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Screw Robin Hood: New Study Claims Credit Card Rewards Take from the Poor to Give to the Rich

in Money Basics, Rants

Here we go again.

I’ve written extensively about credit cards and credit card rewards in the past and I rarely try to comment on the news of the personal finance world.  Today, however, I’m going to make an exception.

In the past couple of weeks, a new study has emerged which suggests that credit cards rewards represent a transfer of money from the poor into the hands of the wealthy.

My first reaction?  No $#!*, Sherlock!

A year ago this time, I wrote Bend Over… I’ll show you where you can stick your “Rewards”, where I shared that credit card rewards seemed to “feed on the vulnerable” section of our society.  By taking advantage of people who are stuck in destructive and cyclical habits, credit card companies can afford to pay out 2% to a smaller fraction of it’s users.

I didn’t have the math, statistics, and legwork to prove any of it. I was simply expressing that it was a major factor in Courtney and my’s decision not to take advantage of rewards.  As it turns out, though, the Consumer Payments Research Center has the math, statistics, and legwork to prove it.

Here’s my rough summary of the new study:

  • Credit card companies charge transaction fees to merchants when customers use credit cards. This is nothing new, but some people don’t know this.  The charges are slightly less for purchases ran as debit (but still exist).
  • Credit card companies prevent merchants from charging fees for credit card use and/or providing discounts for cash to help recoup costs.  In other words, they are greedy controlling sobs.
  • Instead of being able to pass these fees on to only those consumers that use credit cards, businesses are now forced to raise prices for everyone. For example, if an average credit card transaction costs a business $0.50 they can’t charge credit card users an extra $0.50 charge.  Instead, they raise prices $0.35 (as an example) for all customers, regardless of how they pay, to cover this cost.
  • Because of this above concept, consumers who use cash or other forms of payment pay marked up prices to account for the transaction fees generated by those which use credit cards.
  • Credit card companies then pass along a big portion of the fees that they collect as rewards to the credit card users.  In other words, they collect fees from everyone (because they are built into the end price) and pass them back out only to those that use rewards credit cards.

Here’s how the Federal Reserve Bank of Boston summarizes the study on their download page:

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.

The funny thing about this study is it doesn’t account for interest earned off of low-income households (correct me if I’m wrong)!  This is simply a look at how the transactions fees are charged, recouped, and handed back out.

My biggest grief with the credit card industry isn’t the way they charge transaction fees (as retarded as that is), but instead the fact that an even larger portion of their profits are being derived from the ridiculously high interest rates and fees they charge many consumers whom are trapped.

The recent credit card reform and legislation helped shine a light on some of the most shady practices in the credit card industry.  That’s generally a good thing, even if I disagreed with some of the extra clauses thrown into the bill.

But this “Rewards” discussion is only one part of the debate…

While I believe this is great food for thought, this is certainly not the only reason Courtney and I ditched credit cards.  Here’s an small excerpt from the guide Unautomate Your Finances, where I really dig into the issues:

“Never spend your money before you have it.” -Thomas Jefferson

What about people who aren’t currently carrying a revolving balance? Isn’t it possible to use credit cards as a “tool” to get “free money” through rewards?

Well, that’s one theory. *smiles*

On a serious note, many people try to make it into an issue of whether or not you can be “responsible.” For them, if you can’t “control yourself” you should cut up your cards completely. However, if you possess “self control” then you should be tapping into all the “free money.”

