Do We Really Need Credit Cards?

I wonder how many people reading this article are old enough to remember S & H Green stamps? These trading stamps made a small fortune for Sperry & Hutchinson back in the fifties and early sixties. Consumers felt they deserved to get the stamps with everything they purchased from gasoline to groceries and merchants felt they had to offer them or lose out to competitors. Then one day, everybody woke up and realized this was a middle man raking off money on every transaction and that it was costly to both business and consumers. Thus S & H Green stamps became obsolete.

Today we have a similar situation with credit cards. I recall in the fifties when you could go into a retail store and buy a television set and the merchant himself would carry the credit, at reasonable terms. Now most retailers accept credit cards on purchases, even if you are making small purchases. Like S&H Green stamps, this is costly to consumers and businesses alike.

A merchant will typically pay from one to two percent of every transaction to the credit card companies. The credit card company gets it from both sides because they also charge the consumer interest rates of upwards of 30 percent. In addition they make excessively high fees for over the limit fees, late fees and whatever else they can add in.

Have you ever wondered why it is so easy to get a credit card? Why is it that credit card companies don't worry about whether or not you can pay? Here's the answer. If you default on your payment, the merchant still has to pay. The credit card companies can't lose but the merchant can.

Credit card companies have done a real sales job on convincing consumers that they can't live without credit cards and in convincing retailers that they must accept credit cards to remain competitive. The U.S. financial crisis, which was largely caused by credit card companies, might be just what we need to wake us up to the fallacy in these ideas.

Suppose merchants went back to the old method of granting credit themselves, and suppose more consumers went back to the old way of simply paying for merchandise with cash and only buying what they can afford to pay? It might solve a lot of problems.

One last thing retailers should ask themselves is what do they get for the one or two percent they are charged? Security? Not likely since they still have to pay if the consumer defaults. In the old days businesses included a percentage in their pricing to account for the possibility of bad debts. You can bet the credit card companies also keep this in mind when they issue credit and they simply pass that cost on, either to the merchant, or the consumer, or both. Aside from the one or two percent the merchant loses when he allows credit card companies to handle his credit transactions, the merchant also loses the interest he could be charging the consumer directly. If, for example, a merchant were to charge simple interest of ten percent per year on a major purchase, he would receive more money than he could receive by putting that money into a certificate of deposit and the consumer would pay far less interest than he would be paying to a credit card company.

Consumers also have been led to believe they can't do business without credit cards. In spite of what you are told, there are car rental companies that will accept a cash deposit instead of a credit card There are companies who will sell you merchandise online without a credit card One option is a debit card, although there are similar issues with debit cards as there are with credit cards. Some banks offer electronic checks and a few online merchants (too few) offer the option of billing you and allowing you to pay by check. The fact is, if enough consumers demand other answers, online merchants, car rental companies and other businesses will find other ways to allow you to pay. You don't have to have a credit card.

If credit card companies were cut entirely out of the picture, it could be a win-win situation for merchants and consumers alike.