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Daily Roundup: Credit Cards and Credit Triggers Print
Tuesday, 26th June 2007 (by J.D.)This article is about Spare Change
Yesterday at Blueprint for Financial Prosperity, Jim described how credit cards get you in, keep you in, and keep you spending. This is particularly relevant due to our recent conversations about credit. Jim writes:
Credit card companies have three objectives in mind: Sign you up, don’t let you quit, and keep you spending. They make money whenever you spend and, in fact, they can make a ton of money if you never pay a fee, are never late, and never pay interest because they take a little cut off the top of each transaction. All the other fees and interest, that stuff is just gravy to them.
This is something to keep in mind as I use my new credit card. I like to support small, local businesses whenever possible. One way to do that is to use debit instead of credit. From what I understand, businesses are not assessed a surcharge on debit purchases. Meanwhile, Russell Heimlich forwarded a Daily Kos story about credit triggers. The author writes:
I just heard a piece on NPR about Experian selling your credit history to collection agencies. They constantly monitor your credit activity and if you start to pay off your credit and are getting back on your feet, they notify the collection hounds and let them have at you. This sounded pretty damn wrong to me so I got on Google and found out some more about this.
This seems counter-productive. I know that creditors want their money, and I don’t hold that against them, but if a consumer is making positive steps, shouldn’t they be encouraged instead of hounded? This concept is apparently being applied to mortgage triggers, too. Make a move toward refinancing, and you’ll be swamped with mortgage offers.
June 26th, 2007 at 2:25 am
While going through my divorce, a few of my creditors were paid late. Then I found the financial blogs and decided to start paying everything off. In the last six months I have paid off over $14,000 in credit card debt. I was feeling really good about it. I had everything but one credit card paid off. I paid off Citibank and then got notified that my credit limit dropped from $2300 to $300. Even though they were never paid late, they informed me that because I was late on some other credit card that they were reducing my credit limit. What really seemed strange was that the one credit card I was late on and had paid off earlier actually increased my limit.
June 26th, 2007 at 5:26 am
I’m also a big fan of helping out small business and you raise a good point with how they get hit by credit card fees just like regular consumers like us. Gas stations in particular are getting hit hard these days because most people use credit cards when buying gas which results in what is called an interchange fee - there’s some good info about it here: http://www.unfaircreditcardfees.com. I do some work with them and its important to know that the reason credit card companies have reward programs for people who make lots of small purchases with their cards is because of these fees.
June 26th, 2007 at 5:58 am
Businesses actually get charged for debits as well, I’m pretty certain. The fees may be lower, but there *must* be fees, or there would be no one willing to pay for the necessary infrastructure.
If you really want to maximize local business profit, pay cash. It’s less convenient, but there are no infrastructure fees for cash (well, except taxes, of course).
June 26th, 2007 at 6:51 am
Derek’s right, there are fees for debit. (I work in the merchant side of the credit/debit card world, although on the software side, so I’m exposed to this stuff occasionally if not on a daily basis. And my experience is only in the US - there are some differences internationally.) The basics of it are:
Debit: single flat fee, no matter how much is spent.
Credit: fee plus a percentage of the transaction.
The fee and percentage for credit transactions change depending on a number of factors, including the merchant’s business, manually entered vs. mag stripe read, customer present vs mail/telephone order or e-commerce, etc.
(Part of the reason that debit can be a flat fee is that debit transactions must be customer present, mag stripe read, with a PIN.)
There’s a “large ticket” program that offers merchant a flat fee for high-cost items - but the fee is $35, so it has to be a pretty expensive item to make it worthwhile.
June 26th, 2007 at 7:53 am
And don’t forget the additional fees a merchant has to pay when the
debit card is used as *credit* card!
I have a rewards debit card which earns me I think .5% on every
purchase when I use my *debit* card, but select *credit*.
Basically, what I think is going on there (I’m speculating), is that
Mastercard or Visa is then able to charge the merchant the transaction
fee based on percentage, which is usually higher than the flat fee for
debit transaction. As a result, they then split that fee with me, the
customer, by giving me a kickback to make me feel good about my
collusion in this racket. Realistically, though, in the end, we’re
just hurting ourselves, since, in order to turn a profit, the merchant
has to then raise prices.
June 26th, 2007 at 8:02 am
There’s a wonderful Italian restaurant near where I live that’s home run and absolutely wonderful for the price. For $5 you can get two slices of pizza and a drink, or a pasta dish and drink. He has a sign up at his store asking customers to pay in cash, as buying a meal there for 4-6 dollars has an average cost of 50cents, almost 10% of his entire income goes straight to fees.
He might just be in a bad setup, but since then I’ve carried cash with me to pay when I’m at mom & pop shops.
June 26th, 2007 at 8:26 am
Just wanted to chime in and mention that debit cards indeed charge fees, but it looks like that’s been covered already, in more detail than I could provide (I used to be in a similar situation to Andrew, but that was several years ago, so my memory’s pretty fuzzy).
What hasn’t been mentioned is that ANY form of payment has associated transaction costs.
CASH: Employees have to spend time counting cash in their drawer when they leave, and then the manager has to double-check it, sort it, and take it to the bank (or pay a third-party armored truck service to take it to the bank). Paying in cash seems like it’s store-friendly until you realize that the store has little use for cash. They pay their suppliers, employees, etc. with checks. Their only use for cash is for making change, and only a small amount is needed for that.
