I don’t get credit cards

Hi RIP friends,

I got my first real Credit Card few days ago. I didn’t own one before. Well, as I’ve previously explained, I had some sort of similar tools, like prepaid credit cards and a Hooli issued real credit cards, but that’s another story. With the prepaid cards you don’t get a line of credit and the Hooli card is for work related expenses. I’ve never considered it mine.

I never had a real credit card, I’ve never experiences this sort of monthly threat “pay your bill or we’ll destroy your finances“. It feels strange. And wrong.

Anyway I don’t get it. I don’t understand why it works this way. The system is broken and inefficient, I really don’t understand why.

Let me explain.

RIP, why are you complaining? Why you got this card??

Ok, let’s start with why.

Apparently some sort of Visa/Mastercard is needed in modern world if you want to buy things online. Physical purchases in your home country can still be resolved with debit cards / atm cards / cash. Did I tell you I hate cash? I’d love to experience the disappearance of physical currencies! Physical purchases in another country usually require either cash or some sort of credit card, regular or prepaid. And then there’s US, where for most actions you need a credit card, like car rental, bike rental (!!), hotels… That’s because with credit cards they can reserve an amount for eventual damages or “in case you don’t return the bike”.

Most of the purchases I do in Switzerland can be resolved with PostFinance card, which is a debit card that’s accepted on every Swiss website and physical shop, and it’s bound to your PostFinance bank account.

I hate cash. I avoid using it as much as I can. Did I tell you?

There’s only one money related thing I hate more than cash and it’s debt. I hate debt! Maybe it’s because I experienced so many time (in third person) people going mad due to it.

So, I got the card. It’s a Cumulus Mastercard, issued by Cembra Money Bank and connected with your Cumulus Migros account. Essentially your fidelity card for the Migros world. Migros is the biggest grocery chain. Well, not only a grocery chain: Migros is everything. A bank (Migros Bank), phone company (Migros mobile), IKEA-Like (Micasa), electronics (M-Electronics), gas (Migroil), language courses, flowers, travel, farmacy, you name it.

How does this card work?

  • You do your purchases, they anticipate the money for you. You pay later.
  • If you pay your monthly credit card bill, it will be the face value of the money advanced. No interests, no fees. A 0% loan.
  • You get points for using your card. We’re talking about 1% of your purchases in the Migros circuit and 0.5% of your other purchases back in terms of cumulus points. Actual cash, if you’re a Migros customer (I challenge you not to be one!).
  • You don’t pay any annual fee.
  • You get sign up bonus (3000 points, i.e. 30 CHF).

My first reaction was “where’s the trap? It can’t be that good!

I’m so used to only spend money when I have them, I’d never miss a payment. Why am I rewarded to get a service from an evil company without paying a dime?

Are they just hoping I miss a payment so they can charge 9.99% interests? Is that all?

If that’s all, the system is bugged my friends. It’s an horrible system. Ok, I get the benefits while someone else is paying with interests rates above usury limit, but that’s stupid!

Then I start looking closer at how people use credit cards, reading posts about “avoiding credit cards debts” or the concept of “minimum payments”… holy sheet, do people only see the “credit” word in “credit card”?

Apparently yes, they do. If you get a credit card with 10k limit, you may see it as “cool, I get another 10k to spend“. No no no no it doesn’t work this way! It shouldn’t! Credit cards are not cheap loans.

Credit cards are too good for smart people to be true. You get rewarded for getting a 0% short term loan. This is not a stable system, it’s based on financial illiteracy! Too bad for dumb people.

So I thought: “well, if everyone started using credit card correctly they’d go out of business overnight!

That’s also not true.

They’re not charging you for your purchases, but you’re not the only one involved in the trade. They’re getting a hefty percentage from the merchant! That’s where things go really evil. That’s why some merchant will charge you extra fees for credit cards payments (looking at you, my dear low cost flight company). That’s why some shop won’t accept your card below a certain minimum purchase amount.

And here’s where the system is purely wrong and evil.

Ok, I can’t easily articulate all of my concerns, but I’ll try. Please, understand I’m an old man, getting dangerously close to my 40s, a man who’s born in an age without easy access to credit and always been scared by debts.

