Rewards Cards Only Reward the Credit Industry
Many Warren Reports readers wrote to us following Professor Warren's recent appearance on Fresh Air. If you haven't done so already, I encourage you to listen to her discussion about the credit card industry.
In the coming weeks I'm going to try to highlight on this blog some of the stories and feedback that folks have asked us to look into and publicize. Let's start with merchants rather than consumers.
One small business owner wrote regarding the high costs that card processors charge retailers for every credit card transaction. These fees can range as high as 6 to 7% depending on the volume of transactions and type of card, with rewards card incurring the highest fees.
Interestingly, some consumers don't realize that the rewards percentages that kick back into their accounts are not coming from the credit card company. Rather, the business on the other end pays that amount (and then some) towards the transaction.
Many consumers might find these types of redistributions perfectly acceptable, but the point is often missed that businesses often compensate for these expenses by raising prices.
Moreover, as our reader points out, retailors are not allowed to give discounts to customers who pay by cash or check. Doing so will cause them to lose the "privilege" of accepting credit cards as a form of payment.
Thus, the merchant's credit card-related expenses get transferred to all customers, those with rewards cards and otherwise, and everyone ends up paying more for every item and every purchase. What good are those rewards if you're simply paying more up front?
The only group making a profit or deriving a benefit from these arrangements is, of course, the credit card industry. Our reader suggests that this "smacks of a monopoly."
But the credit industry wants you to believe that your "1% cash back" or miniscule airline miles reward is a little something extra that you wouldn't receive if you paid by cash. They're right, to some extent -- but only because they've forced all of us, cash customers included, to systematically pay extra up front.
Sort of puts a damper on the whole reward card/incentive program, no?
I had often wondered about the economics behind the credit card industry's drive to give all sorts of cash incentives (true, many may be a measly 1%, but others can be quite substantial, like Bank of America's 'keep the change' roundup program). Of course that doesn't much matter if the credit companies just force the point of sale business to pay. And then to have a clause that does not allow for the business to offer incentives when cash is paid is truly monopolistic. The whole scheme reeks of oligarchy.
More people should know about this.
May 5, 2007 2:24 PM | Reply | Permalink
So even though I don't use their plastic I am paying more! That really is the pits.
Looking forward to more of your articles in the coming weeks. Thanks!
Bonnie
http://pupart.1hwy.com/
May 6, 2007 1:34 PM | Reply | Permalink
Kevin, thanks for highlighting the important issue of interchange that affects both merchants and consumers.
As I have mentioned here before, I'm working with www.unfaircreditcardfees.com to raise awareness about interchange fees. There is a vicious cycle with the credit card companies charging higher interchange rates in competing to attract card issuing banks. So yes you may get some cash back or a "free: flight but in the end both the merchant and you and I pay for these rewards through interchange fees. Interchange totaled approximately $36 billion last year and cost the average American family several hundred dollars.
The main cause of this problem is that Visa and MasterCard, controlling more than 80% of the market, operate in a system that is fundamentally anti-competitive. The banks that make up Visa and MasterCard have colluded to set interchange fees, operating in price-fixing cartels that would violate federal antitrust law in other industries.
I urge everyone to check out our website for information on interchange fees and what is being done to address this problem. Thanks.
May 7, 2007 12:38 PM | Reply | Permalink
The real injustice in this treatment of merchants is a oontract that prohibits the merchant from itemizing the merchant fee, and not charging it to cash customers. This is a strategic move by the credit card company to punish those who pay cash, thereby creating an incentive to use credit cards. This is simply criminal in my mind. It is destructive to the marketplace and to society as a whole, and should be prevented. These contractual terms with the merchant are simply unfair to the merchant and to the customer. It infringes on our freedom and liberties by manipulating us into making poor financial choices. Government should be protecting our freedom, by allowing us to make good choices without detrimental consequences.
Jim Anderson
The Truth About Credit
Facebook Profile
May 8, 2007 11:09 AM | Reply | Permalink
I hate credit cards - but I use a rewards card. I resisted getting one for years - but I was denied an apartment because I had no credit. It's a rigged game that everyone is forced to play. In order to get the lowest available electricity rate in my deregulated state I have to pay with a credit card.
