From Gourmets to the Masses
Credit card issuers began by offering cards to the wealthy, but have greatly expanded the availability of credit to all economic groups. In the present day "all but the poorest households" have access to consumer credit, and the ready availability of credit has had a significant impact on the way that consumers use debt to finance their lifestyles.
The Growth and Diffusion of Credit Cards
Between 1970 and 1997, the percentage of households with at least one credit card quadrupled, and households increased their use of cards in the marketplace.
Also, cards expanded from the wealthiest households into the average households. Virtually all households in the top quintile of income have credit cards, over 80% of the second quintile, and over 70% of the third. At the bottom of the scale, nearly 60% of the second lowest quintile have credit cards, as do almost 30% of the lowest quintile (who are, by definition, the "poor"). All of these have grown dramatically over the past 25 years.
Payment Cards and the Transactions Demand for Money
The rapid growth of credit cards has caused an increase on the personal consumption of goods and services throughout the 1990's, as consumers accumulated purchase in excess of their annual income, and most households carry a significant amount of perpetual consumer debt.
One study also indicates that the amount of money kept in deposit accounts has also decreased (by 22.5%) during the same period: as customers are able to "charge" purchases rather than having to save to purchase big-ticket items.
The net result has been an economic boom: cash held in deposit accounts has become unfrozen, and consumers are able to purchase beyond their means, increasing the demand for goods and services.
EN: the author doesn't look ahead to the end of the road - what happens when people have to repay the debt they have accumulated? If the average household is $10K in debt, isn't their present prosperity borrowed from their future earnings?
Credit Cards and Liquidity Constraints
In general, household income increases until the head of the household reaches middle age. At this point, income levels out, then declines in later years. Understanding this, it seems reasonable for younger people to borrow against the income they will achieve later in life. This indicates that people can spread their lifetime's wealth around, enabling them to enjoy a higher standard of living earlier in life.
The author also suggests that credit cards enable providers to engage in "credit rationing," providing small amounts of unsecured credit to borrowers and adjusting the amount of credit available over time for customers who demonstrate an ability to make payment.
There is also the credit-scoring system, which considers many factors to determine the level of personal risk, enabling a card issuer to limit the amount of funds available to individuals whose ability to repay their loans is questionable, without denying them access to credit altogether.
Credit cards are also a method for individuals to manage cash-flow issues in their personal finances, enabling them to purchase needed goods and services for which they do not presently have adequate capital, and paying off the balance over time.
EN: The author's opinions here seem very rose-colored. I find it difficult to accept the suggestion that people are consciously and meticulously managing their lifetime income, and more likely that people are concerned with their immediate gratification (getting what they want now) without considering when they will make the payment (other than a vague "later"). The depiction of issuers "rationing" credit is also specious. A card issuer generally offers a fairly low credit limit to a new customer and increases that amount over time, but I'm not aware that they regularly decrease limits or deny access to credit by customers who have difficulty making payments - their sole reaction seems to be to jack up the interest rate until the customer flips the debt.
Credit Cards and Entrepreneurship
The "small business" segment of the US economy accounts for slightly less than half of the GDP, employs 54% of the private workforce, and accounts for 70% of the economic growth in the early 1990's.
The author uses an example of an entrepreneur who used credit cards to finance her startup operation, and had maxed out fifteen credit cards to get the business going, and later become highly successful.
The author avers that getting approved for a small business loan is difficult because lenders want to be certain their funds will be repaid. It is likewise difficult to obtain access to venture capital, because VCs invest only in businesses that seem likely to be profitable in the future. In this way, credit cards provide an important source of financing for small businesses.
EN: The author is clearly a fan of credit, how it can be helpful to people whose schemes for starting a business are so bad that everyone else refuses to loan them money. He does mention that 80% of small businesses fail, but he seems to avoid the question of what happens to those entrepreneurs who maxed out fifteen credit cards (as his successful entrepreneur did) only to fail and find themselves worse than merely broke. My sense is that this phenomenon contributed to the dramatic rise in personal bankruptcy during the same period, and that the net effect on the economy has been less than positive.
Are Payment Cards Really a Good Deal?
The author suggests credit cards are a good deal because "every adult has at least one" (EN: that's pretty specious reasoning)
He suggests that individuals who pay their bills in full each month are getting an excellent deal: credit cards are essentially free for them, as they pay no interest - and meanwhile, the cash in their checking account continues to earn interest until the credit card bill is due. (EN: he does not tell what percentage of credit card users fall into this category)
Also, consumers who use debit cards likewise earn more interest: rather than having to withdraw cash for purchases, the money can stay in their account, earning interest until the second a purchase is made. (EN: this would be negligible)
He also suggests that consumers incur a variety of costs in securing other sources of financing: going to a bank means taking time off of work, burning the gas and time to get there, and providing personal information. (EN: poppycock)
Also, credit cards are more flexible than conventional loans: the consumer can structure their own payments, and take on additional debt in small increments as needed (EN: this is reasonable)
He suggests that many economists are distracted by the irrational behavior of some consumers, and are using it to color the perception of the entire industry (EN: possibly fair, but he presents no statistics to prove the scale of the problem)
He suggests that there are built-in controls, in that it is not in the interest of card issuers to give credit to those who cannot reasonably be expected to repay it, as they lose money on bad debt (EN: bad debt can be sold, and once it's securitized, it's the bond-holder who bears the risk, not the card issuer)
He suggests that credit cards have contributed to an economic boom in the late 20th century (EN: true enough, but look at the stew we're in ten years alter as a result).
EN: I've picked a lot of nits above, but it's worth mentioning that the author is doing a lot of cheerleading based on very specious and faulty logic and no economic or statistical evidence whatsoever. While it's not very informative, helpful, or accurate, neither does it detract from the value of his more objective presentations elsewhere in the book.