THE NEGATIVE IMPACTS OF CREDIT CARD WITHIN CYBER ERA
FADI ABU ZUHRI
A credit card is a payment card containing virtual money that is handed out to users to allow them to make payments to the merchant based on the creditor’s promise to the user to pay the deposit and other agreed commissions. The card organizer (frequently the bank, or a other financial institution) makes a negotiable account and provides a credit card to the cardholder, where the cardholder may request loans to make payments to the merchant or as a cash advance (Yilmazkuday & Yazgan, 2011). In addition, credit cards combine payment services with credit extension. The complex pricing in the credit card industry limits customers’ ability to make comparisons between different credit providers in order to ensure the competitiveness of the sector and maximize the benefits of the credit industry. As a result, various legislators have controlled the fees of the credit card.
IS CREDIT CARD REALLY A GOOD IDEA – PROS & CONS OF A CASHLESS ECONOMY
Credit fuels consumption and therefore functions as an extra demand for production. Credit is the ultimate answer to implementing the statement “I want it now”. But credit creates an illusion of an exaggerated financial potential. Lie (2017) argues that most people who are used to using credit cards often fail to see that their red accounts have reached the monthly salary level, or went even beyond. Furthermore, some are not sufficiently enough aware of the cost attached to the loan / credit taken, in the form of the most recent interest rates applicable. Today people like going cashless when buying almost anything with a credit card, such us: a simple TV, cell phone, car, even an apartment or a country house. Without a doubt, credit is a very practical and profitable discovery made by the humanity, however it comes with a number of negative impacts as well.
Hodson, Dwyer, and Neilson (2014) point out that a credit card is different from a payment card and the amount used must be fully repaid each month, otherwise significant cumulative interest rates will be triggered. On the other hand, credit cards allow consumers to obtain a permanent debt balance, with interest payments. A credit card is unlike a debit card that can be used as virtual money by the cardholder. Themba and Tumedi (2012) point out that the credit card is not like the debit card, as a credit card is typically a third party that pays the merchant and is compensated by the customer, while the charge card issues the buyer’s payment up to a later date in a cashless society. Nevertheless, credit cards have some negative impacts.
In fact, reaching the credit limit is a bad idea. Certain countries apply a credit scoring which determines your credit limit. The percentage of credit a person uses in relation to the available individual income must not exceed a certain percentage of their credit score. Paying the monthly credit card bills promptly could allow the user to build a better score faster, but there are disadvantages. In accordance with the terms, it may be wise to pay using a credit card in a smart city that promotes a cashless economy. However, credit card companies entice users to spend more by giving them loyalty points that can be redeemed for benefits. Such marketing strategy determines users to look for more ways to spend and earn points (McHugh & Ranyard, 2012).
According to Lie (2017), various bills are not equal and one has to assess each of them to decide which one is best for paying with a credit card. There are pros and cons of paying bills with credit cards. Anyone who wants to pay bills with a credit card must have discipline and must not spend the money that he or she normally pays the bills with. The user has to pay the credit card bill with cash or from a debit card, not from other credit cards. Lie (2017) also points out that it is very important to keep the credit card balance under 30 percent of the limit. The high use of credit cards can negatively affect the credit position of the user and even damage their credit worthiness. If the users pay bills they cannot afford using credit cards, it can result in paying a lot of interest when using virtual money.
In both cases, it should be noted that going cashless frequently in a smart city confirms that the purchase price of goods is much greater than the actual price of the product. It is referred to as “I want it now”, and it also includes excessive payment for the goods. The only thing that needs to be done is to compare the amount with the rate of rising debt. Everybody knows that credit encourages consumption and, therefore, production. However, every borrower of a loan must offer certain guarantees for the loan commitments (Hodson, Dwyer, & Neilson, 2014). Over indebtedness leads to a need to an increase in the income of debtors and, therefore, to a chronic excess of the rate of consumption, depending on the contractual guarantees. Think for a moment that everything a person uses is purchased on credit. All the things one uses and buys, such as the TV, the restaurant bills, the furniture bought on credit are adding up to a point where the user’s monthly salary cannot keep up with prompt payments.