I would much rather pay cash. When I did that I had no worries about identity theft. I'm not going to pay higher prices than I am forced to though, so I use my rewards card wherever possible.
I agree that any terms forced on businesses to prevent the proffer of a cash discount should be voided as monopolistic.
May 13, 2007 7:26 PM | Reply | Permalink
Provide your own rewards program, and treat yourself to pizza everytime you don't have to make any interest payments to these people because you closed out all your credit cards. Trust me, it absolutely rocks. If you need credit, apply for a credit line through your bank etc. No gimmicks, no B.S., and it'll save you a lot of hassle, too. Better yet, cut back on the shopping a bit, and build up your checking by putting money in the account and not spending it. That, too, rocks. Your money, your bills, less intermediaries getting a little slice on the way by...bitter lessons learned, but now interest payments saved...
May 17, 2007 10:15 AM | Reply | Permalink
On May 13, 2007 - 10:26pm uneasyone said:
I hate credit cards - but I use a rewards card. I resisted getting one for years - but I was denied an apartment because I had no credit. It's a rigged game that everyone is forced to play. In order to get the lowest available electricity rate in my deregulated state I have to pay with a credit card.
~~~~~~~~~~~~~~~~~~~~
I'm confused! I don't like CC either. I don't have any. I don't want any and I don't want to be forced to get one . I don't think ANYONE should be forced to get one to have access to getting an apt or utilities etc.
Doesn't paying your essentials on time, having a saving account, and a checking account in good standing count for something, or is it all about
that almighty credit card????
Elizabeth Warren, who I admire alot says pay your essentials on time. Dave Ramsey, who I am not a follower, but I do agree with him about some things, is against CC's. Him and many of his followers don't use them.
Robert Manning is right. This is a credit card nation and it's full of plastic addicts.
It's no wonder ...
The message is ... you need a credit card!!!!
Last year several TV networks interviewed a man celebrating his 100th Birthday. He made a very profound statement that he never used credit cards. He went on to warn against them.
Can you imagine living 100 years and never having a credit card. I wonder in all those years how many people he knew who had screwed up their futures using credit cards.
I know many people can and do use them responsibly, but for those who have gotten in trouble with them,the debt can spiral out of control and it can be a nightmare. Some people just should never have them. Just like some people should stay away from alcohol.
Bonnie
http://pupart.1hwy.com/
May 17, 2007 6:54 PM | Reply | Permalink
My indoctrination begain in high school, 20 years ago. I was told I needed a checking account and credit card, just to "establish a good credit history." I was supposed to get a card, buy a CD once a month, and pay off the $14 balance on time. This, I was told, would help me get bigger loans later on, for important things like a car.
Now, it sounds like that "advice" may be true. As though it weren't hard enough for an 18 year old to afford her own apartment due to stagnant wages, now it's necesessary to have a credit card debt just to be considered. And if you kite your rent by a week to make the credit card bill on time, guess what! Your credit card rate goes up anyway! Nice!
May 18, 2007 3:19 PM | Reply | Permalink
I opened a checking account in high school but avoided getting a credit card until after college. It's amazing I was able to resist the free t-shirts, soft coolers, or whatever it was they were handing out in the student commons. I know quite a few friends who got into varying degrees of trouble with their cards. It sure is nice of the companies to automatically raise your limit without you asking? Who does that really benefit?
Anyway, back to rewards cards and interchange fees. Even if you don't have or use a credit/debit card you are still paying the cost of interchange fees and funding the ever-expanding rewards programs. This is because the cost of this fee is passed on to consumers in the form of more expensive goods. As I mentioned in my last comment, the system is broken in that it's anti-competitive. Additionally, the credit card companies charge higher interchange fees in order to attract more issuing banks. So they actually vie to charge higher interchange fees instead of the lower rates that would benefit consumers. It's a vicious cycle and we are all caught in it.
May 19, 2007 9:37 AM | Reply | Permalink
You don't have to have the debt - just the credit card. If you can resist the urge to spend money you don't have, it's better to have them than not. I get a few hundred bucks a year in rewards from gas, groceries - things I would have to buy anyway. I have never paid less than the full amount due and my rating keeps increasing.