CHECKS: Checks have their own set of disadvantages, as well. They can take time to clear, and bounced checks remain a problem (checks are the only form of payment where this is a possibility). They also have to be processed and sent to the bank. For commercial accounts, banks often charge a per-check fee (there are many things that you get for “free” in a personal checking account — imagine if you had to pay 20 cents per check that you deposit!).
Anyway, all of this is to say, ANY form of payment has its associated transaction costs. It’s just part of doing business, so don’t start feeling too sorry for stores or trying to figure out what’s best for them. They know what’s best for them, and they can choose to accept credit cards or not (and what kinds of cards to accept — I personally always try to use my AmEx card, but many places don’t accept it because AmEx fees are higher than Visa/MC or Discover). They’d rather have your business and have you pay with a credit card, than not have your business at all.
June 26th, 2007 at 10:27 am
I’m happier supporting myself rather than local business, which is why I like to use credit for everything and get 2-5% back in the form of rewards (the cards I’ve chosen have cash redemption options). I don’t particularly care that the credit card makes money because I’m making money.
Also, it seems that American Express has launched a bill-pay service — I’d sure like to get 2% off my mortgage every month (not to mention an extra month’s interest on that money in the bank)… if you’re financially responsible enough it seems like a no-brainer to me…
-d
June 26th, 2007 at 10:59 am
“Credit” triggers and “Collection” triggers are two different things. The linked article tells a story about a consumer refinancing a mortgage and then getting phone calls from competing broker. Refinancing a mortgage adds a new trade line to a consumer’s credit file. This is what causes the “credit” trigger. When a credit bureau sells this information to a 3rd party, this is called a promotional inquiry. Promotional inquiries are the types of things that can be halted by visiting http://www.optoutprescreen.com
Collection inquiries cannot be stopped by visiting the site above. Creditors have the right to pull credit data on their customers in the name of account maintenance. The newsworthy item is the fact that Experian is proactively providing this information in the form of a trigger file.
June 26th, 2007 at 12:07 pm
but the business owner is already recouping the cost of the charge/debit fees, no? Or are they accepting credit cards out of the goodness of their hearts?
I don’t think so.
If a business doesn’t want me to use a credit card, then they should lower the price a bit to give me incentive. Some businesses actually do offer a lower price for cash sales.
June 26th, 2007 at 3:11 pm
When is the governemnt going to do something about these damn banks? It seems like they can do whatever they want, and the current “laws” do nothing to protect the consumer.
June 26th, 2007 at 5:11 pm
Check into a credit freeze. I am.
June 26th, 2007 at 6:25 pm
Yes, the fees very greatly, depending on the type of card and how the card is used. A debit card that is swiped and PIN entered has a much lower Merchant Services fee than other cards. Other cards, that are hand-entered and not scanned pay higher rates. Business cards tend to get the highest fees over consumer cards, and “reward cards” like Discover, charge discount fees on top of the other fees. I reconcile our 20 branches Credit Card statements each month and personally see how fees of verious cards affect my place of employment
If you feel your credit card company is keeping you “hooked” on credit, then you are using it wrong or you have a financial problem. Ideally, you should be using your credit card for convenience: An interest-free 25 day loan. If the cardholder can’t pay the balance each month, then he or she has a financial management issue. This is not an illegal drug sold on the street corner that addicts people into uncontrolled use. Maybe it attracts those who don’t use it properly, but if you go out and buy a car you can’t afford, total it, and you never learned how to drive, is it the car dealer’s fault for giving you a good deal on a car? Or is it the fault of the irresponsible consumer who used the product without proper training and in a way that caused the damage?
If you can’t manage the cards you have, cut up some of them or do what I do, and leave most of them locked up at home. I carry 1 credit card and 1 debit card at a time, with exception of a gas card and sometime a home improvement store card for major purchases. What you charge each month should be what you pay.
Once again, JD, another good article!!!
June 28th, 2007 at 6:30 pm
Why so much ire at the credit card companies? You have to remember to distinguish between the credit card companies who have their logo on the credit cards and the actual banks who in essence loan you the money for a short period. The credit card companies make money on each transaction (a flat fee they charge the bank), since they maintain the network. The banks can and oftentimes do charge the merchant more than the credit card transaction fee and pocket whatever they don’t owe the credit card company. But the real cash cow for banks is the interest. It’s really the banks and their high interest rates that cause headaches for most consumers. I don’t think merchants are suffering all that much. If they are, I agree that they should give you an incentive to pay cash.
July 16th, 2007 at 11:05 am
[...] JD linked to my story about how credit cards get you in, keep you in and keep you spending, I had never heard [...]
October 6th, 2007 at 3:31 pm
sam thing happened with me too as i had two cards with wamu and they reduced the limit on one to 250 and the other which has 3000 balance did nothing what the hell i am going to block this scruplus business for ever i dont need this crap anymore. how the hell the control my financial status.
November 19th, 2007 at 2:10 am
Credit cards always help me to organize my business. Perhaps, I am out of subject but I would like to recommend all of you using business credit cards, if you plan to start new business. They give you neccessary money as well as various bonuses.