(Enough quotation marks for you? More on the way…)

But the discussion is much more deep than just whether you can “be responsible” or not…

Benefits of using credit cards:

  • Rewards. Many credit cards will have rewards and/or points that equate to 1%-3% of the amount you spend. By using specific credit cards in the right combination (gas cards for gas, booking flights on specific airline cards, etc…) you can average between 1.5% and 2% of your overall spending. Many credit card users consider this to be “free money” that they receive when paying off their balances every month.
  • Establish credit history. As long as you can keep from getting any negative marks (missed payments for example), showing a string of consistent use will help bulk up your credit history. When done properly, this can be an easy way for people with little or no credit to become more “established.”
  • Convenience. Swiping a credit card is convenient. It’s easy. We’ve talked about the drawbacks of this heavily, but it’s still also a benefit to consider. Of course, debit cards are just as convenient to swipe in this instance.
  • Digital Tracking. Albeit “passive”, credit cards do offer the additional convenience of making your traffic digital. The resulting data is thus much easier to analyze and sort. Once again, debit cards offer the same benefit in this area.
  • Physically safer than cash. For situations where you are physically mugged or lose your belongings, credit cards are much safer than cash or debit. It’s easier to cancel credit cards; and while there may be headaches dealing with fraud on multiple accounts, you won’t lose any money directly.
  • Misc. Protections. Some credit cards offer random bonuses for specific purchases. For example, they may provide lost baggage protection when you book a flight or extra rental insurance when you rent a car. Extended warranties are common, as well.

Benefits of slicing credit cards into tiny pieces:

  • Opt-out of the industry. The credit card industry isn’t exactly on fire as of late. The limelight has recently exposed many of the sneaky techniques and back-room tactics that led to the enormous profits of the last decade. If given the choice, many prefer simply to opt-out of the industry all together.
  • Simplifies Your Financial Accounts. Removing credit cards from your life simplifies your tangible accounts and eliminates the mental upkeep it takes to juggle them. Even many credit card users are cutting it down to just a single card.
  • Intensifies focus. We’ve talked a lot about the power of focus. Many people enjoy ditching credit cards as a sign of commitment to a set of principles. For example, they may feel that a system in which rewards increased spending is not consistent with their ultimate goals.
  • Lowers risk of identity theft. There are two different types of identity theft. The creation or opening of new lines of credit and the process of stealing existing account information. Each additional open account you have increases your risk for the latter. In addition, losing a wallet with $40 cash is bad, but losing one with 5 different credit cards may make you wish it was the cash instead!
  • Heightened awareness. Studies have shown time and time again that people spend more with credit cards than debit cards or cash. It’s the convenience of the “swipe it and forget it” mentality in full force. It’s not impossible to spend consciously with a credit card, but debit and cash have proven to foster more awareness during purchases.

Ultimately, the decision on whether to keep credit cards in your financial life comes down to weighing the pros and cons above. Of all the credit card benefits, I’ll admit that earning rewards is the most appealing. However, the rewards simply aren’t enough to make it worth it.

Here’s why…

The credit card industry derives a large percentage of its profits from people stuck in a cyclical, destructive habit. They thrive on irresponsibility.

Let me be clear, the individual customers (the ones in debt) are to blame. I’m a big fan of personal responsibility. At the same time, we all have a choice. We can choose to support these industries, or we can choose to opt-out of the system as a whole.

Courtney and I haven chosen to opt-out.

We choose what industries, products, and services we use on a daily basis. In our life, credit cards will never be in this chosen group. Sure, most debit cards are still either Visa or Mastercard, but for now it’s a lesser evil.

Credit cards don’t promote sustainability. They don’t foster focus or passion. Worst of all, they thrive on us prioritizing convenience over consciousness. As you might guess, if we don’t have to be a part of the credit card industry, we won’t.

It’s that simple.

That was the overview of our thought process over the last two years and nothing has changed as of today.  Sure there is a bit more evidence now that the way in which credit card companies charge transaction fees deserves to be scrutinized more closely.  Once again, that’s mostly a good thing.

Additional reading:

At the end of the day, nobody cares…

I’ve had this discussion enough to know that very, very, very, very few people are going to change their minds based on anything in this new study.  After all, it’s always been common sense that your 1-2% in credit card rewards are funded by those that that are irresponsible with credit cards and thus pay ridiculous interest.

