybody starts defaulting together at the same time.
[+] [-] ternaryoperator|1 year ago|reply
[+] [-] hx8|1 year ago|reply
I think people with enough assets to secure such a card might be those less likely to carry a balance, but maybe a lower interest rate would entice them.
[+] [-] gruez|1 year ago|reply
What's the difference between that and transferring your credit card balance to your HELOC? You don't pay any interest on credit cards within the grace period on your bill, so this only adds marginal convenience
[+] [-] jjav|1 year ago|reply
I would think the overlap between people who need to carry a balance on their credit card and those who have a HELOC (own a property with significant equity) or have a non-trivial stock portfolio, is rather small.
[+] [-] vonneumannstan|1 year ago|reply
[+] [-] lxgr|1 year ago|reply
[+] [-] spwa4|1 year ago|reply
[+] [-] andrewmcwatters|1 year ago|reply
Debit cards have the same liability protections, and there are debit cards with cash back as well.
[+] [-] gruez|1 year ago|reply
[+] [-] unknown|1 year ago|reply
[deleted]
[+] [-] 486sx33|1 year ago|reply
Merchant side. 1. CC fees are high so we add 3.5% to the retail price of everything. Someone pays cash? Good, a small bonus. 2. Merchants are being charged the same for “debit” cards which allow electronic payments from bank accounts, coming with the same chargeback risks and fees as a CC.
So what the heck assume the worst for every transaction.
How to fix this. Does it need fixing? If the gov is going to push everything to electronic payments, you might as well get the rewards.
The trap, if you’re not paying off your balance every month, the rewards are nothing and the interest rate is crippling.
[+] [-] WalterBright|1 year ago|reply
2. It gives you an itemized list of what you spent.
It reminds me of an article long ago that explained how Amazon could make money selling items at cost. a) they get paid by the customer right away b) they don't pay the vendors for 90 days. Thus, Amazon gets paid interest for 90 days on the volume of business they do, which is very large.
Not many people seem to understand the time value of money, certainly it isn't taught in school. It's not just about mortgage interest rates. It's everything that involves money.
[+] [-] dehrmann|1 year ago|reply
[+] [-] bluGill|1 year ago|reply
[+] [-] mey|1 year ago|reply
[+] [-] imroot|1 year ago|reply
https://www.federalreserve.gov/paymentsystems/regii-about.ht...
[+] [-] lxgr|1 year ago|reply
These are available on debit cards as well. (Both by law, i.e. Regulation E, and both Visa and Mastercard requiring issuers to provide zero liability policies to consumers.)
> 3. Rewards either points or “cash back”
Which consumers more than pay for themselves – all consumers, including those paying cash.
[+] [-] chrismcb|1 year ago|reply
[+] [-] methou|1 year ago|reply
[+] [-] tobinfekkes|1 year ago|reply
[+] [-] Perenti|1 year ago|reply
Mostly because people keep agreeing to pay a premium for the convenience of spending before the money comes in.
[+] [-] matt3210|1 year ago|reply
[+] [-] AngryData|1 year ago|reply