By Chris | March 22, 2010
In high school, credit cards were alluring. They were a symbol of freedom and adulthood. I couldn’t register a domain name or rent a hotel room without one. So, I convinced my parents to cosign the papers I needed to get a debit/credit card at my local credit union. The credit part of the card only kicked in if my checking account ran out of money. My credit limit was $100.
In college, when I started running out of money I applied for numerous credit cards. I wanted some security in case of a crisis (e.g. if my car broke down in the middle of nowhere; eventually it did). I didn’t have a credit history though, and application after application was rejected until I finally found a company willing to take a chance on a student with no income. Since then, credit cards have lost their luster. Too often I miss the payment deadline by a day and must write customer service begging for a fee waiver.
From an economics perspective, credit cards are fascinating and perplexing. Credit card companies act as a middleman minimizing the transaction costs between merchants and customers unknown to each other. The buyer is protected against a seller who doesn’t provide goods as promised and the seller is (largely) protected against buyers not paying. When you think about it, it truly is amazing that I can type a number on my computer and someone across the country will ship me something very valuable. This is only possible because credit card companies are so good at sniffing out fraud.
On the other hand, credit cards are perplexing in that people use them so irresponsibly. Credit card companies are offering 30-day interest free loans to their customers. Instead of taking advantage of this offer, most customers rack up revolving debt at above market interest rates.
In addition, customers shell out hundreds of dollars in annual fees for prestigious cards with extra perks. One of the bloggers I follow, Tynan, is a big fan of Amex’s Platinum Card. He raves that the card replaced his laptop when he left it in the rain. He praises its concierge service which has served him well during his travels. Maybe the perks are worth the annual fee? Possibly, but it turns out the American Express Gold card has nearly identical benefits with an annual fee that is $300 cheaper. On the other end of the spectrum, Amex offers an invitation only Centurion Card with a $2,500 annual fee. It’s reminiscent of the “I’m Rich” iPhone application. You have to admire American Express’ skill in price discrimination. But other companies are succeeding in the market. There is now a Visa Black Card with mediocre benefits that is made of carbon. It’s wildly popular.
I think credit cards are uniquely suited for status signaling. I’ve come to realize this recently when alternating paying for things with my girlfriend. I’d much prefer to pay for dinner than for gas. Paying for the meal is public and projects status in and of itself. It’s natural to want to augment that emotion by paying with a prestigious card. And yet, in the case of credit cards, the payment for prestige is so obvious. A Mercedes may be higher quality than a Toyota but a metal card has no obvious advantage over its plastic cousin. Status credit cards might just be the most overt form of conspicuous consumption out there. Thorstein Veblen would cringe.