Now there’s data indicating that even responsible CASH users are fronting part of the bill, too!

I know what most people will think:  ”That’s nice, but it’s not changing my habits… after all, I’m not passing up the money!”

Here’s a question for debate. You are on your computer getting ready to pay for a plane ticket.  A message pops up before you can pay… it’s from me!  I offer to pay for the main portion of the ticket for you.  Whoo-hoo!  There’s only one catch, I’m not actually paying for it myself…  I’ve recently walked door to door in the poorest neighborhoods of Indianapolis and squeezed $23 out of every household to pay for your ticket.  As long as you are o.k. with where the money came from, I’m willing to pay for the ticket!…

Would you do it?

The majority of people would, even if they say the wouldn’t.  Heck, I’m not saying I’d even turn down the money if you laid it in front of me.  I’m not claiming to be a Saint by any definition of the word.  In theory, most of us would claim where the money came from mattered, but in practice it’s a whole ‘nother ballgame.

Screw it… go ahead and take the money.  After all, it’s the American Way.

photo by Dunechaser

{ 81 comments… read them below or add one }

the Dad, Climbing Out August 9, 2010 at 12:46 PM

Wow! It never occurred to me that by paying cash I am subsidizing those who pay with a card. I suppose you could make the argument that it depends on the merchant; some might not raise their prices to cover the fees, but that is likely folly.

Thanks for the insight and link to the article.

the Dad, Climbing Out

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Baker August 9, 2010 at 1:02 PM

No problem, “the Dad”. :-)

Glad to have you here, hope you stick around!

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Erica Douglass August 9, 2010 at 12:52 PM

“There’s only one catch, I’m not actually paying for it myself… I’ve recently walked door to door in the poorest neighborhoods of Indianapolis and squeezed $23 out of every household to pay for your ticket. As long as you are o.k. with where the money came from, I’m willing to pay for the ticket!…”

Be careful with this mentality. It shows an underlying “scarcity” mentality–that is, if I make one dollar, I must be “taking” it from someone else. Nothing could be farther from the truth; dollars are created and destroyed all the time. And dollars are now mainly created and destroyed by credit.

http://globaleconomicanalysis.blogspot.com/2010/08/will-quantitative-easing-spur-inflation.html

From the article: “There is $940 Billion dollars in circulation compared to $8,500 Billion of M2 compared to $9,300 or so in total bank credit.”

Anyway–yes, it is your right to either take credit card rewards and it is also your right to ask for a discount when paying cash. I use both; CC rewards for utilitarian purposes and cash when I am working with a small shop and know I can use it to swing a discount.

Neither of these “take” money from anyone else directly.

(BTW, I also recommend Dan Kennedy’s book “No B.S. Wealth Attraction in the New Economy” for a more detailed followup on the scarcity beliefs. Check page 8 for a great story about money scarcity beliefs and how they can strangle your business.)

-Erica

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Baker August 9, 2010 at 1:06 PM

Erica, great comment about the scarcity mindset. I completely agree with you that it’s a slipperly slope!

Just like choosing to buy free-range meat, local vegetables, free trade coffee, or blood diamonds… there *is* some correlation between money or resources that were taken and discount/money you can receive.

$1 for $1 may have been a poor example, but knowing where your money comes from and where certain industries derive their profits can help each consumer decide whom to do business with. :-)

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Benjamin Eukel August 9, 2010 at 12:57 PM

“Credit card companies prevent merchants from charging fees for credit card use and/or providing discounts for cash to help recoup costs.”

Government transactions are apparently exempt from this as they always make sure you know there is a 3.5% fee if you want to pay with a credit card.

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Baker August 9, 2010 at 1:07 PM

Ah, I actually didn’t know this… although it makes a ton of sense. I do remember seeing this in a lot of government transaction (plates, tickets, fees, etc…).

I actually am in favor of this in the private sector, too!