If you are unable to discipline yourself to a) Not buy anything you wouldn't buy if you were paying cash and b) Pay your bill when it comes due every month, stay the hell away from them!
If you get an interest bearing checking account, you collect interest until you actualy pay the bill. If you have an online bill payer account, you save time (it never takes as much as 15 minutes to pay my bills) stamps and envelopes.
May 20, 2007 4:15 PM | Reply | Permalink
You don't have to have the debt - just the credit card.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
That's what I don't like! This is "supposed" to be a free country isn't it?
Why isn't paying ones essentials, having savings,
a checking account in good standing, and generally living a stable life enough to have a decent credit score? All the things I have listed
make a person look pretty responsible. Why does one "need" the almighty credit card ????
I am not a Dave Ramsey fan but those who foillow him have ditched their credit cards.
Hopefully, there will be more places that will look at ones overall financial picture instead of just the "fico" score which seems to relie so much on CC info. It's discrimination in my opinion.
Many people just don't want a credit card and be forced to deal with these greedy corporations.
Bonnie
http://pupart.1hwy.com/
May 21, 2007 7:44 AM | Reply | Permalink
May 21, 2007 2:19 PM | Reply | Permalink
That's one of the many problems. Aside from the credit card companies using their monopolistic muscle to dictate terms (like no cash discounts) to merchants.
The card companies are squeezing from both ends as they also entice consumers to use cards with the highest possible interchange fees. As this article notes,
Tactics like this just add to the cycle that leads consumer and merchants paying more. It appears Visa and MasterCard are the ones receiving the "rewards."
May 22, 2007 11:40 AM | Reply | Permalink
Sounds to me like you got a case for housing discrimination. If you were turned down for an apartment because you didn't have a credit card, that sounds more like a cover for something else. Are you sure they didn't reject you for some other reason? I have a hunch, because a clean credit report is no reason to reject someone for credit. Credit is based on ability to pay, and rejection is based on a record of poor payment history if income is sufficient.
Jim Anderson
The Truth About Credit
Facebook Profile
May 22, 2007 3:01 PM | Reply | Permalink
It is a myth that a credit card will give you any financial credibility at all. I had a credit card for over 20 years without carrying a balance, and suddenly when the credit card company decided to charge corporate purchases to my personal card and then deny my dispute, I learned that having a open account is asking for trouble.
Don't open a credit card account under any circumstances! They are financial traps that legalize banks robbing consumers by consent (even though the consumer is unable to understand the legal ramifications of their agreement).
Jim Anderson
The Truth About Credit
Facebook Profile
May 22, 2007 3:10 PM | Reply | Permalink
Jim, lots of places in my state do credit checks - and no credit is as bad as bad credit. If you (personally)have paid off your bills, you do have credit because you established it previously - even if you haven't used it lately. Someone like me who had always paid cash had no credit - even though we had paid our bills on time and had enough savings to pay a years rent in advance.
Credit has to be established. Despite a decent income and savings, we were turned down many times for credit cards - because I refused to use the "easy credit" options to buy something I didn't need on credit or pay an annual fee for the "privilige" of having a credit card. I must have been rejected 50 times in all. After I got the first card, it became easy to get more. Matter of fact, I have a bushel basket of current offers to shred now.
Hunch or no hunch, you seem to have little understanding of how the credit market works - I speak from experience.
May 25, 2007 9:23 PM | Reply | Permalink
No - I didn't mean it literally, you don't "have to have a credit card" - if you can pay cash for everything you need. Buy an old car like me or save enough to buy a new one cash - no problem. But if you haven't established good credit and want to buy one, your interest rate is gonna be 30 or 40% higher - adding thousands of dollars to the cost. Want to buy a house? Got the cash? If you don't you are gonna have to pay tens of thousands more in interest payments before you pay it off without a good credit rating. Need a job? More and more employers are checking credit ratings and rejecting applicants with low or no credit ratings.