The system is based on splitting consumer and merchant worlds. They (credit card issuers) befriend and reward consumers and drain merchants. Divide et impera. They drain way more (2-7%) the merchants than they charm consumers (0.5-1%). Plus signup bonuses. Ok, that’s a little bit of exposure on their side, but the break even for them is probably very close to few thousands spent on your side. Plus yes, they’re close to explicit thievery when it comes to currency conversion fees, but that’s not an issue for most people who (unlike the RIPs) don’t live a three currencies life.

The system is inefficient. Consumers and merchants could find a 1.5% discount or so for “cash payments” and credit cards will be cut out. I don’t understand why merchants don’t offer discount for cash payments. Are they forced to be silent? Ok, I admit handling cash is boring, risky and obscure (money laundering? tax evasion?) and it doesn’t work for online shopping… but what about wire transfers? Ok, I know, debit payments are not immediate and can’t be…

But…

But what about cutting out the middle man here?

Why can’t I just have money and send money to someone without a middle man?

Than I watched this TED Talk. Did I tell you I love TEDs?

Enjoy

In my EGN about future I missed this one!

Are cryptocurrencies the solution for this inefficiency/robbery?

I think so.

Are they production-ready today?

I don’t think so. But sooner or later they must become. I don’t like the mechanics and the whole speculative world behind Bitcoin, but if I have to guess how the world currency is going to be in 100 years I’d bet on a decentralized credit system almost impossible to hack, i.e. Cryptocurrency.

Have a nice day… and use your credit cards judiciously!

11 comments

  1. You hate cash? Well that’s not really good.. Everything that’s not cash has to be paid. Credit cards? Shops pays 1-3%. Paypal? Same. Everything you pay without paying cash has to be paid. Will you be happy if next time you go buying groceries you pay 52chf instead of 50chf? Unfortunately it will never happens because Credit Card companies made (now illegal) deal with shops that did not allow them to charge the usage of credit cards. Migros/Coop etc will never try to make you pay. Not if some sort of alliance comes or the government tell them to. Airlines doesn’t follow this “rule” and started to make you pay. Some even invented a bigger surcharge (I’ve seen 15-20chf surcharge for a 100chf ticket!).
    So CC are bad imho.

    And I don’t even start the more philosofical discussion about the fact that removing the cash from the economy is basically giving too much power to governments (They can control you and your money. Example: They can decide to istantly get a percentage of your saving from your account because there isn’t enough money. It happened in a similar way already in Italy with Poste italiane accounts.)
    Also the fact that there isn’t a swiss (or european) credit card company isn’t also a good idea for the cashless society.

    1. Oops. Disregard the part where I repeat what you said. 🙂

      The discount thing is too much of a hassle and will look bad on Migros/Coop if they do that. They dig themeselve a hole by accepting CC in the 80ies when the contract clearly said that they were not allowed to pass the cost to customers.

    2. “everything that’s not cash has to be paid”… well, cash has to be paid too! Not only in terms of “minting and printing” but in terms of physical security.

      Having to pay for a digital currency is a temporary issue, it can be fixed with uber-secure cryptocurrencies. Today they make you pay (a lot) due to a monopolistic and legacy situation.

      Governments can screw you up even with paper/metal currency. Hyperinflation? Zimbabwe Dollars? Cryptocurrencies could reduce their power.

      I’m not saying they’re production ready today, but there we should aim to go in 30-50 years in my opinion.

  2. We doe have a credit card… it sometimes makes life easier… And, we do not have a credit facility attached to it. Each month, it goes out of the current account.

    One month, I did not pay attention and went in overdraft. I got directly an email from the bank to inform me. I pay a lot more attention now!

  3. Hello Mr. RIP,
    Your view on the money is so peculiar, but I obey with you as the credit cards are really very beneficial. They provide everything first and need to pay later, similar to the post paid 🙂 . And all the perks provided by the credit cards are very attractive. I only thing to be noted is to manage all the debts of the credit card to be paid every month.

  4. Thanks for such a thought-provoking text! Next time I pay for something at a small business, I’ll think twice whether my 0.5% cashback is worth ~2% lost to the merchant (http://www.moneyland.ch/en/credit-card-payments-markups-switzerland). For instance, it certainly does not make sense to donate via credit card if you can do it differently.

