Dave Ramsey: "Why We Don't Take Credit Cards"
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Next door is a gambling establishment, with an ATM outside of it. I tried getting cash and the ATM refused my card.
So I ended up walking three blocks (small town, luckily) and found myself a bank branch, which took my card. I returned to the hospital, paid the bill, and went on with my day.
Some time later I mentioned to my bank manager "By the way, I think my card is bugged -- it got rejected by a reader the other day." And I told him the circumstances.
"Sir, do you remember when we gave you your credit card that you promised not to gamble with it?"
"Yes, of course. I don't gamble, ever."
"We appreciate that, sir. Neither does the bank. Nor will we permit our customers to hurt themselves by gambling. Accordingly, we do not site any of our ATMs by gambling establishments."
"Oh, I can respect that. Of course, your competitors do, and that makes them money."
"Our real competitors do not. We have an understanding with them on this issue: no honorable bank in $SMALL_TOWN_JAPAN will countenance our customers losing their livelihoods while our eyes are still white. [Japanese idiom, means "while we still draw breath"]"
"But there really is an ATM in front of it?"
"It is from a Tokyo bank, and a disreputable Tokyo bank at that. And let them put an ATM there. They have no branch in this town, nor will they ever."
"But they don't need a branch, do they?"
"No. Bank A, Bank B, Bank C, and ourselves have enough branches to have 98% share of deposit accounts in this town. A, B, and C share our understanding of the importance of protecting this community."
"Wait, so NOBODY can use that ATM?"
"Maybe they can soak some tourists. wry smile Its a free market, you know."
I've got to say, the capitalist in me thinks "Oh crikey, cartelization". The rest of me really, really likes my bank.
[Edit: I just looked in my dictionary and it says that the actual idiom is "While my eyes are still black". I guess that means my memory is faulty. Wouldn't be the first time. Take note, students of the language.]
In the middle of Kyoto, and in downtown Tokyo I have repeatedly seen branches of major japanese banks that have lottery ticket vending booths built into their exterior walls. Talk about "disreputable"!
Just like the US is big enough to accommodate both a sub-prime crisis and Dave Ramsey, Japan is big enough to both accommodate cosmopolitan financial centers like Tokyo and small farming towns where "a bank from Tokyo" is understood as an insult.
From this point of view the story is about local community enforcing their values effectively, not cartelization.
That site is specifically for people who are struggling to manage their finances. I'm not really sold that their reasons for not accepting credit cards make sense (lack of fraud protection is the biggest problem). But it makes some psychological sense. You don't see a lot of AA meetings held in bars.
Also, complaining that the average yokel can't manage their credit is like complaining that users can't deal with a command-line interface. Sure the discipline to learn it would pay off, but most people aren't wired that way. Furthermore the credit system as we have it now is designed, by very talented professionals, to prey on common flaws in the human mammal's ability to assess risk and future obligation.
Everybody has something that they're irrational about. Don't make me ask you how much time you've spent on WoW this month.
Lastly, those of us on this board are probably lucky to have relatively high-paying jobs, even if we were less-than-perfect students or tried startup life for a while. The demand is just that great. But software is a huge anomaly in the North American economy. Wages for most people have been flat, relative to inflation, for decades. And furthermore, the risk of sudden and prolonged drops in income has been much higher since 1970 or so. For hackers that means okay, okay, I'll take the stupid J2EE job. For the average North American worker, it might mean accepting some stupid low wage service job.
Anyway, the point is, most families have been making up the difference with credit cards. They're not living extravagantly and still they're falling behind. See this lecture by Elizabeth Warren, "The Coming Collapse of the Middle Class". (http://www.youtube.com/watch?v=akVL7QY0S8A) that punctures some of the myths with hard stats.
That is a very, very scary statement. Basically it implies that most people are doomed to live a live in dependency and slavery, because they will always depend on the goodwill of other people to not screw them over. Maybe it even implies that in the long run communism is the only workable system. I can't imagine that the majority of people is THAT bad at maths :-/ I mean it is just basic addition and substraction. Even if you can only count to 5, you could get a rough idea of the state of your credit (number on bank account has less digits than number on credit card debt == bad).