I agree that paying your bills on time and having money in the bank ought to count for a lot and I notice that you 1 rated my comment as if I was a proponant of this stupid system. I didn't write these rules and have stated elsewhere in this thread that I'd change em if I could - I know you read that, because you rated the comment.
I don't owe anybody a dime. If I went to the gas station or supermarket and demanded a 5% discount, they'd laugh in my face. I use my rewards card and get a $50 check every time I spend $1000. I have never paid a nickel in interest because I pay my bill in full as soon as it comes due. My light bill just dropped 40% because I switched to a provider that only accepts automatic payments through a credit card. I'll get cash rewards for that also.
Look, the system sucks. We agree on that. If you don't want credit cards, don't get em. If you do get em, treat em with the same respect you would a basket of poisonous snakes - or they'll bite you in the a**.
I decided that I might want to buy a house someday and also want a decent interest rate. In order to get that, you have to have good credit. Good credit can only be obtained by buying things on credit and paying them off to establish a good credit rating. The only way I know to do that without actually paying interest or the outrageous prices charged by the "easy credit" furniture stores and so on is to use a credit card for everyday purchases and pay the bill in full each month. Credit card companies hate that! Since that is the way it works, I got a rewards card. Sorry you don't like that; as I previously noted, I don't like it either.
I didn't design the game or make the rules; if I have to play though, I'm gonna try to win.
May 25, 2007 10:27 PM | Reply | Permalink
I have great respect for Professor Elizabeth Warren.
When she appeared on Nightline a few months ago
the woman interviewing her asked her about establishing credit.
She replied looking almost like she was gritting her teeth with the comment :
pay your essentials on time.
Dave Ramsey and his followers have ditched credit cards.
Maybe the rules would have to change if there were more people who would refuse to "play the credit card game"
I for one will be like the 100 year old man who said to no to credit cards.
Bonnie
http://pupart.1hwy.com/
May 26, 2007 5:39 AM | Reply | Permalink
I wish you well - I really mean that.
I want to point out that unless you have found a way to only shop at places that don't take credit cards at all you are in the game - like it or not, because you are paying the higher prices the merchant charges for participation in the CC industry. It is also worth noting that Dave Ramsey followers who cut up their credit cards have already established credit. I would also point out that they are also dramaticly improving their credit score when they pay off all their debts. I haven't listened to Ramsey much, but every testimonial I have heard on his program is from people who got in pretty deep with credit and had to make huge sacrifices to pay it off. I never heard somebody like me who pays in full every month call in to say they were cutting up their cards. Paying those outrageous interest rates is deadly and (as I said earlier in the thread) if you can't resist the temptation to spend money you don't have don't get them!
Unless you: a) Own your house already, or b) never intend to buy one, or c) can save enough cash to buy one outright, you are going to get a terrible shock when you do so because you are going to be forced into the subprime market. Then you may be unable to get a fixed rate mortgage at worst or at best will get a fixed rate - but at a much higher interest rate than someone with a good FICO score. This will cost you tens of thousands of dollars over the lifetime of the loan. Is that just or fair? Of course not! Is it a sad fact? Sorry to say - it is.
Maybe you can afford this - I've tilted at quite a few windmills myself. Good luck!
May 26, 2007 9:34 AM | Reply | Permalink
Yes, I am indirectly in the game, because I do have to shop at places that accept CC's. Unfortunately, that is everywhere now.
I remember a time several years ago when grocery stores didn't accept CC's. I was a cashier at one
and remember a man getting very angry because the store would not take his plastic. Oh, for the good old days!
I am not in the game as far as dirty tricks go. Just recently I read about a man who had a hell of a time trying to close an account and was billed for trailing interest which was clearly gouging.
And I am not one of these people who have to worry if I close an account is my credit score going to be lowered. I see that question so often on the net or hear it on radio/TV shows.
I no longer listen to Ramsey, but on a few occasions I had heard about alternative financing, which didn't even look at a fico score but looked at someones over all financial picture.
I am fortunate to bank with USAA and if I need credit or if I am able to purchase the home I am living in sometime this year I believe I can get a decent rate.
They have certainly given me a decent rate on auto and renters insurance and at the time I got those policies, I was not in the best financial shape. I even asked the rep if they based my rate on my Fico score and she told me they don't even check it.
