To quote Timon the Meerkat: “DID I MISS SOMETHING?”

I suppose that the phrase “due diligence” went out of the window when the Bankruptcy reform act allowed the Credit Card companies to “secure” their unsecured loans by court order.

That book looks interesting. Thanks for pointing it out

No doubt a cash only system would be best for this guy. Banks do still offer ATM cards that do not act as debit cards and this is the best alternative.

BTW, here’s the math on the overdraft versus credit card assuming similar fee structures:

Debit Card Overdraft: $35 initial fee + $5/day fee

Overdrawn 2x in one month over the weekend and it’s $100 in fees for the month.

Credit Card: $35 over-the-limit fee + $35 late fee = $70 in max fees.

Interest charge would need to be $30 or more which would equate to a $1,200 balance @ 30% interest.

A credit card would be less expensive than a debit card assuming he requires swipe-able plastic and won’t go for an ATM card. The real devil of debit cards is the way banks hit folks with multiple fees on the same day for transactions as little as $1.

John Maxwell wrote a book and created a whole curriculum around Failing Forward. In it, he explains that it can be a very good thing to fail, fail, fail, and fail, but in the end succeed in the bigger picture. I don’t think a $1,000 credit card that he will ultimately implode will rise to the realm of catastrophic, but I’d much rather him fail often now before he has REAL responsibilities like a wife, kids, house payment, job, etc.

Only 17% credit card users paid the installments monthly.
84% used credit cards to pay for groceries, 70% to pay for clothing 69% to pay for cosmetics.
45% of students are get nervous looking at the credit card statement.
35% of student never talked over the details of using credit cards with their parents.

The mom mentions overdraft fees, but doesn’t say whether the overdraft is a mounting debt, or just fees incurred because of careless use (but then the money is replaced). If it’s the former case, then your strategy might make sense. If it’s the latter, then I’d have to agree with the mother’s point that it would be just too big of a temptation. If a person can’t handle one responsibility, it can be very damaging to heap more on them that they’ll inevitably fail.

But here’s a thought: What if they got rid of the debit card as well and went to a cash-only system? If he has to pay in cash, he’ll have a visual reminder of when he’s running low, and when it’s gone, it’s gone. No overdraft fees, no credit card debt. Maybe that way he’d learn how to plan and prioritize.

You’ve missed the point. This individual is already demonstrating misuse of a debit card and it is more expensive than had he simply used a credit card. Having worked at a bank branch that collected over $1.5 million in overdraft fees, I can assure you that the overdrafts are more expensive than the fees and interest from a credit card. It is commonplace to see accounts that average double digits in overdraft occurences.

The benefit here is that the credit card company will call him relentlessly until the situation is fixed. When he overdrafts his checking account, the bank won’t call unless it is a severe overdraft or two weeks has passed without a deposit.

Your analogy again misses. He’s already driving the car over mailboxes on his way to a telephone pole in the future with no one screaming at him to stop. Having a credit card adds people on the side of the street screaming at him to stop driving recklessly.

The deck is stacked against him currently and having a credit card can actually put them more in his favor over the long run.

Ultimately when someone overdrafts but is still living comfortably, it is a matter of responsibility and self control. However, when third parties (collectors) get involved, the stakes are increased and attention is paid.

This is true in this instance and it is also true that goals shared with others increases accountability and the likelihood of achieving those goals. Adding the element of the third party serves as a benefit.

The point I’m making relates to credit cards and other short-term consumer debt because the group that pays the balance in full each month truly doesn’t need a credit card. A debit card is equally convenient and has similar features to credit cards.

Your point about housing is a bit mushroomy and the analogy isn’t clean. If a homeowner had the ability to pay his/her entire balance each month, then yes, I would also say he/she doesn’t need a mortgage. The same is true for someone that can afford to pay cash for any purchase but elects to use a debt instrument instead.

As to the causes of our financial woes in the last couple of years, I’d say it was a helluvalot more than just people buying too much mortgage.

Jim:

The fees to merchants vary based on network (V, MC, AMEX, DISC) and the issuing credit card company does NOT collect the entire fee. A good chunk is siphoned to the network and to merchant processing companies. The issuing company would not survive on this revenue stream alone and that is why any credit card issuer relies on revenue from card holders that do not pay their balances in full each month.

Years ago, one of the most popular credit cards in the marketplace was the AT&T Universal Card. It was the most widely held credit card at one point and the product was failing. Since the product wasn’t making money, it was sold to Citibank where there were major changes.