It's about discipline more than it is being good with numbers. Sometimes I would imagine it would be hard for people to look at their bank account and see enough money in it to purchase X, so they use their credit card to purchase X only to spend the money in their bank account on something like groceries later.
(One of the things I never understand about communists spouting off about capitalistic exploitation... by the same standards you're accusing capitalism of exploiting me, communism only exploits me harder and with no hope of escape. Not progress. The answer to this paradox is that the communists always assume The Party is a magical fairyland group of people which, unlike every other group of people every formed, only has your best interests at heart, whereas they grant no such fairyland powers to anybody else.)
Libertarians may hate it, but consumer protections make the lives of most people simpler, safer, and more free. They also reward honest businesspeople, rather than rewarding the con artists who are the least detectable.
Also, how are consumer protections supposed to work? I think they would require a hypothetical "perfect" state employee who is 100% honest and 100% omniscient. Even if a few of such people would exist, I doubt that there would be enough of them to monitor ALL kinds of economical transactions.
Rather, I suspect the more regulation there is, the more corruption or hidden taxes will there and be a burden on society. Even today it almost feels as if one can't do anything without the protection of an army of lawyers. More regulations => this only gets worse. Lawyers will be leeching off us, with the support of the state.
Also the current crisis can not simply be blamed on crooks. Everybody was playing the game, down to the average "normal, honest" home owners. Plus, people will always act selfish, and in trades, try to get the better deal of the involved parties.
I think what he said was that additional checks have a cost that must be weighed against the benefits.
Funny, you are the one who is touting himself as able to handle complexity. And yet in this debate you can only perceive black and white. If communism is bad, that means that ALL regulation is bad! And if some people need extra help or training to deal with credit, that means that they're SHEEP who will be the wards of the state forever!
I am sad that nobody has taken up the point that I was trying to make; that we all need some help from time to time. Hackers have an easy time bouncing back from rotten luck, illness, or poor life choices; things that would cause other people to eventually amass an unsustainable debt.
If you call for regulations, first tell me why the market failed to regulate itself (that is weed out the crooks, if the crooks are to blame)?
If you are calling for more transparency, maybe I can go with you. But I don't think complex rulesets about who should give credit and who should be allowed to get credit are the way to go forward.
I don't want to claim to understand what pg wrote, but my understanding would be he wrote among other things about something exactly like that: more regulations means it becomes more costly to give somebody credit. Therefore there will be less firms giving credit, and "smaller people" will have more problems getting credit because they are not worth the bother. In the end there will be a monopoly of a few big firms who handle credit.
Also, what if housing prices really would have risen forever, and regulations would have prevented people from gaining from it? Who is to say in advance what course of action is right? Or would you say everybody who took out a mortgage was a crook?
That said, the solution to an overabundance of regulations is not necessarily to utterly eliminate them, and the lack of perfection should never be an excuse for not performing an action when the consequences of inaction are worse.
I won't pretend to know what should or shouldn't have happened in the current financial crisis. My post was really directed more toward basic consumer protections -- things like truth in advertising, not selling rotten meat, being upfront about the terms of payday loans, etc.
So you just need the "count the digits" rule of thumb to decide if you can afford to buy something or not. If you can count to 10, you could even compare the first digit of each number (credit card debt vs bank account balance).
Don't think of it like we're taking people's freedom away, think of it like someone pointing out the dangerous ice on the sidewalk, or better yet, cleaning it up before someone slips on it. It's just neighbourly. (Can you tell I'm Canadian?)
I'm not saying all of society has to be nerfed -- that would be totalitarian -- but a world where "caveat emptor" is the last word makes for a crappy and unsustainable society. It's about balance.
Want evidence? Just open any newspaper. In fact, because they refused even modest regulation, the USA is now going to have to get 1970s-style-socialist and probably nationalize a lot of the economy. Which I think is a terrible outcome.
Incidentally, Elizabeth Warren is a propaganda artist. She has "hard stats", but they often don't mean what you think they mean. Read Todd Zywicki's debunking of her to get a flavor for how she works:
http://volokh.com/posts/1108558247.shtml
http://volokh.com/archives/archive_2008_04_27-2008_05_03.sht...
I'm not claiming the video you cite is right or wrong (it's 57 minutes long, I'd rather just skim the paper), just suggesting that she deserves Michael Moore levels of skepticism.
