Credit and Full Faith

Maybe I’m just approaching this like a student, but it seems that as between apple pie and debt we’d be hard-pressed to decide which is the most quintessential American institution.  The only thing Americans want more than more is to compete, right?

Keeping up w/ the Joneses costs money, as it turns out.  And, as we’re daily reminded through the health care debacle, no money is more fun to spend than theoretical future money.

Theoretical future money is so much more fun to spend, in fact, that we’re willing to spend twice as much when paying with credit as when we’re paying with cash.  In November a New York City authority required all cab drivers to install credit card machines in their cars.  The drivers resisted, but wound up making more money as a result:

The story boils down to loss aversion blinding the cabbies to two salient facts about credit cards: 1) They make people spend more, 2) They can be programmed with “default” tip amounts much higher than what drivers were typically receiving with cash.

The effect of credit cards on our spending is particularly striking. I think we all have an intuition that plastic makes us spend more. This study (PDF) shows that people will bid more than twice as much for an item (in the experiment, NBA tickets) when allowed to pay with credit card instead of being restricted to cash — far more than even I would have guessed.

Not only do credit cards make the taxi option more convenient, they make the spending option more convenient:

New York City’s Taxi and Limousine Commission reports that revenues are up 13% from the end of last year, despite a recession which is hitting the taxi industry hard in other cities. Tips, meanwhile, have risen to an average of 22% on credit-card transactions, up from around 10% under the old, cash-only system.

Most people are vaguely aware that they spend more with plastic than with paper.  That doesn’t mean that we’re willing to cut back the credit, though.

Instead, even in these lean economic times, we’re finding new ways to rely on Theoretical Future Monies rather than hit the ATM and suffer the loss of cold, hard cash.  Forget the ubiquitous credit options online (who hasn’t used Google Checkout?); we’re looking at future spending options that make even Paypal seem tame.

Square, a credit system backed by one big i-bank plus a “team of angels,” offers a gadget permitting members to swipe a credit card from their mobile phones.  Gushing that Square may well represent the “end of cash,” PCWorld explains:

Square allows credit card payments to be processed directly from an iPhone or iPod Touch. That part alone isn’t all that revolutionary. There are a number of iPhone apps that facilitate credit card payments, but they require manual input of the credit card number. What sets Square apart from those apps is that is provides users with a small–well….square–gadget that can read the magnetic stripe information from credit cards.

Using a private credit card reader allows members to avoid problems of privacy, identification, germs (no need to carry filthy cash!), and card company fees, presumably higher than whatever fees Square will charge.

So we’re working to revolutionize the credit industry in a way that will make spending more convenient and that statistically will enable — nay, encourage! — us to spend upwards as twice as much.

Indeed, if the cab study is any indication, statistics suggest that we’re willing to spend over 10% more on things we wouldn’t have purchased at all were it not for the lure of theoretical future monies.  Doubling our spending only comes in with things we would have purchased even with cash, if the doubled-tip phenomenon is any indication.

More than the spending, credit card holders likely worry about fees.  In fact, fees only affect users who spend beyond our means.  From last Sunday’s “Five Myths About America’s Credit Card Debt“:

As more and more people were preapproved for credit cards in the ’80s and ’90s, the “free” credit used by the most affluent households was subsidized by the high interest rates and penalty fees paid by the most financially distressed. A carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues. Nearly half of all credit card accounts do not generate finance and fee revenues.

So credit card companies frame fees as part of the territory, discussing nigh-exclusively fee structures in their ads, but most card holders never have to think about that.  Most credit holders pay off their bills each month so fees never become an issue.

Where to go from here?  As far as I’m concerned, debt is at least as American as apple pie.  I’m in my sixth year of graduate school and, were it not for credit card debt I wouldn’t be where I am today (literally: In a queen size bed at Manhattan’s swanky Algonquin hotel, paid by yours truly but mercifully reimbursed by my law school as soon as this moot court competition ends).

What makes credit card debt unique is that even knowing these caveats — we tend to spend more, even on things we wouldn’t want if not for the “theoretical” nature of Future Money, and we can avoid paying more for that debt — many Americans nevertheless go full throttle on debt acceptance.

Americans are all loose-fisted Keynesians, as it turns out, when it comes to creating or saving creature comforts.  It’s just a matter of looking down the road and deciding whether holding onto creature comforts is worth it, or whether you’d rather have that future money (and the bigger purchases incumbent to it) when the cash ceases to be theoretical.



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5 responses to “Credit and Full Faith

  1. Wow! thank you! I always desired to write in my site something like that. Can I take part of your place to my blog?

  2. Hello, it looks like your site is up and coming in the

  3. thanks !! very helpful post!

  4. I couldnt resist commenting. :)

  5. @chels I know what you mean, its hard to find good help these days. People now days just don’t have the work ethic they used to have. I mean consider whoever wrote this post, they must have been working hard to write that good and it took a good bit of their time I am sure. I work with people who couldn’t write like this if they tried, and getting them to try is hard enough as it is.

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