First, Citibank dropped the average credit quality of the pool of card holders. Next, they strengthened the rewards program and attempted to move ‘BIF’ (balance in full) payers to other products with larger rewards to induce overspending. Finally, the card re-emerged with a much lower percentage of BIF’s and the brand became very profitable.

The only company that truly has a model to make money without interest is American Express. If you speak with merchants, you’ll find that their fees to merchants are considerably higher AND many of their cards come with annual fees.

One of the reasons AmEx was profitable for many years while having a balance in full card offering is because they extended credit only to those with very high credit ratings. To compete, they’ve brought their offerings down the credit worthiness scale considerably and now are paying the price.

Credit card companies are writing off around 9% (source:Fitch’s Jan Report) of their accounts right now. There is no other way to explain their business model other than it relies on fees and interest. Fees from processing, fees from over the limit charges, fees from late payments, and interest on non-BIF payers. You can label it however you like, but non-BIF payers subsidize a great deal of the credit card issuers operations including BIF/responsible/savvy card holders.

If you get a chance, watch ‘Maxed Out’ and you’ll see some of what I’m talking about. In addition, whenever there are hearings on the Hill involving the credit card industry, turn on C-SPAN and watch. Seeing the CC industry execs testify is very revealing about their practices.

The bottom line for me is credit cards are useless and gaining the system corresponds to someone else paying a pretty stiff price. I don’t know, maybe I spent too much time as a collector at Citibank and heard too many God awful stories from card holders drowning in debt, but for me, I’m done with the whole lot of it.

I don’t think “stupid” or bad credit card users subsidize responsible credit card users.

Does this also apply to mortgages? After all, wasn’t it mortgages that significantly contributed to the economic crisis in the US (which had a domino effect around the world?) Should I avoid getting a mortgage too because some people get in over their heads, and the bank is relying on me to be responsible? Consider this scenario: all of the smart/responsible/savvy people decide not to get mortgages (or car loans or lines of credit). That would make it impossible for ANYONE to get credit.

I’m not attacking your points — Oddly enough, I’m starting to agree. I’m just wondering how far you could take this argument.

While I do agree that making mistakes is a powerful part of the learning process, I think sabotaging someone is going to do more harm than good. Let him get a credit card, guide him how to use it, and then let him make mistakes (or not). Stacking the deck against him is just going to a) make him resent you, and b) not really teach him anything because he doesn’t have all of his financial tools at his disposal (you’re taking away the debit card).

Consider this scenario: If all of the ’smart/responsible/savvy’ credit card holders cancelled their accounts tomorrow, credit card lending would become a much higher risk proposition for banks. The result would be the lowering of credit extended to borrowers that would thereby reduce the total debt in the market.

Your comment about ’stupid’ is both interesting and naive. Interesting because if you know you are ‘gaining’ from the ’stupidity’ of others, would it not be the responsibility of the ‘enlightened’ to alleviate the problem? Your comment is naive insomuch as the majority of those that have very real struggles with debt are hardly stupid. They are normal people that have struggled with debt for a variety of reasons. To believe that it is a shear matter of stupidity is…well…naive.

This appears to be counterintuitive, but a credit card will allow him to fail faster and cheaper in the hopes that it will teach the lesson of responsible money management. The way this happens is (1) overdraft fees can stack up and surpass the fees of credit cards–over the limit, late charge, and interest paid–so this will be cheaper, (2) once he falls behind, creditors will harrass him from 8 a.m. until 9 p.m. daily, and (3) assuming he completely screws up, he’ll have difficulty in obtaining future credit to hurt himself with.

Given a choice of fail now or fail later, I’ll always suggest failing now for a college student. That is the best time to fail compared to when he grows up and is raising a family only to have the problem persist and ruin his finances and potentially his marriage and relationship with his children.

To execute fail fast, fail cheaper, do the following:

1. Get rid of the debit card completely
2. Have him sign up for a credit card
3. Obtain cash advance pin number for said credit card
4. Sit back and wait for life to teach in the best way it knows how…through failure

A chainsaw can be used to build yourself a home, or you can cut your own arm off with it. It’s not the fault of the chainsaw. If you are the type of person who will forget to turn off the chainsaw when you set it in your lap (or to pay off a $30 bill), then don’t use a chainsaw, but don’t condemn those of us who know how to use them properly.