But I do recommend watching the whole presentation if you have the time -- especially before you start calling people "propaganda artists". That implies deliberate deception and razzle-dazzle to con the unwary.
If she's really trying to foment unrest among the working classes she's kind of doing it wrong, with a rather unfashionable pantsuit and a series of dull charts and graphs. I get the sense she honestly believes in her data, but perhaps she is simply honestly mistaken? Anyway, something to think about.
I'll take one example from her medical bankruptcy study. This is the study, widely described by the media as asserting that 50% of bankruptcies are caused by medical bills or serious medical problems.
http://query.nytimes.com/gst/fullpage.html?res=9C0CE2DD133BF...
You need to actually read the study rather than listen to her talks to discover that "medical problems" includes "alcohol or drug addiction" and "uncontrolled gambling."
http://content.healthaffairs.org/cgi/content/abstract/hlthaf...
This is far from the only example where she plays games of this nature. Read Todd Zywicki's debunkings of her, she seems to make mistakes like this all the time.
I suspect that congress and the media, rather than the working classes, is her target.
The study you and Warren cite does group alcoholism, drugs, and gambling under medical problems. But, even combined, they form just 3.7% of bankruptcies observed. Even if you threw these out, that wouldn't affect the main conclusions.
http://content.healthaffairs.org/content/vol0/issue2005/imag...
Now, I'm not saying that this study was flawless or Warren's use of it beyond criticism. But the criticism you made was indisputably worthless. It seems to be designed to inflame passions and exploit stereotypes in a few words, and to be difficult to refute without long explanation. You should go on FOX News.
Or perhaps you did not read the study, as you advised me to do, but merely quoted someone else's critique? If so, I suggest that you re-evaluate your sources.
The example I provided is merely the simplest and most egregious misrepresentation she makes.
(1) To estimate the number of bankruptcies caused by "medical reasons", you need to compare Pm = P(bankrupt | medical cause) to Pnm = P(bankrupt | no medical cause). The number of medically caused bankruptcies is then (Pm-Pnm) x (number of people with medical cause). She only measures Pm x (number of bankruptcies with medical cause).
In the case of debit cards you don't have any of that protection, so if you want to get your money back you have to get it back from the supplier (which if they've gone bankrupt/disappeared is near impossible for an individual).
I've setup my credit card to be paid off in full on the due date each month so I pay no interest. My savings account is offset against my mortgage, so it's generally better to pay by credit card as that defers savings account withdrawals (thus saving mortgage interest) by up to 45 days.
The card fee is paid by reward points on the card and there's enough extra points per year for between $200 & $400 in store vouchers.
So combining the mortgage interest savings, the rewards payouts and the fact I pay no interest or annual fees, I'd guess the card saves me ~$1000 a year.
As a debit card is just as easy to use as a credit card, the argument that I'm likely to spend more with a credit card is bogus as well.
I suspect the fees Dave Ramsey would have to pay on credit card transactions may be higher than on debit cards though...
Except for the credit card continuing to work even if you don't have the funds right now?
But just so you know - the $50 limit on fraud that you're protected by if someone steals your credit card? It's not there if you use a check card. If you want to shop online, use a real credit card. If you want to shop offline, use a regular ATM card + PIN identification.
I'm calling "urban myth" on this debit card liability thing, and eagerly await my comeuppance.
I know debit card loss limits at major banks have become similar to credit card loss limits (as a competitive matter), but there are still practical differences.
Debit fraud means your bank account is empty right now -- and until you discover the fraud -- meaning payments of other expenses may fail unexpectedly.
The worst that can happen with credit card fraud is that one card gets denied. You are never short of cash unless you pay the bill without reviewing/disputing it, weeks later. Your liquidity is under your control, not the thief's or the bank's.
Note the bit at the bottom about not actually being able to tell a debit card from a credit card. This is really just a philosophical position. He can't enforce it online due to how the card processors work. I believe he tries to enforce it at his live shows, though, by simply not taking any cards that appear to obviously be credit-only.
Here's a great credit card offer I recently found: http://www.schwab.com/public/schwab/banking_lending/credit_c...
2% CASH BACK ON EVERY PURCHASE, automatically deposited into an interest bearing account at the end of the month, which has an optional checking option providing free checks and full ATM reimbursements, no fees.
