The Use and Misuse of Credit Cards

Unless you have read the fine print of your credit card contract, here are two facts you probably do not know.

If you are on a trip, and you sign into a hotel using Card A, but you pay your bill with Card B, your credit in Card A to pay for your expected stay at the hotel is locked up until the next card payment period. To get it unlocked, you must tell the clerk to “remove the credit block” on Card A after you have paid your bill with Card B. Do not forget to do this before you leave the check-out counter.

If you use a corporate credit card to buy anything, and your company then goes bankrupt and refuses to pay the bill, you are personally liable for 100% of the bill. You signed away your immunity when you signed for the card. Do not run up a big travel bill just before quitting the company.

In short, read the fine print. When it comes to debt, know what you are doing, and also what your creditor can do to you.

In this report, I will pass along some other goodies that can help you.

If your children are old enough to have a credit card but are not aware of this information, you will be doing them a favor to forward this report.


College students today are confronted with ads to get a credit card. They may run up bills that they cannot handle. Parents will then be called in to bail them out. No one in high school taught them the uses and misuses of debt.

If I were teaching high school, I would buy a pile of Texas Instruments BA-35 Plus Solar calculators for student use in a class on consumer economics. I would teach students how to use the I, N, PV, and FV keys. A student who does not understand the use of this $20 tool is opening himself up for a lifetime of servitude.

This threat did not seem great in 1959, when I took such a class. Credit cards were then unknown to my generation. The credit card had been introduced in 1950 by Diners’ Club. The initial client base was a total of 200 people, who used their cards in a total of 27 New York City restaurants. American Express introduced a card in 1958. Its target audience was travelling salesmen. In that same year, Bank of America also introduced a card, later called VISA.

I can remember receiving my first credit card in the mail in the mid-1960s. I’m not talking about an application form. I was sent an actual card. I tore it up. That was one of my better decisions.

Bank of America made the credit card a mass consumption consumer good by sending out 60,000 unsolicited BankAmericards, beginning in Fresno, California, in 1958. Over the next 12 years, 100 million unsolicited cards were mailed out in the United States. In 1970, legislation introduced by Senator William Proxmire made this practice illegal. (Robert D. Manning, Credit Card Nation [2000], p. 84.)

Bank of America franchised the operation to other banks in 1966. Immediately, Master Card appeared. Citibank got into the race. There was no turning back. In 1996, the number of cards in the United States was almost 1.5 billion.

You might think that mass-mailing cards would lead to debt run-ups by people who would then declare bankruptcy. This happened, but not at a rate high enough to threaten the profitability of the credit card industry. This cost was basically a marketing cost associated with the creation of a mass-consumption item.


A credit card loan is a legally unsecured loan — a signature loan. Thus, the likelihood of default is higher. Anyway, it was higher until the new bankruptcy law was passed, making it illegal to stiff the credit card issuer. The strongest chains of debt are made of plastic.

An unsecured loan is a high-risk loan. So, rates were high.

The public became used to paying rates of interest above 15%.

People seldom seek to change what they are used to.

A credit card lowers the cost of making a debt obligation to practically zero. It may actually be zero, net, because the risk of carrying a credit card is less than the risk of carrying a lot of currency, at least for legal transactions with after-tax money. When the price of something falls, more of it is demanded. So, a lot of people use credit cards. Most of them do not understand the erosive effects on capital of a 15% interest payment.

Ignorance is not bliss. It is expensive. In a fascinating chart on page 92 of Manning’s book, we see the history of the spread between credit card rates of interest and the Federal Reserve’s rate for overnight interbank loans. In 1980, the credit card rate was 17.3%. The federal funds rate was 13.4%. This was at the height of Carter’s inflation era, when the Federal Reserve stopped creating money, allowing rates to climb. The percentage point spread between the two rates was 4. A year later, 1981, it was 1.4, the lowest in the credit card era. By 1984, it was up to 10.6. It dropped below 10 only once, in 1988: 8.8. It was 11 in 2000.

For obvious reasons, banks prefer to lend money to consumers who use credit cards. The interest rate spread is high.

You can check the average national rate for cards by clicking here.

Be aware that this is the average. You can beat this rate. If you aren’t beating it now, get to work.

Most consumers do not know that they can negotiate a lower rate when rates are falling merely by phoning the bank that issued the card. More of them understand card-switching: paying off their debts on Card A by signing up with Card B. But the savings may be temporary: six months or so. Then Card B imposes new, higher rates. People don’t read the fine print.

