the toxic relationship between Americans and their credit cards
How to boost your credit score, which credit card to get, and how to maximize your credit card points are all google search queries that have quadrupled in popularity since 2004. The vast majority of adults in the U.S. (82%) now have at least one credit card. Credit cards are increasingly popular in the U.S., even more than they always have been, especially compared to in other countries. When I visit my family in Latin America, I realize credit cards are widely unpopular and not even accepted at most local stores — instead, people pay primarily through direct bank transfers. Some of this of course is due to socioeconomic wealth, but wealthy countries like the Netherlands and Germany still have less than a 30% share of credit card users. Our love for credit cards has sunk us into a tough situation — total credit card outstanding balances as of the end of 2023 is now the highest it’s been, and average credit card debt is up to 8.7k in states like Maryland and New Jersey. Households are overwhelmed by inflation and student debt payments kicking back in as of Q4 2023, and it’s the credit card payments that are taking a backseat.
So, how did we get here? Why are Americans such avid credit card users?
The beginning of the relationship
Some history first:
The credit card model isn’t anything new in the U.S. — we’ve been delaying our payments as long as our economy has existed. For example, people would have an account at their local gas station and pay it off at the end of the month. Bank of America, then named the Bank of Italy, saw this as a business opportunity and offered a charge card, specific to each business, that consumers could carry around. However, it wasn’t until 1950 that Diners Club was founded to provide the first multipurpose charge card. This card was embraced by the wealthy residents of Manhattan wishing to flash their luxury card and cover the restaurant bill. In just the first three years, businesses started accepting it abroad, in the UK, Canada, Cuba, and Mexico. Today, there’s a stack of winners involved in the credit card business, primarily the bank issuer, the credit card provider, and the card network, and it’s a treasure trove of interchange. Running a credit card network is an especially profitable business in the U.S. — buyers are relatively wealthy and happy spenders, so credit card rewards have become abundant.
Why it’s a fit
Though credit cards are often an economically beneficial choice, adults in the U.S. adopt them for many other subliminal reasons:
- Individualistic optimism
Americans are overly optimistic; they believe they’ll be able to pay their monthly credit bill, even if they have steadily increasing credit card balances. We all have psychological myopia, but part of this mindset is also due to the way people grow up in the U.S. We’re raised to dream big and take risks and live freely. Another emotional driver is the desire to treat ourselves. Food ads croon at us, “you deserve this,” because they know that message resonates with us, and we’ll end up spending because we’ve worked hard and we’ve earned the right to a reward. So tapping that card is a way to fulfill our luxurious American dream and care for ourselves.
2. Class demonstration
People flaunt wealth differently in different places, but in the U.S. it’s largely through memberships, brands, and credit cards. To take out your Amex card is to signal status and belonging. We have third spaces that are reserved for the special: Amex Plat airport lounges, Equinox gyms, and Chase lounges at sports games. In my home country Colombia, for example, the same or even more classicism exists, but the different social strata are usually separated from each other and don’t intermingle. Wealthy people live in gated neighborhoods in Bogotá and are chauffeured around to a certain type of places. In the U.S., everyone is mixed together, and a shiny pass to maintain one’s bubble of wealth is valuable.
3. Consumerism
Credit cards are also the way people can keep up with each other; they want to be able to buy the bag or the coat everyone is wearing, so there’s motive to swipe mindlessly. I remember growing up and watching Enchanted, and the scene that struck me was when Giselle is given a credit card and makes herself over, prancing through Manhattan boutiques and racking up a mountain of shopping bags. It was such a joyful, free spirited montage.
A hidden dark side
For lots of consumers, credit cards unlock financial freedom and help us counter inflated prices by earning cash-back and rewards. However, for many others, credit card usage is a harmful cycle, and this toxic relationship issue isn’t one-sided.
Credit card companies earn almost double in interest as they do in interchange (see below), which means they’re incentivized strongly to allow customer balances to accumulate. There’s even more incentive to raise credit limits to attract new customers, with increasing competition between credit card companies. Even though the consumer financial protection bureau tries to protect consumers, it only requires card issuers to consider the consumer’s ability to pay, and never explicitly mentions taking into account other loans (source). My Visa Signature Rewards credit limit is almost five times what I earn in a month post-tax.
As the Fed has hiked up interest rates to combat post-pandemic inflation, credit card interest rates have risen from 15 to 20% (see below). That means credit card companies are earning significantly more interest on some of the collective $1.13 trillion that Americans owe on their credit cards as of Q4 2023. This is turning the pervasive credit card debt into a growing opportunity for credit card companies. Amex is increasingly going after millenials and Gen Z, with aspirational ads and increased offerings. This will contribute to a cycle benefitting companies much more than consumers. The next time you watch a credit card ad on social media, gaze at one at the airport, or come across one in the city, take a moment to think about how it might be fueling the craze we see in the U.S.
How will this change?
Though Americans are still widely in love with their credit cards, I think this will be changing with the new generation. Despite its increased marketing to younger generations, Amex already lost the wave of millennials and is more popular amongst older folks, and we’re seeing fragmentation of the market to other players, like Chase and Discover. Market fragmentation means less brand loyalty and more room for people to reconsider their financial product choices.
The next generation may not even want consumer credit. Gen Z is much more wary of storing their wealth in optimistic potential value and is saving more. Think about trends like the recent “Loud budgeting” or “soft girl era” trends that are swaying Gen Z folks to embrace previously unpopular lifestyles. People are starting to value things less and experiences more — good streaming content, concerts, and restaurants. Of course, credit is still the go-to financing for all of this, but I believe we’ll slowly see an increasing number of subscription-based services and BNPL offerings, with no credit card debt involved.
People of all ages are now widely using Apple Pay and are abandoning the pieces of metal that carried so much meaning. If the only luxury benefits left are the special perks and access, then stakeholders like gyms and airport services will individually break off from partnering with credit cards and instead focus on customer acquisition themselves.
What would the U.S. look like without credit cards? Probably similar to Latin America, where BNPL is the default for all purchases unless you indicate preference for one single payment. Maybe we’ll become like the Netherlands too, where the word for debt is synonymous for guilt. Soon, you won’t have to worry about forgetting your credit card on a date, there’s no need to flash it anyways.