    BTW, Postfinance together with Coop and other merchants are pushing for people to adopt Twint, which apparently has lower costs for the merchants. I used it several times to buy stuff at Digitec and Microspot. I think this can made work without the behemoth which bitcoin has become.

  5. I have just discovered your great blog (shame on me) and I have devoured it in just few hours. I have been a fun for years of the popular American blogs on FI (and keep reading them eagerly!), but sadly I never got a link to yours.

    My comment is not directly related to this post, but I want to share with you the fact that there are unbelievable similarities in our lives, and one huge difference.
    I explain: I am also Italian, I am also a software engineer, I live in Switzerland, I am 40ish, I am aiming at FIRE, I am saving like crazy, I am investing, I am married, my wife is working, we are not that far from FIRE etc. etc., but we do have children.
    That’s not the huge difference I was talking about, even though it is heavily related.
    The thing is that, as you know, retiring in Switzerland would require much more resources, therefore a country with more reasonable costs needs to be chosen. And I am not talking about Kenya here, but rather of Italy. The problem is that my wife has started bringing up the differences in the quality of education, in the future opportunities etc. Basically she is in love with what Switzerland offers! I see that you are both determined to retire in Italy and also planning to have kids. Don’t you share the same concerns?

    1. Thanks Reitsman for your awesome comment! Wow, we are definitely on the same page! I don’t see any “huge difference” here. Yes, kids, we plan to have one or two in the near future. About Switzerland vs Italy and quality of life the RIPs are not yet convinced. Mrs. RIP loves Switzerland and she has a preference to stay here. I’m the pushy one in the couple. We both would like to not have to work though, so if it means we can reach Italian-FI in 3 years and Swiss-FI in 10 years she gets it and she’s all in.

      Anyway, we should definitely chat a bit 🙂

  6. Honestly I get all your reservations on credit cards and I agree with them whole heartedly, but I find myself actually disagreeing with your opinion. Respectfully of course. I totally agree with you that credit cards in the hands of irresponsible people are evil and quite possibly the root of many societal issues. However for those of us responsible individuals I think they are a fantastic tool. My card rewards me point like you mentioned in the post and I pay my card off every month when the bill comes due. I’ve had a credit card since I was 16 and I have never, ever missed a payment to them. Needless to say that gives me a pretty good credit score and helps when purchasing large ticket items. I had to purchase a new vehicle last year and my 800+ credit score opened up a lower interest rate for me. I couldn’t pay cash because it was unexpected at the time when my old car died, but it was paid off within six months once the assets became available. In addition I accumulate enough points through daily life, gas, groceries, etc. to essentially pay off most of a months expenses every February because of the accumulation throughout the year. So I get that the credit card companies are evil, and in fact fully support that stance, but in the right hands they actually can be a powerful tool as well. Loved the post, thanks for the interesting read!

    1. Hi Duncan, thanks for your comment.
      I see how European and US mindset differs here. You say CC are cool because they give you a lot of benefits if you “respect the rules”. For example you were able to get a nice interest rate on a vehicle purchase thanks to your credit score (why the hell do we need to have a credit score??), that’s awesome! You know what? I never had to ask for financing a purchase! Do you really need “a nice interest rate” to afford your purchases? Isn’t it simpler to just pay things with cash?
      Plus, ok, you get benefits for paying your CC bills on time, you’re gaming them! They’re losing money thanks to you! Or… aren’t they? They charge 4x your bonuses to the merchants. Merchants have to increase their prices in order to keep their margin so you’re (we all are) paying more than needed for things.
      It’s a lose/lose situation from a mathematical point of view. It’s even worse if you don’t pay your bills and go into CC debts.
      The only good point is “convenience”. Digital payments are practical, safe and simple. Only problem is that VISA/Mastercard/AmericanExpress Mafia has to go away for something less centralized and controllable.

  7. I also ordered the same card but now I’m a bit confused. Is the 1% that they promised for purchases in Migros circuit the same 1% that you get with the Cumulus card any way, or is it on top of it? If it’s the same 1% then the card actually encourages you to buy in Coop, as there you can get whatever you get with Coop loyalty card + 0.5% cashback from the Cumulus MasterCard. 😀

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