Why and how does _credit_ becomes the first and default way of payment?
With credit cards, it's the bank's money that's missing, not yours.
I know I prefer to only put the bank's money at risk, not my own.
It has no membership fee, I get 0.5% cashback which is free money, and one time a merchant failed to deliver an order and they gave me back my money within like 10 minutes of me raising a dispute
If I had used my debit card with my normal bank it would probably take a week to resolve, and I'd be the one out of pocket in the meantime
Why not?
That's of course still worse than not being out the money on a credit card, but it's not the dealbreaker many make it out to be, and could easily be amended by regulators if there was any interest in doing anything about the drag on the economy that are inflated card payment fees.
You mean the same regulators who just rescinded the cap on overdrafts?
And yes, regulations alone aren't enough, they also need to be enforced. That goes for both credit (Reg Z) and debit (Reg E), though.
” For debit card transactions, the Electronic Funds Transfer Act (EFTA) applies. While these laws offer some similar protections, knowing the differences is key to understanding why it's safer to use one type of plastic than the other... According to the EFTA, your potential liability for fraudulent debit card transactions is virtually unlimited. You have up to 60 days to report a lost or stolen card under the EFTA. After that, you simply lose whatever money was taken, even funds siphoned from linked accounts.”
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.
It really helps with one-off costly purchases, like a new device or some stuff for home/garden. I never miss card payments and keep my finances organized, avoiding purchases I can’t pay off monthly.
- 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.
Available but unused credit helps your credit score.
Even though it isn't actually 0% interest, even 5% is an amazing credit interest rate.
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.
Even under Regulation E, it would only be $50 as long as the issuer is notified within two days of losing your card, and $0 for other types of fraud (e.g. unauthorized use of your card number online) if reported within 60 days of receiving the corresponding monthly statement.
Process your debit as credit and bam.
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.
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.
If everybody were "using them correctly", issuers would be bankrupt. The fact that they're not should tell you that there's at least one winner other than the never-balance-carrying cardholders.
> Credit card issuers fight to attract those high income bracket spenders.
Correct, and everybody pays for this (very expensive) fight, one way or another. The fact that some people come out ahead does not make them a good deal in the median case.
> And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this.
I agree, but as an aside, you might be surprised to find that the author of the article you quote would disagree with you there: https://x.com/patio11/status/1902555603534295115
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.
So Americans are forced to use credit cards and enrich the companies offering that service, because using a debit card carries risks.
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.
The problem is, most people don't do that.
In this day and age? Inertia?
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".
Overdraft fees hit harder than interest
In EU rewards are shit, and the only reason to keep credit card is to be able to rent a car during summer vacation.
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-...
US Consumer Debt Delinquency Hits Highest in Almost Five Years - https://www.bloomberg.com/news/articles/2025-02-13/us-consum... | https://archive.today/ivRqd - February 13, 2025
Record Share of Americans Pay Only Minimum on Credit Card Bills - https://news.bloomberglaw.com/banking-law/record-share-of-am... - Jan. 22, 2025
Philadelphia Fed: Card Balances and Delinquencies Continue Upward Trajectory; Mortgage Originations Stagnate - https://www.philadelphiafed.org/surveys-and-data/2024-q3-lar... - January 22, 2025
St Louis Fed FRED: Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks (CCLACBW027SBOG) - https://fred.stlouisfed.org/series/CCLACBW027SBOG
(credit card balances total ~$1T outstanding as of this comment)
Some consumers may be stressed. That doesn't explain why credit cards use has dominated across all income ranges for decades.
It seems like you are trying to shoehorn a pet issue into an unrelated question.
Edit: you still seem to be missing the question. It isn't why credit debt is so high. The question is why so many people use credit cards. What you are saying may be true, but it is answering it an entirely different question.
>People would use debit cards if they had the funds.
This is the part that simply isn't true. The rich use credit cards too. Less than half of credit card owners carry a balance from month to month.
https://time.com/6957322/why-credit-card-debt-is-high/
> The higher cost of everything from housing to high-tops to haircuts are a major culprit. Although inflation has moderated since it peaked in June 2022, Americans—particularly lower-income families—are relying more on credit cards to cope with the sticker shock.
> “They used credit card debt to supplement their incomes to maintain their purchasing power,” says Mark Zandi, chief economist at Moody’s Analytics.
> A few years ago, low interest rates plus a host of pandemic-era programs—stimulus payments, enhanced food stamp benefits, pauses on student loan payments and eviction proceedings—made this new math work for families’ budgets. But those financial supports have been discontinued, and for borrowers who were barely treading water financially, these programs couldn’t have been eliminated at a worse time.
Credit card rates are high because they can be, if you need financing you have nowhere else to go except perhaps a payday lender or other hard money source. This is why there is recent talk of capping interest rates at 10%. People would use debit cards if they had the funds, they don't, which is also why overdraft fees were a source of billions of dollars in fees for commercial banks.
S.381 - 10 Percent Credit Card Interest Rate Cap Act - https://www.congress.gov/bill/119th-congress/senate-bill/381
Big banks have drastically cut overdraft fees, but customers still paid $2.2 billion last year - https://www.cnbc.com/2024/02/09/jpmorgan-chase-wells-fargo-c...
> MANY folks carry zero credit month to month
Even if 40% is 10x too high, and I'm pretty sure it isn't, 4% of all credit card holders is still a hell of a lot of people. As far as I can tell you haven't actually contradicted the claim.