Thoughts on Credit Cards

I’d first like to acknowledge I don’t know all of these things for certain! These are just some concepts I’ve come to from my own thinking, however they are subject to change with exposure to new information.

• It’s economical as a consumer to play the game. There are ridiculous discounts and promotions from credit card companies, and building credit has important perks. It seems to me that as a consumer living in a country with financial privilege, it’s in my best interest to utilize the perks of credit.

• “Building credit” as a system doesn’t make sense to me, or at least it seems flawed. People build credit by buying things using a credit card, and paying off their credit card bills at the end of the month. Your “credit” is supposed to represent your credit-worthiness, i.e. how likely you are to be able to pay back any credit/debt if loaned to. Paying off your credit seems to me like a function of your income and/or current assets in 99% of cases, that is, it seems like the ability or action to pay off your credit card bills does not serve as any new evidence that you’re more creditworthy than what you could gather from looking at someone’s income and assets. However it seems that “building credit” in this way is recognized by financial institutions to be very necessary for a variety of financial perks and services.

  • Generally, I view debt as a tool. It’s good when it can finance something to increase someone’s income/productivity that they might’ve otherwise not been able to afford, and it’s bad when it finances over-consumption. From what I can tell, credit cards in most cases are not used to finance ways to increase someone’s income, nor do they signal creditworthiness. It seems to me this system was legitimized to encourage over-consumption and pull people into debt.

• Reversibility as fraud protection is a band-aid to a design flaw. Every time you pay for something online, you give away all the necessary information to spend your funds. Of course that’s insecure and prone to having your information or funds stolen. I believe digital signatures, or any more secure method of authorizing transactions (virtual cards are a step in the right direction) would already eliminate the perceived need for reversibility for security in the majority of transactions today.

• The real cost of reversible transactions is it requires a custodian to be fully in control of your funds. To be able to reverse a payment, the credit card company has to be able to pull the funds from the merchant, and so settlement must be delayed. Importantly this is only possible when the merchant does not hold their own funds either. Third party custody of funds not only risks people’s livelihoods on the trustworthiness of financial institutions, it also means these third parties have full control over who can participate in the economy. The only way to have custody over your own funds digitally seems to be to have some sort of non-reversible payments as a settlement layer.

• Intermediaries increase transaction costs, either raising prices or hurting the merchant. These transaction costs apply on many transactions where reversibility or third party custody may not be necessary; the costs have remained because financial intermediaries have been the only way to accept digital payments up until recently. Importantly, these transaction costs also prevent the possibility of micro transactions. If you wanted to pay 10 different people a cent or a fraction of a cent, if an intermediary were to take a cut, it would mean some people you wanted to pay wouldn’t be paid at all (there can be workarounds for this but you get the point).

• I previously thought that card companies take the loss when a fraudulent payment gets reversed, but actually it’s the merchant that takes the loss. Reversibility increases the merchant’s risk, requiring the intermediaries or the merchant to hassle the customer for information. Not only does this invade people’s privacy, this requires credentials or records recognizable within legal jurisdiction, which complicates cross border transactions.