THE GOODS : No Money Down : As Companies Heap on the Benefits, Credit Cards Are Replacing Currency--Even at the Supermarket
Barbara Toohey always picks up the check when she’s out for dinner with friends. “And the bigger the better,” she said. Why? Because, the Van Nuys publisher said, she pays for it with her MasterCard Continental frequent-flier card. Her friends reimburse her in cash and every dollar on the credit card means another free mile on Continental Airlines.
Toohey, who loves to travel, gets a couple of free trips to New York every year and recently used her miles to upgrade from economy to business class on a trip to Paris. And it’s not just dining out that helps her rack up mileage.
For instance:
* She now uses the card for large purchases of equipment and software needed by her business, Prana Publications.
* She has power of attorney for her invalid mother and pays for both personal and medical expenses on the credit card.
* “And there are all the other things that can be paid by credit card now,” Toohey added, “like charitable contributions, groceries and newspaper subscriptions. What I really like is the double hit when you buy an airline ticket on the credit card.”
Toohey is in the vanguard of a savvy breed of consumer --informally dubbed “credit card sharks”--who have learned to make plastic pay. Taking advantage of the proliferation in credit card options, they choose a card that fits their personal needs, picking through a complex array of fee structures, interest obligations, cash rebates, discounts on everything from gas to new cars and higher credit limits.
The emergence of these eager megachargers, particularly at the supermarket, concerns those with public advocacy groups, who fear an epidemic of personal bankruptcy as shoppers overspend and backslide into the trap of minimum monthly payments.
Although personal bankruptcy filings are expected to rise only 2% this year (a nominal figure, compared with the late 1980s), analysts emphasize that such filings are a trailing indicator, reflecting what has already happened, and that repercussions from misused credit cards might lie a year or two ahead.
“I think it is totally inappropriate to use credit cards for food purchases any time,” said Ken McEldowney, director of Consumer Action in San Francisco. “Cards should be saved for large-ticket items, and those with a long life span.”
But the best of the credit card sharks know how to manage debt, and they follow two sacred guidelines. First, they buy everything possible with their cards. Without big-ticket purchases, the game doesn’t pay.
“I used to pay cash for anything less than $30, but now I have lowered my threshold,” said Steven Short of Lake Tahoe, business manager for author/lecturer Leo Buscaglia. “I am now using my card as currency.”
And second, the new consumers always, always , pay their bills in full each month. Short said he even overpays a bit, to have a cushion in the account.
“If you don’t pay it off, you’ll be fiscally strung up by your thumbs,” Toohey said. “The idea of 18% interest just makes my toes curl.”
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Steve Apesos, a spokesman for MasterCard, said the movement is fueled by both the increased willingness of merchants to accept cards (more than 65,000 new merchants were added last year) and the credit card industry’s aggressive promotion of cards as smart money.
In fact, the two trends seem to be intertwined. Card issuers, having saturated their traditional markets, have been pushing plastic as never before in a fierce competition to create new categories.
“In the ‘80s we promoted the credit card as an aspirational thing, denoting glamour and status,” Apesos said, “like using it if you lost your luggage in Paris.” But today’s ads are pushing cards for everyday use, he said. “They are about using the card for a haircut, going to the hardware store, not in the St. Moritz mountains.”
Although only 15% of all payments in this country are made with credit cards, Apesos expects the figure to keep climbing. Card companies have exploded in variations of co-branding with companies like GM or American Airlines or Krogers, he said. “From the ‘plain vanilla’ MasterCard of a few years ago, a cardholder today has a choice of more than 4,000 types of affinity or co-branded cards like an airlines or a supermarket.”
In addition to frequent flier miles, he said, niche shoppers can get cards that offer gas rebates, retail bargains, new computers and discounts on new telephone service. Those are just a few samples.
“GM is offering a 5% rebate toward a new car, Visa has just offered a Blockbuster discount card. We have one little bank in Iowa that offers rebates on Honda lawn and farm equipment.”
