In perusing the articles, comments sections, and forums at a number of Personal Finance blogs, I have developed a theory that I like to call the “Credit Card Continuum.” This theory is that everyone travels an arc of credit card use populated by a number of different stages. Credit card users can get their start on the continuum at any point, and move towards any other point at any time. Generally speaking, however, I would suggest that most people do not move far past the left side of middle after having inhabited the right side.
Here is a graphic that I put together to help visualize the Credit Card Continuum:
The Continuum is an inverse curve. All categories to the left and right of center represent credit users, the left side bad, the right side good. The lower down the curve you go, the more credit that’s used.
As you can see from the graphic, the left most position on the Continuum is occupied by those in an almost hopeless debt situation. These are people who, I’m sorry to say, just don’t get it. They are probably making the minimum payments on their cards because the 30% interest rate doesn’t allow them to pay any extra. It will take them 40 years to pay off their balances under these circumstances.
The next position is occupied by many Americans today. This position is reserved for folks who maintain a monthly balance on their cards. The balance is high, but not too high — perhaps less than half of their annual salary. The real crux of their problem, however, is that they add to the balance just as fast as they pay it down. Because of this they end up paying a lot of money in interest over time, and they effectively pay 1/3 more money for just about everything they own.
Next we enter the band of responsible credit card users. This particular category contains people who use credit cards on a fairly regular basis, primarily for the sake of convenience, but they always pay off the balance at the end of the month.
The peak of the Continuum Curve represents those who use no credit at all. Period. Many of these people are former inhabitants of the far left side of the curve who have been seriously burned by bad credit usage. Some of them take their no credit use beliefs to the point of zealotry. These people may believe that all credit use is bad and even that credit cards themselves are “evil.”
Some people have discovered that there are some uses of credit that are actually beneficial (that is, other than receiving instant gratification by spending money that they have not yet earned…). These people have come to recognize that credit cards aren’t bad, but poor credit card habits are. With a plethora of rewards cards currently available, one can earn air miles, groceries, money off of their next new car, and even cold, hard cash. These people inhabit the first category to the right of center, and they pay for most things using their credit card but pay the balance in full every month.
The next category is similar to the last one, except that these people take things one level higher. Many people take advantage of the 0% interest teaser rates offered by many credit cards. They make as many purchases and payments as possible (within their normal budgets, of course) on their cards, and then make only the minimum payments every month while depositing the difference into a high interest rate savings account. In this way, they essentially take a 0% interest loan and earn interest in their savings account. Before the end of the teaser rate, they pay the balance in full and pocket the interest earned. People in this category also sign up for credit cards solely to collect sign-up bonuses, such as $100 just for making 1 purchase.
The final step of the Continuum contains the few brave souls who make 0% interest balance transfers from their credit cards, tens of thousands of dollars at a time, and deposit them into CDs or high interest savings accounts. This is similar to the former step on the Continuum, but the full balance is deposited at the beginning of the loan period. This is known as credit card arbitrage.
My own path on the Continuum started about halfway between the center point and the left most point on the curve. My college years and the few that came after found me in chronic, low level debt. Even when I was making excellent money, I still had the interest meter running on the debt. Eventually I switched to an all cash method, cleaned up the consumer debt, and now I have begun to venture towards the right hand side of the graph. Last year I earned over $1000 in credit card bonuses, rewards, and interest on 0% interest teaser rates. This is over 4 times greater than I had ever earned in interest before.
So what do you think? What step are you on the continuum? Do you think you can occupy multiple stages at the same time? Have your attitudes about credit card use changed over time?