The Credit-Free Diary

Consumers and banks alike are moving rapidly away from credit cards. If this trend continues, within 5 years, there may be no credit cards left. What would life be like if credit cards disappeared, or, to quote Ellen DeGeneres, without a credit card, “How do you do anything?”

The debit card is part of the answer, of course, but to get a handle on how big a change we’re considering, I will attempt to get through the month of June without using a credit card or a debit card. I won’t be going so far as to leave my credit cards at home, because I have a feeling that there are whole areas of commerce that won’t recognize a person without a payment card. At the end of the month, and several times along the way, I’ll let you know how it works out.

There are some failures to announce in advance. My communications accounts (telephone, Internet access, and the like) are billed automatically to my credit card once a month or once a year. I don’t want to risk experimenting with those accounts, as the communications business is in even more tenuous condition than the credit card business. Besides, the automatic payments question, while important, is somewhat removed from what I’m trying to find out here.

Even without credit card transactions, I am not exactly credit-free. I owe a bank about a third of the value of my home, and I’m promising to pay that off over the next 27 years. Many people like to think of their home payments as a completely different world from credit cards, but it isn’t really separate. If I can cut my credit card spending, perhaps I can pay off my home that much faster.

This afternoon, to get started, I paid off all my credit cards. I found that I had balances on three cards. It took 11 minutes on cycle through all the credit card web sites and submit payments of $346. When those payments process tomorrow, I will have a credit card balance of zero. One of the transactions I paid for was for a music download. The next time I want to download music, how will I pay for it?

No-Cost Boosts for the Personal Energy Economy

The government economic recovery programs are valuable in buying essential government services at a huge discount, but they will not by themselves create an economic recovery. We ultimately cannot improve the money economy just by moving the money around. Every gain from economic stimulus, where the money is moved to, comes with a cost, where the money is moved from. The money economy needs an influx of fresh energy, and it must come mostly from what I call the personal energy economy.

This is tricky too because we are used to spending money to boost our personal energy. Medical treatment, entertainment, and travel are examples of services that, done right, boost people’s energy, but they cost money. But there are also ways to boost energy that don’t cost money, and we need to rely a little more on these now to give the economy a boost. You can boost your own personal energy without spending money by doing things such as:

1. rest
2. breathe
3. run
4. cook
5. listen
6. dance
7. study
8. explore
9. remember
10. meditate

None of these automatically boost your energy, but you know how to do them in a way that will, so do them that way, and add some energy to your life — especially if you have spare time on your hands. Some of the extra energy will spill over into the money economy, and after enough of us do this kind of thing, the money economy will start to turn around.

This Week in Bank Failures

One of the reasons BankUnited failed in Florida last week was that it paid too much in interest. It’s a well-known pattern, going back at least to the 19th century, that banks that are financially weak may think to offer especially high interest rates to attract more depositors and build a stronger deposit base. Yet the high interest payments weaken the bank’s financial position further. This quickly becomes a downward spiral and in the worst case can become a Ponzi scheme, if the bank becomes so weak that it becomes impossible to pay back all the depositors. BankUnited in the end was uncomfortably close to this outcome, and that was one of the reasons it had to be closed down.

High interest rates on deposits are a red flag for banking regulators, and the FDIC specifically prohibits them for banks that are in a weak capital position. The FDIC tightened this rule today. Starting next year, banks that don’t have enough capital will essentially be prohibited from paying above-average interest rates. These rules affect only banks that are “less than well capitalized,” currently about 1 bank in 33.

The limitation on deposit interest rates reduces the competition between banks and should make banks generally more profitable, at least in theory. In specific communities, the rule could prevent a poorly capitalized bank from drawing deposits away from a healthy bank and perhaps causing both banks to fail. Instead, a struggling bank is forced to find ways to improve its operations and make a profit in order to improve its financial condition.

