NOT SO TRUSTWORTHY NOT SO TRUSTWORTHY Distrust in credit card companies is on the rise: Consumers were asked if they trusted these institutions more, less or the same as a year ago: Trust more Same Trust less Credit unions 18% 68% 14% Local banks 14% 62% 24% Lawyers 2% 64% 34% Car dealers 3% 63% 34% Investment companies 3% 53% 44% Credit card companies 3% 50% 47% Federal government 9% 43% 48% National banks 3% 47% 50% Source: Auriemma Consulting Group. Based on Web survey of 403 credit card users conducted in July 2009. THE CREDIT TRAP THE CREDIT TRAP Part 9: Anger at bank overdraft fees gets hotter, bigger and louder Part 8: As lenders clamp down, credit scores take a hit Part 7: Courtesy overdraft fees hit credit union customers, too Part 6: Banks' 'courtesy' loans at soaring rates irk consumers Part 5 : Checking accounts are targets as banks find ways to boost fees Part 4: Sliding economy raises questions about credit scores More Emily Maddox, 24, of Knoxville , Tenn., is the kind of customer credit card companies covet. She has a good job as an Internet marketing coordinator, and she lives within her means. But she's never had a credit card, and she has no plans to apply for one. Credit cards, she says, "make me really nervous, and I've never felt comfortable having one." In a country where the average consumer owns five credit cards, Maddox may seem somewhat quaint, like an Amish farmer who drives a horse-drawn buggy. But proponents of a no-credit-card lifestyle say there's nothing old-fashioned about their choices. And they're convinced that their numbers will grow as consumers become increasingly disenchanted with credit card industry practices. Credit card usage is slowing. Revolving credit — largely made up of credit card debt — fell by nearly 20% in November, the largest drop on record, according to the Federal Reserve, reflecting less borrowing by consumers and banks' tighter lending standards. Through October, the number of new credit card accounts was down 46% from the same period in 2008, according to Equifax. CREDIT CARDS: Bankrate.com helps you find the one that fits you best But abandoning credit cards is a much more radical step than using them less. Consumers who don't own a credit card often have a hard time renting a car. Some hotels won't book rooms to travelers who want to pay with a debit card or cash. Those that accept debit cards may place a hold on several hundred dollars in the customer's bank account, which could cause checks to bounce. And many consumer experts say that responsible use of credit cards is one of the most effective ways to build a good credit record. Those concerns haven't swayed Dann Zinke, 22, of St. Paul, who works at a gas station to save money for college. He's never owned a credit card and doesn't plan to get one any time soon. "I refuse to recognize it as a rite of passage into adulthood," he says. "I don't want to go through the hassle of signing up and receiving other credit card offers." Reasons consumers are opting to live without credit cards: •Desire for a simpler lifestyle. Two years ago, Adam and Courtney Baker decided to reduce their debts, sell most of their stuff, and spend a year or two traveling around the world. By selling their small business and a rental property, they were able to pay off more than $11,000 in credit card debt. Initially, they planned to use an American Express card during their travels, says Adam Baker. But once the couple wiped out their debt, they decided to stick with debit cards and cash. Going without credit cards helps them keep a handle on their spending and suits their stripped-down lifestyle, says Baker, 25, a freelance writer whose blog about his family's experience is titled Man Vs. Debt (www.manvsdebt.com). "We enjoy not having them (credit cards) in our lives," says Baker. "Getting 1.5% cash back for using four cards and juggling them is just not something that interests us. We have bigger and better things we want to focus our attention on." Louis Rosas-Guyon, 37, a business technology consultant in Miami, says his life has become less stressful since he stopped using credit cards 10 years ago. His epiphany came after he plugged his $18,000 in balances into an Excel spreadsheet and learned that, at the rate he was going, it would take him 180 years to pay off his credit card debts. Instead, he went into what he calls "aggressive debt-payment mode." He negotiated with his lenders, consolidated his debt and borrowed money from a relative, eventually paying off the balances. "I have far fewer bills and headaches and fears about that monthly billing cycle," Rosas-Guyon says. "My life has gotten substantially easier because I've offloaded 10 to 12 different credit cards that I no longer have to make a payment on." •Increased acceptance of debit cards. A decade ago, consumers who didn't want to use credit cards had two choices: carry a lot of cash or write checks and hold up the supermarket line. Today, debit cards blend the discipline of cash with the convenience of plastic and are accepted by most merchants that accept credit cards. In recent years, their popularity has soared. A July 2009 survey by Auriemma Consulting Group found that 28% of consumers had shifted the way they pay for purchases in the past year, with an increase in debit card usage coming at the expense of credit cards. Forty-six percent of consumers surveyed said they believed debit cards helped control their spending. "There's quietly been a debit card revolution," says best-selling personal finance author Dave Ramsey, who urges fans of his radio and Fox Business TV show to cut up their credit cards. Now that debit cards are broadly accepted, he says, using a credit card "with all its fees and interest rates and traps with customer service is really stupid." Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, says the shift reflects a desire by consumers to get a better handle on their spending, rather than a rejection of credit cards. "It's easy to demagogue the big credit card industry," he says. "Credit and debit card services play a vital role in our economy. Seventy percent of our GDP is based on consumer purchases, and credit cards and debit cards make that easy, safe and fast." •Outrage about industry practices. Tim McFarlin, a consumer bankruptcy attorney in Irvine, Calif., 34, stopped using credit cards eight years ago because he thought the industry's business practices were unfair to consumers. "Any time there's even a hint of a financial issue in the consumer's life, the credit card company will raise the interest rate to the high 20s, or 30%," he says. "They'll do anything they can to make life as difficult as possible." Last year, Congress enacted legislation that will make it more difficult for credit card issuers to raise interest rates on existing balances and charge certain fees. But those rules don't take effect until Feb. 22, and in anticipation of the change, credit card companies have aggressively raised interest rates and fees, even for borrowers who pay their bills on time. In addition, credit card companies have lowered credit limits for many customers. The changes have been particularly hard on small-business owners who rely on credit cards for short-term business loans. Jennyvi Dizon, 29, a self-employed bridal wear fashion designer in Phoenix, says her credit card lenders cut her credit limit in half last year and raised the interest rate several times. Like many small-business owners, Dizon carried a balance, but says she always paid her credit card bills on time. About three months ago, she decided to stop using credit cards and resolved to pay off the remaining balances. She now uses her savings to buy supplies, which hasn't been easy. Sometimes, she has to negotiate with suppliers because she doesn't have the cash on hand for a full order. But it's been worth it, Dizon says. "It's just a hassle these days to trust credit card companies," she says. The public's opinion of credit card companies, which has never been particularly high, has plummeted during the past two years. Forty-seven percent of consumers surveyed in July said they trust credit card companies less now than they did a year earlier, according to Auriemma Consulting. Only national banks and the federal government fared worse. The financial services industry provides choices for consumers, says Kenneth Clayton, senior vice president of the American Bankers Association. "If they don't like what a credit card company is providing, they should say no and move on to something that works for them better." Drawbacks to doing without Some consumer experts say consumers who have sworn off credit cards are misguided. Among the reasons: •Debit cards provide fewer consumer protections than credit cards. If fraudulent charges show up on a credit card bill, the card holder can simply refuse to pay them. Federal law limits credit card holders' liability to $50 of fraudulent charges, and most card issuers have zero-liability policies for victims of identity theft. Federal laws also limit liability for debit card theft, but resolving the problem is more complicated. Money used with a stolen debit card is immediately drawn from the holder's account, which means the consumer must fight to get the funds reimbursed. In the meantime, outstanding checks could bounce. It's also more difficult to dispute a defective purchase that has been paid with a debit card. Credit card holders can refuse to pay for the item; debit card holders have to battle for a refund. And while debit card users don't have to worry about interest rates and late fees, they need to keep close tabs on how much money is in their bank accounts. Otherwise, they risk triggering hefty overdraft fees on debit card purchases that exceed the amount of available funds. Overdraft fees at the largest banks average $34, which means even a few small overdraft purchases could trigger hundreds of dollars in fees. •Responsible use of credit cards helps consumers develop a good credit profile. Consumers who don't carry a credit card have an average credit score of 563, vs. 689 for those with at least one card who carry a monthly balance, according to Credit Karma, a consumer website that provides free credit scores. The data were based on TransUnion credit scores. "We still live in a credit-dominated society, and even if a person chooses to live on a cash basis, most of us are going to need credit when it comes time to buy a house or a car," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "This means having a thick credit file and a high credit score, which can only be accomplished by having some degree of credit and treating it responsibly." While debit cards resemble credit cards in many respects, they don't help consumers' credit scores, says John Ulzheimer, president of consumer education for Credit.com, a consumer website. "A debit card is a plastic form of a check," he says. "You don't have an obligation to manage it appropriately." Debit cards, he adds, "have zero value" as far as credit scoring is concerned. Ironically, Ulzheimer says, people who have sworn off credit cards are the best candidates for credit. "Those are the people who would manage credit cards very well, because they're so disciplined," he says. Emily Maddox is one of those people. She pays cash for day-to-day purchases and uses debit cards when she shops online. That way, she says, "I don't buy anything I can't afford." But Maddox learned the downside of living without a credit card recently ago when she decided to buy a new car. A local Nissan dealer made her an attractive offer on a 2010 model, but her application for a five-year-loan was rejected because she has no credit history. Maddox ended up buying the car with her fiancé, a graduate student, and each signed for the loan. Maddox's fiancé has a credit card, so his credit history, combined with her income, let them jointly qualify for a loan with very favorable terms, she says. Even after that experience, Maddox says she has no interest in applying for a credit card. She's hoping the car loan — which she plans to pay off before the term expires — will help her establish a credit history. "I've known people who have had credit cards, and I've seen what can happen if you get behind and how hard it is to get out of debt," she says. "I don't like owing people money." 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