I
work for myself so I don't have direct deposit so I asked to get Deposit At Home with USAA. One of the requirements for it was to have a USAA CC. I was honest and upfront with them about having a CC and they waived the requirment and I
got Deposit At Home, which BTW, is great!
Maybe I have my head in the sand, but I'll just continue doing what I am doing and if I need to buy something on credit, I don't believe USAA will gouge me or treat me like a number.
They haven't so far!
Bonnie
http://pupart.1hwy.com/
May 26, 2007 1:14 PM | Reply | Permalink
Great! I meant it sincerely when I said I hoped that it worked out for you. Obviously you don't have your head in the sand - you have thought it through and are willing to accept some disadvantage for a principled stand.
I have no idea what deposit at home or USAA are.
It's obvious that you and I have no argument about the pitfalls of credit cards. I liked living "off the grid" and thought long and hard before I applied for that first one. I knew I would be sacrificing privacy and that it's a nearly irrevocable step. (Even if you cancel cards, the companies will still send you checks that amount to signature loans - and they won't stop. If there is a way to make em stop short of intentionally messing up your credit, I haven't heard of it.) It means being more subject to identity theft and that an errant spouse can run up huge debt that you become responsible for.
More and more these days the noose is tightening around people like you are (and I was). You disadvantage yourself in many ways by refusing to participate. I respect that decision, but it simply isn't available to everybody. My point was that there are ways to use the cards to your advantage if you have em. Responsible people don't have to get caught in the "easy credit" trap and if you feel compelled to play in the game, there are ways to "win" at it.
The big winners obviously are the card companies. I would dearly love to return to sanity and see financial prudence appropriately rewarded and I would love to slide back "off the grid" just as a matter of principle. I just don't see that happening anytime soon.
I'm still POed about that 1 rating - I think you are a bit defensive. I understand that and appreciate what was otherwise a reasonable and thoughtful discussion.
May 26, 2007 8:58 PM | Reply | Permalink
OK, I gave you a FIVE now, so is all forgiven? :)
I do understand what you are saying.
If I ever do deciede I need a creidt card there will be certain conditions I will have to meet.
Like my emergency fund which doesn't have nearly as much money as I want it to have, but am working on that.
Plus I don't have a steady income, but that should change sometime this year.
USAA is a bank, but not a brick and mortar bank. They mostly serve the military.
They are the only bank I trust.
If I am defensive, there are reasons.
Bonnie
http://pupart.1hwy.com/
May 27, 2007 7:03 AM | Reply | Permalink
We're cool ;o D
May 27, 2007 7:50 PM | Reply | Permalink
It looks to me like you have bought into the credit card company propoganda hook, line, and sinker! You believe the myths, and you look for evidence that supports the myth. In reality, you don't need debt or a history of it to get a mortgage. You need an income, assets, and plenty of money left over at the end of the month. Bankers just want to know that the loan will be paid back. If they have collateral, they see that you are responsible with your money, and you can afford the purchase, then they will lend. Mortgage lenders check more than a FICO score.
BTW, if you haven't read Dave Ramsey's books and understand his complete message, you don't have enough information to draw conclusions about what he teaches. You are reading a post from someone who used a credit card for over 20 years and never carried a balance, but still got screwed by the credit card company to the tune of more than $20,000 in charges I did not authorize. It was done legally. Credit card contracts are the problem, not your money management skills. For many people, poor money management skills are what get them in trouble, and using debt as a bridge over problems causes more problems. But even if you don't use debt, you have signed a contract that gives the credit card company the ability to make legal claims against you that you have waived your right to effectively dispute. They have a dispute process, but it is rigged. Take it from me, I have taken my dispute all the way to the courtroom. Its rigged. There are loopholes in consumer protection laws that end up doing more to protect the credit card company than the consumer. IMHO, Dave Ramsey is the only financial counselor I've heard that comes close to telling it like it is. He still leaves much of the dirty details unsaid, because he is focusing on solving problems, not airing dirty laundry.
Jim Anderson
The Truth About Credit
Facebook Profile
May 28, 2007 8:44 AM | Reply | Permalink