Handling Finances

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).

I use a credit card for just about everything I purchase. I get my gas without walking inside the gas station, I tip waitors without having just the right bills and ordering online is easier than shopping in person. I don’t pay the credit card companies a cent — I pay off the full balance on time each month and to top it all off, I even get over 1% cash back on everything I purchase! The credit card company must hate me since they give me money and don’t make a cent right?

Not quite. You see, the credit card companies (and the banks that issue the cards) collect an average of 2% of every transaction in interchange fees. Because the vendors I purchase from need to make just as much money from credit card transactions as from cash purchases, that means that they must have slightly increased prices to gain back the money they’re sending to the credit card companies.

Don’t get me wrong here, as I said before, I use credit cards for just about everything. I enjoy the convenience of not having to carry around as much cash and the ability to download my transactions directly into Quicken gives me an amazing budgeting tool. At the same time, I think it’s important that we don’t fool ourselves into thinking that we’re actually getting that 1% cash back for free. As only a third of Americans are aware of interchange fees (according to a Jan 2007 Harris poll) we clearly aren’t very well informed about where the money to fund our rewards comes from!

I don’t particularly mind getting a virtual refund for my purchases through my cash back rewards program, but I would much prefer if the credit card companies would just make it a whole lot simpler and stop charging such high interchange fees. That’s been a big deal in many other countries in Europe and recently, Australians passed a law capping interchange fees at 0.5% of purchases. Of course, rewards cards disappeared overnight in Australia, but I can’t help but think that they are much better off.

It’s important to note that businesses aren’t just being charged extra for transactions for nothing in return. In particular, allowing people to purchase goods they can’t afford is a great asset to any store. If it weren’t for this strong incentive, few companies would be interested in processing credit card transactions at all!

Of course, there is an easy way to avoid these rather large interchange fees. Debit card transactions (called online transactions vs. the offline credit card transactions) are much easier and faster to process so the fee is only a few pennies — generally around 10 cents. Be careful though — debit cards can be processed just like credit cards with the higher interchange fee. If you’re signing for the transaction, your debit card is being processed as a credit card. Be sure to punch in your pin number and you’ll be processing a real debit transaction.

One more warning: the banks that issue debit cards know they get a whole lot more money from offline transactions — both because of the higher interchange fee and because they get to keep the money and earn interest for a couple more days. They often offer their own rewards that are accumulated only when you use your debit card offline like a credit card.

For now, I continue to use my credit card for most purchases. To be quite honest the marketing of 1% cash back works very well with me and I like getting some money back on everyday purchases. I also like the idea that people who pay with cash are paying the same price as me even though I’m getting a cut of the interchange fees back through rewards (is that greedy?) The bottom line is that using credit cards isn’t free and even if you don’t pay interest or late fees, the credit card companies get their money.