Handling Finances

Back in January, I wrote about the hidden cost of using credit cards. Especially for small businesses, the 2% or greater fees merchants pay to credit card companies can be very painful! As customers, we don’t usually see the interchange fees except at the occasional small business where they charge a small fee for credit card transfers to recoup their cost.

Of course, with the credit card companies competing for users, they’re quite willing to give back some portion of this money as a “reward.” While the reward comes out of interchange fees (and thus must be compensated by an increase in prices for merchants to break even), effectively saving 1% on all your expenses can be quite significant! Of course some people see credit cards as evil and cash back as a worthless ruse. I’d suggest that they’re missing the point.

First of all, I don’t know of anybody that has ever “worked themselves up into a froth over getting 1% back from a credit card.”  Right away this particular blogger makes it clear that they’re exaggerating for effect (that or disconnected from reality).  For the sake of an informative article, I’ll ignore this sort of colorful interjection and instead discuss some of the more reasoned complaints about credit card rewards.

The Bible is not anti-credit card!

As a Christian, I’m always quite disturbed to see Christians taking Biblical teaching out of context.  While the author of Proverbs (probably largely King Solomon) had a great point that the borrower is slave to the lender, this was never intended as a blanket condemnation of borrowing or lending.  Taken to the extreme, I have heard that there are people who refuse to take out a mortgage and who will not deposit money in the banks (what do you think they do with that money?).  Heck, even checks are small loans — you promise to pay later (through your bank) for goods or services acquired today.  I don’t think this particular blogger is quite that extreme, but their suggestion that you have to “sell your soul to the credit card companies” — followed by a Biblical quote rather carelessly insinuates that credit cards are Biblically evil.  Again, I’ll move on and leave that bit of unsupported hyperbole alone.

Credit cards would still be profitable if nobody carried a balance.

This particular blogger then hints at the truth before falling into another rant about commercials encouraging spending:

Yes, it is possible to use credit cards responsibly and I’ve actually seen it done. But lenders don’t make money off of responsible usage. Or not as much off of responsible usage - there is the ever-present transaction fee as well as the occasional annual fee. They make more money off of spending more and spending more often.

I’d say the 20% of 109 billion annual profit they make off interchange fees is pretty significant.  And yes, while it’s true that credit card companies target people who will carry a balance and pay interest, this is yet again not remotely a reason for responsible users to avoid credit cards.  Not only do they greatly simplify accounting (it takes as long to download all the transactions in a month as it would to manually enter a single cash transaction) but they allow a greater flexibility in payment.  Because of credit cards, I am able to keep a much larger portion of my cash in interest-earning money-market accounts and simply pay each month’s purchases all at once out of my monthly paycheck.  I’d either be constantly shuffling money back and forth or keeping a much larger portion of my cash in my checking account if I wasn’t able to time my expenses so they coincide with my income.

Yes, you need financial organization to use financial tools.

For the entire rewards argument to be true, you must first assume the best-case-scenario - zero balance, never late for any reason. No payroll mishaps, no direct-deposit miscues, no auto-bill-pay snafus, no network outages, no rogue reps in the billing department posting your check on the next day’s business since they benefit from your misfortune. The entire tangled web must function correctly. And that doesn’t even take you into account. On vacation, out-of-town on business, visiting the family in Hicksville (internet access = ZERO), blah, blah, blah blah, blah….

[the blah bit was in the article — not added my me — Deamiter]

It’s true, you have to be organized to take advantage of credit cards.  Similarly, if you purchase products based on a warranty you decline to read, you’re making poor purchases.  If you buy a house without reading the mortgage, you very well could be stuck with a horrible deal.  If you use a rewards card and carry a balance, it’s not the bank’s fault you are making a poor decision.  You should have put half as much research into your credit card as you did your television or microwave and gotten a card with a low rate instead.

Similarly, if you think there’s a chance that the credit card company will screw up your payment don’t pay at the last second — pay when you get the bill!  It’s also not that tough to plan ahead and pay your bills BEFORE visiting isolated relatives or going on vacation to Antarctica.  Totally aside from financing and mortgage payments, these objections apply equally to utility bills like electricity and gas as well as phone and internet lines — if you’re not organized enough to pay monthly bills, you will receive late fees.  If you are not organized enough to keep a few months of expenses on hand for emergencies, you should PLAN to pay fees when (not if) you don’t get paid or worse — you lose your job.

So why use credit cards at all?

So help me out here. Why? What is the draw? Do rewards draw you in like a moth to a light? Do you think you are winning because of your rewards/cash back/free hat?

I’m glad you asked.  I actually find it funny how blanket-opponents of credit cards repeatedly miss the point that credit cards are convenient.  And safe.  Oh heck, I’ll write up a list.

