Why don’t Europeans use credit cards?
Credit cards and their myriad rewards programs, commonplace in America, have never caught on in Europe.
The credit card is a staple of American life. Upon entering the workforce, and often even earlier, Americans open up their first credit card. Some people opt for a basic credit card provided by their bank, with few bells and whistles. Others will conduct extensive research on sites like thepointsguy.com or nerdwallet.com to identify the card that will deliver the best points and rewards. Consumers can shop around for the ideal credit card that suits their lifestyle, regardless of their primary bank.
The rewards offered by American credit cards are a major selling point. Miles earned with certain airline companies on every dollar spent. 2% cash back on every purchase. 4 or even 5% at certain retailers, the grocery store, or the gas pump. Deals on food delivery and streaming services. There are benefits galore to be earned when you spend your hard-earned dollars. While the points system from card to card varies, it is almost considered malpractice if you aren’t earning some type of points or miles via your daily spending. It is not an uncommon practice to open multiple credit cards just to acquire their sign-up bonus and then shutter them before you have to pay their yearly fee (I managed a free round-trip flight to Dublin for a European vacation years ago thanks to a sign-up bonus with American Express and Delta).
There is a practical element to credit card usage as well. Beyond rewards programs, using a credit card is integral to building up a credit score. A high credit score ensures people can access consumer loans and mortgages, with creditors assured they are lending to a reliable citizen who pays their bills on time. But credit card ownership is not all trips to Europe and unlocking home ownership. There is a pernicious side to pervasive credit card ownership. Unpaid credit card bills result in debt and diminished credit scores. Americans collectively owe nearly $1 trillion in credit card debt. The average American consumer has $6,194 in credit card debt. People get buried under a mountain of debt with extremely high interest rates. This debt can hang over people for a lifetime. Along with the debt, an impaired credit score means people then lose access to crucial financial products. It is a vicious cycle. Too many Americans, when choosing a card that matches their spending lifestyle, neglect their earning lifestyle.
It is a different story across the Atlantic. Credit card usage is virtually non-existent in Europe. While card adoption and non-cash payments are high across the continent, notably in Scandinavia where they are close to eliminating cash, none of the cards being used are linked to a line of credit. They are all debit/charge cards using money from current accounts. The United Kingdom is the lone European nation (if they can still be considered as such with Brexit looming) that has high credit card usage. In all other countries, credit cards are shunned for their more basic, less-risky cousin.
It doesn’t have to do with an aversion to credit either. While many in Europe like to cast a judgmental eye on Americans for their billions in credit card debt, Europeans aren’t too far behind their American counterparts. In fact, Europe has nearly the same level of household debt as America. But the debt in Europe is not due to overcharging a Capital One card. Even though the Old Continent won’t use credit cards, it loves itself some consumer credit. It just manifests in different forms. Klarna, the Swedish start-up, demonstrates the contrasting approaches to credit. The Swedish startup provides point-of-sale financing that allows customers to pay for their purchases in installments. Klarna’s success, as the highest-valued fintech in all of Europe at $10.6 billion, clearly shows Europeans’ appetite for credit is strong. They just prefer to take purchase-by-purchase loans and not maintain a revolving line of credit.
So, are Europeans wiser when it comes to their personal finances? Are they avoiding the pitfalls that come with credit card debt? Having now lived in Europe for three years, I have yet to find a satisfactory answer to the question in the title of this article. In the end, it may just be a cultural difference. Everyone I have asked, from the French to the Danish to the Italians, has expressed an aversion to a continuous line of credit with yet another financial services company. Given the amount of credit card debt in America, maybe the fact that they haven’t caught fire in Europe has spared people a lot of misery.
It seems like there is space in the market for a fintech to introduce a rewards-based credit card. Until now though, consumer-facing fintech in Europe has been geared toward bread and butter retail banking, business banking, and consumer credit. Surely Europeans would be interested in free flights or cash back from simply shopping at the grocery store? Maybe the next European fintech unicorn will be the company that finally gets Europeans hooked on a rewards program. Until then, Europeans will be missing out on a world of airline miles, rewards programs, and extra money in their pockets, but afforded the peace of mind that comes without constant APR and balance monitoring.