Now that rates are rising, it is time to do whatever you can to get a locked-in rate on your credit card. If you have procrastinated, it is time to make a call to renegotiate your credit card rate. Here is what you say to the person who answers the phone:

Hello. My name is [ ]. I am a long-time customer, but recently, I have received a letter from another card company that offers me a much lower annual interest rate if I switch and pay off my existing card. I have decided to switch, but I thought I should give you an opportunity to lower my rate.

Save all such solicitations for your files. This strengthens your hand in negotiating.

If the sales rep refuses to do this, ask for a supervisor. Sometimes lower-echelon people have not been granted the authority to do this.

If you still get no cooperation, use this search engine to locate a better card.

Before signing up with a new card company, there are a series of questions you should get answered. Read the fine print. If you still aren’t sure, ask an agent. Here is the list of 15 questions.

If you are tempted to re-finance your home to pay off a credit card, don’t. The loan-creation fees will eat you up.

If you are in so much debt on a credit card that you really do need to re-finance your home, re-finance it for no more than you owe on your card. Then tear up the card. You are not sufficiently self-disciplined to carry one.

Immediately go to your bank and switch to a debit card, where the bank issues you no credit. You can use the debit card to spend only what you have already deposited and have remaining after your previous expenditures.

Banks do not like debit cards and the skinflints who use them. Banks like people who spend enthusiastically on their credit cards, run up a huge balance, pay only the minimum monthly required payment, and stay on the bank’s hook for a decade at 15%.


A free rider is someone who benefits from a product or service but who doesn’t pay for it.

A person who buys a loss-leader at a supermarket but who then refuses to buy anything else is a free rider. For instance, someone who buys gasoline at Wal-Mart at a rate below wholesale is a free rider. About 17 states have passed laws requiring Wal-Mart to charge no less than the wholesale price per gallon. The politicians are responding to Wal-Mart’s competitors. The losers are consumers, as is usual for legislation.

Another example: eating dinner at a restaurant that charges low prices in order to get you into the building, where you will visit the bar. Just don’t visit the bar. The low-priced food is a hook to pull in crowds, who sit in the bar and drink. Avoid long lines by coming early or coming on an off night. (I have known fundamentalists who refuse to go to a restaurant that serves liquor. They do not understand that people who eat there without buying any booze are imposing losses on the restaurant, and if local churches organized large dinner parties there, they might drive the place out of business.)

A person who uses a credit card but who then pays off his monthly balance every month is a free rider unless the card requires an annual fee, which most of them do these days. Even with a $25 fee, the user is ahead. The card is convenient. He is using the bank system’s vast digital network and recording system to make his purchases.

I am told that people who pay off their monthly credit card bills on time are referred to in the credit card industry as “deadbeats.”

Why do banks issue credit cards free of charge? Because (1) they think most people will finally succumb to the temptation of spending beyond their means; (2) cards reduce the number of checks written, which are more expensive to clear and record than credit card entries are.

For items I purchase that I do not care who knows about, I use a credit card. This is usually limited to gasoline, an occasional bag of dog food, and books. I have no idea what my wife spends, but she always seems to have enough frequent flyer miles to let her visit her sisters in California.

I know a woman who told her mother to charge her father’s funeral on a credit card. The frequent flyer miles from a burial are high. The hymn, “I’ll Fly Away,” belongs in the planning stage of every funeral.


When you get used to using a credit card, you tend to carry less currency. If your credit card gets red-flagged by a programming error, you can find yourself trapped in a store or, worse, on the road. If you have one card, have one in reserve. The backup card should have a low loan limit for safety’s sake.

Use the primary card to track your expenditures. Use Quicken — warning: a pre-2004 version — to categorize your expenditures. You can see at a glance where your money is going. This is important for budgeting and saving.

Write down your credit card’s number and the bank’s toll-free number. Put this in a safe place. You may need to cancel your card if you lose it. This will help you get the right information to the bank.

Read your statement every month. My wife monitors this with a vengeance. She has caught overcharges and false charges. If you’re not sure how to read your statement, click here.

Find out in advance how good your credit is. Never negotiate a loan until you know this for sure. If you don’t know, you will probably give up too much. The higher your rating, the better your chances of getting a lower rate. To find out where you stand, use the credit-rating program here.

Take steps to insure your card’s privacy. Once your identity has been stolen, you will find it a time-consuming mess to clear up the confusion and restore your good credit rating. Here are 15 tips to protect your credit card privacy.


A credit card is a tool. Like any tool it can make your life easier if you know how to use it. But it can mess things up terribly if you don’t.

Use it properly. If you have any doubts, get a debit card instead.

July 7, 2004

Gary North [send him mail] is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

Copyright © 2004