The card companies now talk about cards as “plastic checks,” he said, for doctors and dentists, the gas station, college tuition, fast-food restaurants and even the parking lot attendant.
“We had to find ways to capture more volume and people feel comfortable using it as part of everyday life now,” he said.
As a result there are now an estimated 383 million cards in circulation from the four general-purpose brands: Visa, MasterCard, American Express and Discover. This is double the number 10 years ago, according to Credit Card Management magazine.
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Linda Punch, managing editor, recently devoted a cover story to the intensity of the movement. “Never before has the sales pitch been more intense,” she wrote. “A consumer can’t watch prime-time TV, open a magazine or newspaper, check a mailbox, or even use an on-line computer service without stumbling across a solicitation for one card or the other.”
Punch shares the concern about mounting personal debt, although there is no evidence of it yet, she said in an interview. “Time will tell if it creates problems down the road.”
In the meantime, she said, the megachargers who pay up every month are benefiting from the rewards program. “If they can pay the card off every month it is smart,” she said. “It’s a good deal.”
It’s more than a good deal, said Encino accountant Randi Bach, it’s sound personal economics. “I buy everything on my credit card unless the place won’t take it, such as a parking garage. I always try, and 98% of the time I am paying with a credit card. The mileage can be used for plane tickets or upgrades or hotels or car rentals,” she said. “That’s free money.”
She also likes the convenience. “It provides a clear record for me. I get one bill. I have to write one check and I can summarize my monthly benefits right off the bill. Furthermore, I don’t have to carry a purse: I can put my driver’s license and credit card in my pocket.”
George Ritzer, who has just published “Expressing America: A Critique of the Global Credit-Card Society” (Pine Forge Press), said the emergence of the megachargers is a two-edged sword.
“[It’s] wonderful for those one-third who pay their bills in full each month.” (In an ironic reversal, the sociology professor at the University of Maryland says, the cardholders who pay on time are known in the industry as “deadbeats” because they aren’t paying their share of interest.) “They are being subsidized by the other two-thirds who still revolve their credit and pay extremely high interest rates.”
Ritzer sees the cards phenomenon as a sociological metaphor: “We’ve gone from a country that emphasizes saving to one that emphasizes debt, and banks have gone from being institutions inducing people to save, to inducing us to go into debt.”
Despite his pessimism, he acknowledges that the sophisticated credit-card users are changing the way America uses money, and pushing us a little further down the path toward a cashless society.
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Don’t Get Strangled by Your Credit Line
While the credit card “sharks” gobble up free airline miles and other bonuses offered by the industry’s marketing frenzy, other shoppers are in danger of getting hooked on debt.
“With everyone else accepting credit cards, I think consumers are headed for a lot of trouble,” says consumer advocate Marc Eisenson. “We are being blitzed with offers and seduced with teaser rates as thousands of companies compete for our business.”
His Good Advice Press, based in Elizaville, N.Y., publishes the Pocket Change Investor, which educates consumers on saving money. Eisenson ticked off some of the credit-card traps:
* The temptation of a low annual percentage rate (APR). “Usually within six months to a year it converts to the prime rate plus a hefty additional charge, in the range of 17%.”
* The temptation of overspending to get bonuses for every dollar charged on the card. “It’s just crazy to pay interest on something that is disposable, like cornflakes.”
* The minimum payment requirement. “It’s the notion that you only have to pay a few dollars a month. In reality, you are paying almost nothing but interest, so you just keep getting deeper and deeper in the hole.”
* Choosing the card with the lowest minimum monthly payment. “That means your final payment, if you live long enough, will be the highest.”
* The common belief that you have two choices--to make the minimum payment or pay the whole thing off. “Of course you can pay anything in between, and the more you can send in, the more will be applied to the principal and the sooner you will be out of debt.”
* The company’s offer to let you skip one month’s payment (usually January). “They are still charging you interest on the whole balance.”
* The offer of “convenience checks” to pay off balances on other cards or to buy something you need. “The fine print explains that checks go on your credit card and you start paying interest immediately. But it’s easy to overlook.”