The Quarterly Banking Profile released this week by the FDIC did not seem to depict an industry in crisis when you look at the financial aggregates, but the loan portfolio is another matter. The percent of distressed loans is the highest it has ever been in the 25 years the FDIC has been keeping these statistics. Less than three years ago, the percent of distressed loans was at historic lows, but since then, the quality of bank loans has deteriorated at the fastest pace ever recorded.

This is one of the reasons the banks are shrinking. Banks are not making quite so many new loans, and the number of people working in banking is 4.4 percent less than a year ago.

The Fly Swatter Saga

Some things are such a regular part of life that you think you can just go out and buy one if you need it. But I couldn’t buy a fly swatter for any amount of money — not at any supermarket I went to, not at a drug store, not at a discount store, not at a hardware store.

In case you’re in the same predicament, I’ll tell you where I finally found one: in Walmart, at the back of the grocery section, in the cleaning supplies, on the top shelf in a display of insecticides. The price, 92 cents for a 2-pack, tells me that the store was making a pretty healthy markup.

This isn’t the first time I’ve gone out to buy a common item only to find that it is no longer common in stores. If you want to buy a single-line, plug-in telephone, you might find yourself driving all over town too. Ditto for a basic, mid-quality computer scanner. Or a pair of shoelaces.

How can common household items become hard to get? How does the search for a fly swatter turn into a saga? It’s easier to understand when you look at the marketing side of the retail process. Everyone who gets trained in marketing is taught that they need to have an angle to get ahead of the competition, or what’s called a Unique Selling Proposition, or USP. Business experts tell how important it is to dazzle, surprise, and delight your customers. And the biggest marketing concept in the past century is upsell, a nice short word for steering customers toward big-ticket high-markup items so you can rake in the big bucks. As long as businesses believe in upsell, the big-ticket value-added items will never disappear from the shelves — there is no problem getting a four-line telephone, or a telephone with a digital answering machine built in. But the item you really want, the basic, no-frills telephone, won’t thrill you, isn’t unique in any way, and sells at a low price, so retailers decide not to carry it at all.

Of course, it is a problem for a retailer whenever customers go away disappointed at the gaps in the merchandising. When a supermarket decides to stop selling yeast, the 99 percent of customers who don’t make bread may not even notice, but for the 1 percent who do, it weakens their idea of the store as a place where they can buy food. They become more alert to alternatives, which makes them more likely to visit the competitors. If I had found a fly swatter in any of the first 15 stores I visited, I wouldn’t have had a reason to go into Walmart.

The irony, of course, is that these common, familiar items are disappearing from retail even as the United States has an embarrassing amount of retail activity. There are more unique items than ever at retail, spread out across billions of square feet. When common items that people want are suddenly not sold in stores, it represents a peculiar kind of breakdown. Retailers are competing so hard that they’re forgetting to compete.

Why Maria Bartiromo Doesn’t Have a Credit Card

As another indication of the way credit cards and debit cards have flipped, here is a TV segment from January in which CNBC anchor Maria Bartiromo explains to Ellen DeGeneres why she doesn’t have a credit card. Ellen asks the obvious question, “How do you do anything?” (The credit card discussion starts at 6:37.)

The money quote: “But if you’re gonna load up on debt on your credit card, I am just so not of that mindset.”

This revelation made headlines at the time (though I somehow missed it until today). I have seen two main reactions to the story. Some people are surprised at the thought of a Wall Street honcho who doesn’t carry a credit card — isn’t a credit card supposed to be a sign of success? Others gripe that you have to be rich to get by without a credit card. There is an element of aspiration in this second point of view: I may have a credit card now, it says, but someday I could be successful enough to ditch it.

I think there is a connection between success and the lack of a credit card, but I focus more on the reverse connection. Success comes, in part, from simplifying life by doing things such as not carrying a credit card. To anyone who is hoping to become successful enough to get out of debt, I would suggest trying to find a way to reverse that: get out of debt so that you can become successful.