By Stephen Buller
Continuing with the “Cash on Vashon” concept, this article will get to the heart of why so many people use credit cards, namely the rewards. We’ll look at the incentive this creates, why it’s okay for you to get that cash back, and how you can consciously choose when your reward is worth it. My goal is to encourage readers to use cash at local or loved businesses, and to feel good about using their card elsewhere.
First, we must start with a brief history of credit: Looking back as far as the 1700s, it was common for a farmer to keep a tab with the merchant who sold him seeds, and later for a customer with his local grocery store. These relationships were intimate, and their nature was one of trust and mutual success. Prior to that, the concept of credit surely goes back as far as the concept of money. You may have heard of the Diners Club card, invented in 1950 and commonly referred to as the first, modern credit card. Frank McNamara was an entrepreneur who saw an opportunity when he forgot his wallet dining out one night in New York.
Once his product was successful in the marketplace, the banks were quick to follow. Their contribution to the industry was that, unlike the Diners Club card, you didn’t have to pay off the entire balance at the end of each month. And this “convenience” has painted the current-day picture of credit cards: In the U.S. alone, we are approaching $1 trillion in credit card debt, with the average balance-holder owing $7,279 at the end of 2022. In the first quarter of 2023, the average interest rate on those balances was almost 21%, meaning those people are donating well over $100 to their bank of choice every month.
When I was younger, I remember credit cards being a novelty. Not everyone had them, and those that did used them less often than they do now. Someone needed good credit to start with, and there was often a significant annual fee for the privilege and prestige of buying now and paying later. Over time, qualifying became easier and the fees disappeared. Today, you’re “pre-approved” for thousands of dollars if you have a pulse, and fees have been replaced with rewards. Not long ago, there was a veritable arms race in rewards, prompting one of my friends to open a credit card each month, transfer balances, and make purchases to claim the sign-up bonus and other rewards.
Today, you’re missing out on cash back or its equivalent if you don’t use a card. Don’t you want that “free money?” Unfortunately, no such thing exists in the marketplace. A business must profit to perpetuate, and even though banks can fabricate currency out of thin air, they’re not charities. If you get $2 from your bank, you can be sure they got more than that. The merchant pays a percentage of every electronic sale to their processor, and the banks are at the end of every transaction.
I’m a firm believer that people respond to incentives. If someone says I can have a product for $100 cash or $98 on credit, the second option sounds better – on the face of it. But that’s ignoring those nasty statistics above … Even if you don’t carry a balance and pay exorbitant interest on it, have you ever forgotten to pay and swiftly been slapped with a late fee that does its best to offset your rewards? There’s a reason credit cards are marketed so furiously – they are profitable.
The question then becomes about value. Where is the value in this product? In a word, convenience. It’s easier to pull out a card than to count bills and audit the checker’s count on your change. It’s also easier to pay later. But fees, interest, and a culture of consumption above our means represent serious costs to using a credit card. There is also value in using cash: People who use cash budget better, are less likely to succumb to impulse purchases, and don’t pay for the use of their currency.
My recommendation is to go reward-crazy when shopping on Amazon or another mega corporation that can easily afford the merchant processing fees. Then, experiment with the benefits of using cash at your local and beloved businesses, brush up on your personal budgeting and arithmetic, and give your hard-earned dollars to your neighbors instead of the banksters. The world of money and currency is constantly evolving, and you may find these skills invaluable in the near future …
Stephen Buller, CPA, is a Vashon native who graduated from VHS before getting his graduate degree in accounting from the University of Washington. He worked for four companies over 10 years before starting his own firm serving small businesses. In 2021, he returned to Vashon with his wife and two daughters, and is happy to be part of his hometown community once more.