• I’ve used credit cards in the USA, in Canada, in England, France, Belgium, Germany etc… and they sure beat US dollars in terms of acceptance!  Yeah, there’s a fee, but not much more than to get cash (and yes, I carried cash for smaller purchases too).
• They reduce the amount of change and the number of bills I have to carry around.  My wallet is lighter and I worry less about losing serious cash if I get robbed.
• I’m not liable for theft.  Technically, I can be liable for up to $50, but I’ve never heard of somebody being asked to pay the $50.  If the card gets stolen, fraudulent charges are reversed.  If the card is just lost, I ask for another card to be sent and I lose nothing.
• Tracking expenses is simple.  Transactions are automatically downloaded to my computer.

What about rewards?  Well I don’t know who this particular blogger hangs out with, but apparently those with reward cards are “foaming at the mouth” (I’d check for rabies).  Personally, I don’t know anybody who purposefully pays with their credit cards just to get the rewards.  That said, if one rationally chose to use credit cards for everyday purchases for the reasons listed above, choosing a card with rewards helps to reduce the financial impact of credit cards on the economy.

The whole reason that rewards are possible — that most credit card opponents seem to miss — is that the interchange fees (fees to merchants) are much higher than they would be if there were true competition.  Honestly, the amount of infrastructure necessary to run a credit card business is HUGE (you need consumers to carry and use the card, AND you need merchants to accept the card).  With no competitors, the major companies have little incentive to reduce merchant fees since merchants would lose business if they stopped taking the cards.

Recently in Australia, a 0.5% interchange fee limit was put in place by the government.  I would be strongly in favor of similar regulation in America.  Of course, rewards cards would go away overnight, but in exchange, the prices of goods and cost of doing business (especially for small businesses) would drop.

In the absence of a more efficient economy, though, I will continue to use my credit card for convenience and safety — receive “rewards” that put less of the interchange fees into the hands of the banks and as always, I will stay organized and aware of the terms of my contract with the credit card company.  It’s really not as hard as some people want to make it look.

First of all, two of my posts were included in blog carnivals this week.  First, my post Finding the Best Value when Prices Move Fast was included in the Festival of Frugality.  Second, my post Cheaper Financing is a Funny Route to the American Dream was included in the Festival of Personal Finance.  Check out these festivals for a whole lot more really great articles!

A Raise!

I got my first minor, scheduled raise this month — rather exciting in my life, if not exactly life-changing.  It was actually rather large at 2.2% after only 6 months which is largely due to the fact that I’m at the low end of my pay scale.  I probably should have haggled over the pay, but I’m happy with both the pay and the job and a raise seems like icing on the cake of my career.

A Medical Benefits Cut.

Along with just about every other company these days, my employer is trying to cut medical costs.  Luckily for me, they only cut retiree medical benefits — something that will change a dozen times before I retire 40 years from now.  It’s awfully nice to just be able to ignore this sort of thing.  They’re looking at a huge number of older employees becoming eligible for retirement in the next two decades and I fully expect the company (as well as the economy) to start competing for new hires and increase benefits sharply before I look into retirement.

On the plus side, they also removed a rather silly (around $200) profit sharing contribution to my 401(k) and instead increased their 401(k) contribution match from 0.5% to 0.75%.  Even better, they’ll be paying it in cash rather than in company stock starting next year so I won’t end up with all my eggs in one basket with my job and my retirement savings depending on the same company!  I’d be eligible to convert these stock contributions to cash within 3 years or so, but it’s really nice to not have to bother!

Practical advice: make absolutely sure you’re contributing enough to your 401(k) to get your full employer match (if they offer one of course).  Even if it’s company stock, it represents an immediate return on investment and amounts to free money!  If your company gives out company stock as their matching contribution and doesn’t let you sell the stock… consider complaining to the trustees.  I trust that my company will not go the way of Enron, but then again, most Enron employees thought the same thing just before they lost all their retirement savings.

This week has been rather crazy for me with some new responsibilities at my job and the hardest part is coming home and trying to feel productive (or happy being unproductive). It’s a dangerous feeling because it often leads to spending money — both to relieve boredom in the act of shopping and to try to buy stuff that will entertain me. Knowing why I feel like buying stuff helps me keep myself under control, and my budget is loose enough that I can afford to spend $100 on eating out and playing with photography, but it’s important to remember that spending money won’t help me feel more content.

Anyway, on to the riddles.

Last week, Rob, Patrick and Jennifer invested their money and earned 5.87%, 5.34% and 4.90% respectively. A year after they invested their money, their spouses, Linda, Rachel and Morgan took over investing and again, they each invested $10,000 at the start of the year at a fixed rate compounded monthly. This time, they were less open about their investing and while Morgan revealed that he had earned $600 in interest — as much in the year as Rachel had in 11 months, Rachel only revealed that she had earned as much in the last year as Linda had in only 11 months. How many months would it have taken Morgan to earn at least as much as Linda earned in 12 months?