William Furr ([info]thugkiwi) wrote,
@ 2009-05-20 11:06:00
Previous Entry  Add to memories!  Tell a Friend  Next Entry
Current location:Work
Current mood: angry

New Credit Card Rules
I pay my credit card balances each month. I use them for convenience and the reward programs, not for their interest rates. When I learned that I'm termed a "credit card deadbeat" and that the companies might turn to charging me fees and cutting back my rewards, I had the opposite reaction to the knee-jerk fear such intimidation was supposed to provoke. Instead of crying about how I'm being forced to pay for other people's mistakes and government socialism, I instead thought about where the money to pay for my Amazon.com gift certificates and 1.5% cash back comes from.

The money for MY rewards comes from interest and fees paid by people who can LEAST afford it. People who aren't responsible spenders and have let their credit card debt get out of control and start ruining their lives (aided and abetted by the credit card companies and their practices) are subsidizing my responsible habits.

I've been one of those people, and I know how easy it is. I've also seen the toll that credit card debt has taken on many of my friends.

Therefore, my credit card rewards are wholly unethical for me to take advantage of, and I will be switching back to my debit card for all of my spending post haste. It's a move I had already considered making for various other reasons, but I'm accelerating the timetable. I probably won't cancel my cards unless they actually try to charge me an annual fee, but they'll be relegated to my desk drawer instead of my wallet.

If you're one of those people with credit card debt, I suggest destroying your cards and consolidating your debt with a loan from a locally-owned credit union or banking co-operative. Then you can at least be assured that your loan will eventually be paid off if you stick to the payment schedule, and your interest payments will go to your community instead of credit card company shareholders.

Lifehacker - What the New Credit Card Rules Mean for You - Credit Cards


(4 comments) - (Post a new comment)


[info]subwaysex
2009-05-20 09:52 pm UTC (link)
While I fully agree that the knee-jerk "why've I got to pay for deadbeats?" reaction is crap, I don't agree that people with poor spending habits are subsidizing my benefits. The 3% fee that merchants pay for every transaction I charge is where my benefits come from. There are debit cards that offer benefits, too (though they are not as good as the best credit card benefits).

(Reply to this) (Thread)

[info]thugkiwi
2009-05-21 07:21 pm UTC (link)
Credit card company revenue comes largely from interest (about 70%) with the rest split between penalty fees and merchant fees (so-called interchange fees).

Merchant fees are not enough to sustain credit cards as a business. If you never contribute to interest payments or penalty fees, you're not even breaking even with the credit card company.

Reward programs are largely marketing gimmicks to differentiate card offerers (who are otherwise commoditized and can only compete on interest rates). For a responsible spender (a.k.a. a credit card deadbeat), those reward programs actually constitute a loss.

It's interest payments on revolving balances that keep credit card companies in business to offer you your reward program.

U.S. GAO - Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers
Credit card revenue relies more on fees

"Hence, the notion that higher penalty fees are being charged by card issuers to increase their profit margins is largely without merit. It is more likely the case that, as the GAO found, these fees help to offset the increased operating costs associated with offering things such as rewards programs and because card issuers serve a very large number of relatively small accounts. Such fees may also offset the risk of loss posed by some cardholders who make late payment or engage in irresponsible card usage" (emphasis mine)

American Bankers' Association - GAO Credit Card Study – Summary

(Reply to this) (Parent)

[info]jjanetc
2009-05-20 10:46 pm UTC (link)
I concur with the comment. The points or cash-back come from a portion of the merchant fee which is why many stores do not accept credit cards of one type or at all.

The reaction of the credit card companies may not produce the correct response. If they want to take more money from the credit worthy people many will stop using credit cards. When cards try to charge us a yearly fee we simply cancel the card. There are other options available that won't cost me money. This may simply shrink the pool of people with good credit using credit cards.

(Reply to this) (Thread)

[info]thugkiwi
2009-05-21 07:24 pm UTC (link)
Hey JJ,

In a nutshell, credit card company revenues are about 70% interest, 20% merchant interchange fees, and 10% penalty/late fees, as of 2005. Your reward programs and no-annual-fee cards are enabled largely by balance-carrying interest payers, not merchant fees.

Reward programs are loss-leader marketing gimmicks to differentiate what's otherwise a commodity competing solely on the interest rate margin.

Check out my response to Derek's comment for more, including sources.

(Reply to this) (Parent)

(4 comments) - (Post a new comment)

Create an Account
Forgot your login or password?
Login w/ OpenID
English • Español • Deutsch • Русский…