Many people do not have any savings because almost all of their salaries are used to pay off the loans they use. These loans are called subprime and if these people were to lose their jobs, the following day in front of their houses there will be a long queue of creditors looking for guarantees on payment obligations that the debtors got themselves into. Therefore, most people are anxious to get decently well paying jobs with enough wages to meet or exceed their monthly payment obligations. McHugh and Ranyard (2012) indicate that if the customers do not pay the credit in due time, their accounts are “fined”. In the worst case scenario, their property may end up under the hammer. If the same situation continues, when one cannot pay the loan, it happens on a global scale, that the property will be auctioned off, however no one can buy it at the auction because the neighbours of their neighbours will find themselves in the same situation, as it was the case in the 2008 financial crisis, or Detroit housing market.
Time passes very fast. If we were to consider some time back, the purchase of an item on credit took on a “state” role. Yilmazkuday & Yazgan (2011) argue that today, purchasing on credit is a common and routine activity that has nothing to do with stringent government approvals. Many people do it, often times without thinking about the results. It is not a secret that if people do not have enough money to pay the total purchase price, for example for a washing machine, a car, or a new apartment, they will take it on credit or loan. From a rational and practical point of view, credit is a direct alternative to loan stacking.
Meltzer (2013) argues that people can be better without a credit card because they can learn to have self-control. At best, the reluctance to have self-control when people have money can deprive them of their financial security. In the worst case, an impulsive attitude towards purchases can also negatively affect other forms of their lives. Yes, the restriction can be both difficult and annoying, but there are other valuable rewards of these people being able to afford their homes.
An often-overlooked benefit of credit cards is the payment protection feature. It’s called ‘chargeback’ and it means that if you don’t receive the goods you bought, you may be able to get your money back. Some card companies also refund the charge if the customer is not happy with the product or service (Money Team, 2018).
To sum up, people need to be smart with their credit cards. Here are a few tips: don’t charge food purchases, create a budget, read the fine print, don’t buy what you cannot afford and simply leave your credit card at home (Khaleej Times, 2018).
While offering the charm of easy and quick money, credit cards have fuelled a cashless economy and destroyed financial prudence. If you want it, you can get – seems to be the motto for the younger generation that doesn’t seem to know the difference between what is an asset and what is a liability. Once caught in the web trap of paying off interest on the principal amount, people could very well be tempted to criminal behaviour to pay off their debt. Could we be stoking a new generation that is financial less secure and therefore more inclined to beg, borrow or steal, in order to buy their next object of desire?
Some say that paying with hard cash gives the product a higher psychological value than that which is bought with a single swipe of a credit card where you don’t have to pay anything until the next bill is generated. Are we not promoting irresponsible consumerism and individual bankruptcy, with all the implications involved, in the name of going cashless or priceless?
Hodson, R., Dwyer, R., & Neilson, L. (2014). Credit Card Blues: The Middle Class and the Hidden Costs of Easy Credit. Retrieved 2018, from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4707673
Khaleej Times. (2018, August 25). Be smart with your credit card.
Lie, C. (2017). The “Negative” Credit Card Effect: Credit Cards as Spending-Limiting stimuli in New Zealand. The Psychological Record , 60 (3), 399–411.
McHugh, S., & Ranyard, R. (2012). Credit repayment decisions: The role of long‐term consequence information, economic and psychological factors. Review of Behavioral Finance , 4 (2), 98-112.
Meltzer, H., Bebbington, P., Brugha, T., Farrell, M., & Jenkins, R. (2013). The relationship between personal debt and specific common mental disorders. European Journal of Public Health , 23 (1), 108–113.
Money Team. (2018, July 1). Visa, Mastercard & Amex Chargeback. Retrieved 2018 from https://www.moneysavingexpert.com/shopping/visa-mastercard-chargeback/
Themba, G., & Tumedi, C. B. (2012). Credit Card Ownership and Usage Behaviour in Botswana. International Journal of Business Administration , 3 (6).
Yilmazkuday, H., & Yazgan, M. E. (2011). Effects of credit and debit cards on the currency demand. Applied Economics , 2115-2123.