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Comment by zrail | Hacker News Reader

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop.

In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you count the rewards and the tiny amount of bank interest they may receive.

[1]: http://www.creditcards.com/credit-card-news/credit-card-debt...

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I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest.

[1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.

Interesting. What card is this?

Several different cards. Sallie Mae Rewards MC from MC (sadly discontinued recently for new signups), Discover It, Chase Freedom, and Double Cash from Citi.

American Express has a card "Blue Cash Preferred". You get 6% back on Groceries (up to $6k/yr), 3% back on gas, and the card has a $75 annual fee.

If you only use the card to spend $100/week on Groceries, you get $312 in cashback rewards. Subtract the $75/yr fee, and Amex paid you $237 to use their card that year.

(Amex isn't the only card like this -- there's lots from MasterCard and Visa as well. This card in particular just happens to be one of the rewards cards that I know the details of.)

I don't understand these reward schemes. Surely they are being funded by higher merchant fees, which means merchants charge more, which just means that the rewards are a transfer scheme between people who pay by cash/unrewarded cards and those with rewards cards.

There's a lot of truth to that (cash paying customers pay the same, even though the cost to serve them is less).

But unrewarded cards aren't really any different. Most merchants still have to pay the same high fee for them. Since the bank/processor is going to take the maximum amount of money they can regardless, and most merchants will have to pay that full fee regardless, you might as well use a rewards card over an unrewarded one.

Handling cash isn't free for a merchant. It has to be stored, counted, transported, banked, insured and it's easily stolen. Even though the fees aren't the same cash still has a fee.

(In the UK)

American Express cards offer the best rewards, but the cost to the merchant is much greater. Many shops or restaurants don't accept AmEx, and sometimes those that do will say they prefer you to use an alternative card.

But within one network, I think it's correct that the cost is the same regardless of the card's promotion.

They're mostly being funded by the people who don't pay off their balance in full every month. Accidentally miss one or two payments and all of a sudden all your 'profits' from using the card have been wiped out.

I think you are neglecting the fact that, even if some people don't carry a balance, most credit card users do, and the rewards scheme acts as an incentive (perhaps not a rational one, but people demonstrably don't behave rationally) to additional use of the card, all other things being equal. So, credit card issuers probably make up the additional costs of rewards cards in interest and fees from those cardholders, on average, even though perfectly disciplined use provides a net win to the cardholder.

I've had the same qualms, my guess was always that it is subsidized by those that use the rewards cards in a suboptimal way, such as carrying a balance and paying interest. Either way, the end result has been me having a desire to be on the rewards card side and using it for a net gain.

That's exactly right. It's a game you are forced to play, even if you don't want to use any cards at all.

I realize I'm losing money by paying with cash, because I'm paying the markup for credit card swipes (assuming a retailer that charges the same for credit cards and cash). Even if I can only get back 2% (there are several no-free credit cards that give 2% back on all purchases), that's more than with the cash where I'm paying higher prices and not able to get any of that back with cashback.

Depending on agreement, card type, and other factors, the swipe fee is sometimes higher than 2%, so I don't always get all the difference back.

That's the prisoner dilemma, and leads to the expected results.

Merchants can't always charge more. The amount of the charge that's passed on to the consumer depends on the good/service being sold and its price elasticity of demand.

You can also get Amazon gift cards at grocery stores that provide gas points. For example, at Safeway $500 Amazon gift card purchase will give you $30 AMEX cashback + $25 discount on gas if you dont mind bringing a couple of gas cans with you to the station.

I'm not well versed in the history of consumer debt, but 34% carrying month-to-month debt seems historically high, since consumer credit cards were only widely introduced in the mid-20th century[1], and took a few decades to reach mass penetration.

The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me. Given our fairly short history with widespread revolving debt, we might be setting ourselves up for another, bigger, debt crash that the government won't be able to bail out.

Of course, revolving debt does have a longer history than that, but it was often used as a "barely-there" facade for stealing money from the poor, e.g. coal miners living in a company town weren't paid enough to buy food at the company store, so they ended up in life-debt to their supposed employer. Of course, in that scenario, the company made money even if the coal miner died without paying them back the full amount they owed. These days, companies trade consumer debt like it's real money, and get in actual trouble when the music stops.

[1]http://www.creditcards.com/credit-card-news/credit-cards-his...

> The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me.

The page I linked, under the heading "Transactors versus revolvers," presents a chart that shows the percentage of households with revolving debt declining from 44% in 2009 to 34% in 2014. A 22% decrease over five years is rather significant, no?

Interesting. I was looking at the total debt, the first graph in the article. So fewer people carry month-to-month, but the total dollar amount of revolving debt is still going up. It is good that fewer people carry it, but it still looks like a significant portion of the population is increasing their debt level.

Wouldn't being able to continue your life unobstructed by the need for some potential purchases be an asset in the same way the parent described student or car loans as potential assets? If something comes up outside your usual cash flow, say a tire blows, and smoothing out that irregularity helps you keep your job, I would consider that a worthwhile investment.

Student and car loans are not assets. They are debts used to finance assets.

"Only" 34% ?

I imagine it is still a huge amount in absolute terms.

Yes, 34% of households is a lot of households. But part of the point of the article is that most people do not handle their debt well, however, most people with credit cards do not carry credit card debt month to month. It doesn't mean the article is wrong but it is certainly a point against the article's thesis.

I wonder if this counts households which are carrying balances on cards which offer an introductory 0% interest rate? I know quite a few people (myself included) who have utilized the 0% intro rates offered by both branded (Visa/MC/Amex) and store credit cards.

My understanding is that about 75% of households use credit cards. So, that's about half of them.

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