If instead you used a lousy BOA debit card, you'd have no cash back, a bunch of fees, and a hell of time fighting any illegitimate charges.
So these 'benefits' you tout are just marketing.
Many of the new customers will carry a balance, transfer a balance, and/or invest & trade with them. This makes the bank money. Now if everyone paid their balance in full, this offer wouldn't exist, but of course this doesn't happen.
For the record, I'm personally against credit cards too. I only keep an AMEX, for emergency use, which has a zero balance every month.
We're all usability fanatics here, and adding friction like this is asinine. If anything, give people a discount for not using a credit card or use this as an opportunity to preach to them.
I'd also be able to at least empathize with this nutjob if he said it was because of the fees. These fees are why some small businesses are still cash only or credit card above a certain amount.
Oh, and I have over 40,000 Points on that card right now which means, since I've never paid any interest, AMEX is paying me to use their card. This guy is right, CCs are the Devil. When I die, they'll take that money out of my soul I suppose.
Whether you agree with his opinion on credit cards is another story.
A cynic would also point out that that by not accepting credit cards he also avoids losing the cutr of the transaction that they charge and so makes more money.
I'm not a cynic of course. Personally, my credit card is paid of automatically each month in full.
But chargebacks are very common in online retailing. I don't think you can chargeback a debit transaction, can you?
Also, if his business is dealing with people who are at the end of their rope, defaults and chargebacks may be more common.
Without any statistics to prove it, I would reckon that Ramsey looses more money buy alienating potential customers than he saves on transaction fees.
I also think that CCs have their benefits, if used in a responsible way. But if Ramsey is strictly against CCs, not accepting them shows integrity.
At least, it creates massive buzz if the tubes pick up the story ;)
Uh, yes. That is his entire business proposition, telling people how to manage their finances.
Also, putting business expenses on a CC is just plain common sense, especially if you work for someone else. Why should I lose interest waiting for reimbursement?
Credit cards are terrible if you abuse them, and the whole credit system is mucked up. But they are otherwise very pro-consumer, because you have no liability when you are defrauded.
What is it that makes it so hard for people to come up with a headline that vaguely resembles what they have written about?
Cons with CCs: If you don't manage your funds well, you git hit with a 20%+ interest rate and will never likely climb out of that hole. Solution: learn to manage debt. Seriously, most CC companies now allow direct account transfers. If you are that scared, whenever you make a purchase, go home, log in to your bank's website (every major bank has one, if yours doesn't, open an account with one that does), and pay off the card immediately. Its not rocket science, just basic financial management.
Pros with CCs: Fraud protection. Easily one of the biggest plus points of CCs. Concerned that there is a charge on you statement that you didn't approve? Just call the company and tell them that it is a fraudulent charge and then its their problem. If nothing else, this easily makes credit cards worth the time it takes to manage them. After this, we have the easy record of all transactions, cash back, convenience, safety from the fact that you don't have a giant wad of cash with you, and last but not least, a credit history which can be used to reduce interest rates on long term loans.
Seriously, this anti-debt attitude is in general ridiculous. Is excessive and badly-managed debt bad? Absolutely, its one of the worst situations to be in but there is a simple way to avoid it: manage your finances. Swearing off all debt is foolish and inefficient.
But the fact is that we're a minority and the majority of people are bad at managing money.
And so long as you're anything less than good at managing your money, a credit card represents risk. And so for those who don't pay off the debt, the risk grows.
I like Ramsey, he goes balls to the wall and is over the top, as the site mentions he can get repetitive painful at times. And the NO-Debt approach, as you are noting, is a bit crazy but for those who have proven they can't be trusted with debt, then this is the safe choice.
Your response is fine, but I think you're approaching it from a normal, well balanced and money conscious individual. There are people who call into his show with literally $250,000+ in debt between their house, car, boat, property lots, and they've got a sliver of that as income. These are the people he's marketing towards. Not you.
He's pointing out Ramsey's integrity here, not the position.
Not using a credit card costs you a ton when you go to get a mortgage. Building a solid credit history is well worth it.
Clearly he's going to need more help than just telling him to quit, but pretending that he can moderate his consumption of alcohol when he is biologically incapable of doing so is a betrayal.