Handling Finances

I have a friend who was recently caught by a rather questionable policy in the credit card industry of changing billing due dates.  By moving the due date around by just a week or so, they hope to catch people who try to pay at the last minute each month and simply assume that the due date will be the same from month to month.

It’s easy to solve this problem — pay bills when you get them and not when they’re due!  I totally understand if you run out of money to do this once or twice, but if you’re waiting for your paycheck to clear before you pay your bills, you need to change your habits.  Always keep one paycheck of funds in your checking account and live off your previous paycheck, not your next paycheck! This might be hard at first if you’re used to spending every penny that goes into your checking account, but it’s certainly not impossible!  Unless you’re reading this from your local library you might start by canceling your internet account if you can’t think of any other ways to save money to get started on this.

Anyway, my friend was particularly resistant to paying early because he didn’t want to give his credit card company even one day extra interest on the money.  This is silly — the credit card company is already giving you an average of half a month with the cash interest free, and that’s before they even send you the bill.  In essence, you’re getting an interest-free loan for a month and a half, so while you might want to hurt the credit card company by a few pennies of lost interest, it’s not worth the amount of effort it takes to avoid late payments if you’re trying to nail the deadlines.

Don’t just pay your debts on time, pay them ASAP and you’ll reduce your stress, miss fewer deadlines, and even if your checking account pays money-market interest rates, the pennies you might lose just isn’t worth the trouble!

It’s my dream card come true!  While perusing my daily dose of blogging, I found an article about the Revolution Card at CashMoneyLife.com.  This credit card is exactly what I’ve been looking for, but as such a new service, it isn’t yet accepted by the merchants I use regularly.

The Good Side

The credit card is friendly to merchants (unlike existing credit cards in the USA) as it only charges a reasonable 0.5% per transaction rather than the more common 2+%.  As much as I like getting cash back, I’d rather not throw even more money at greedy banks and keep it circulating in my local economy!  I find the high interchange fee rather unpalatable and perhaps even immoral as the pseudo-monopoly held by visa and Mastercard has restricted any competitive cost-down pressure.

The card also has no name or number embossed on the front and even better — it can only be used with a pin number, not a signature!  That means unlike debit or credit cards that can currently be used by thieves since nobody checks signatures, this card can only be used illicitly if somebody steals both the card and your pin number (not likely).

For even more security, you can generate temporary pin numbers — great for online purchases, or a one-time thing at a store you don’t quite trust.

The Down Side

Patrick at Cash Money Life had some good criticisms of the card — namely that since it requires a pin number, it will be more difficult to process in places like restaurants and bars where they’re traditionally taken or kept as collateral for a tab.  Since you have to be present and (presumably) sober to use your pin number, this card won’t be as handy for people who regularly eat out.  Still, I feel rather nervous leaving a credit card with a waitress as the magnetic strip can be copied and stolen so I would welcome an excuse to follow the waiter to a card swiping machine.

The biggest issue for me is the short list of stores that accept the card.  While they include large chains like Kohls, CVS, Walgreens and Rainbow, they don’t include my everyday stores like Cub Foods or Target or even any gas stations as far as I can tell.  I will apply for this card as soon as I feel like I would use it regularly, but they have some recruiting to do before I personally will take the plunge.

The Verdict

The advantages to this card are not huge.  While security is highly important to me, credit card companies universally cover any fraud past the first $50 so financially it’s not a huge issue.  It’ll still be a huge hassle to get your money back, but it’s not hard to get your money back.  I’d much rather have a card that largely prevents theft, but I don’t feel my money is in danger now.

Some people with good credit might be able to get competitively low rates (the rates are largely based on credit history) but you could probably get an even lower rate with a card that charges higher merchant fees for obvious reasons.

The main advantage, then, is the low interchange fee which users never see.  Quite honestly, I’d be paying a bit more for my purchases than I do currently as I wouldn’t receive kickbacks in the form of ‘cash rewards’ for my credit card purchases.  At the same time, the more of my money that goes directly to those that provide goods and services I want, the better for the entire economy.  It’s a small effect, but barring legislation like that in Australia that limits interchange fees to 0.5%, I’d prefer to vote with my wallet and use the more efficient method.

For me, then, the main down-side is the limited acceptance of the card.  I’ll be watching this card closely and as soon as I see it being accepted by gas stations or my local supermarkets (or even better, some of the smaller stores I shop at), I’ll get myself a card and ‘be part of the revolution’ (sorry — I couldn’t resist).

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.