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NerdWallet August 10, 2010 at 3:39 PM

They are exempt from adding surcharges to credit card purchases, but most merchant agreements do not exempt them from offering discounts for cash, which is really just a semantic difference (the authors acknowledge this in the paper).

So why don’t most merchants offer discounts for cash if it would save them money? Probably because it’s nearly as expensive for them to handle cash, though the expense isn’t as quantifiable (security, fraud, etc). Or even if it was significantly cheaper, we’re talking about a 2% charge being incurred by 15% of users (the actual numbers used in the paper), which is only a 0.3% increase in prices, which is hardly worth getting worked up over.

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Baker August 10, 2010 at 3:46 PM

Hmmm… I did not know this. I thought most merchant agreement stated that they couldn’t charge different prices, period. It seems awkward to only not allow a charge.

Either way, discounting cash is more difficult than increasing credit in practice (credit card surchages could be automatically added to receipts). In addition, advertised prices would be a bit lower, which is better for businesses.

To a local candy store (to use a previous mentioned topic) the difference may be small. The yearly numbers for Wal-Mart though… may reflect a different matter! :-)

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Brandon August 9, 2010 at 12:57 PM

Have you ever tried to rent a car without a credit card? Usually it requires a massive cash deposit or hold on a debit card. Do you book travel online and use a debit card instead?

Also just a general thought on credit card usage: there are comprises I personally choose to make every day for financial reasons because the alternative is too expensive. For example, I buy conventionally (read non-organic, non-free range, from a factory farm) raised chicken and beef, even though I abhor the practice of factory farming. My income is not high enough to allow me to afford the luxury of free range organic meats. And I refuse to be a vegetarian. Nearly 100% of the food I buy is non-organic, because going organic is too costly. For the same reason, I choose to use credit cards. They allow me cash back on purchases I know I will make (gas, groceries, etc…) even though I know that money comes from interest earned by people who overspend.

I drive to work everyday alone in my car. I could buy a scooter, but that would be more costly than just driving my 14 year old Saturn.

Sometimes you have to make compromises in life, because life is life and is full of compromises.

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Baker August 9, 2010 at 1:10 PM

Brandon, this is a fantastic comment on of the best I’ve seen on a discussion like this. We all have to choose which battles we fight and which compromises we make.

For example, I recently defaulted away from being a vegetarian after 3+ years. It was a battle I chose to fight, but one I’ve compromised on recently. :-)

As a side note (it’s not your main point), I’ve rented several cars with debit cards. One was free (because we asked) and one we had to upgrade our insurance. In the latter, we deemed it to be worth the extra bit!

We’ve also traveling pretty mobile-ly across New Zealand, Australia, and Thailand with a debit card, although I can’t vouch for every corner of the globe. :-)

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Lou Mindar August 9, 2010 at 1:01 PM

Baker — This reinforces my belief that credit card companies are the anti-Christ. I have long recognized that the entire credit card industry is set up to profit when individuals make poor financial decisions. Under the guise of helping people financially, they actually encourage and assist people in ruining their financial lives.

I hope that doesn’t sound over the top, but I really do view the credit card industry as evil.

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Baker August 9, 2010 at 1:12 PM

Hahaha, Lou is *does* sound a bit over the top! ;-)

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Matt August 9, 2010 at 1:06 PM

Baker, my wife and I couldn’t agree more. We cut up the cards 5 years ago and have never looked back. We didn’t really do it because we felt as if we were taking “redistributed” money, we did it to get control of our household. I know many on here will claim that they are responsible enough and that is good news for them.

I just came back from completing the Dave Ramsey Counseling Training, and I can tell you that they meet with people day after day that are using them for emergencies and daily living. I’m starting to counsel people and it is the same in 98% of situations (credit card and foreclosure issues).

Those aren’t my ideas of a “reward”. Thanks for writing a thought provoking post.

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Baker August 9, 2010 at 1:13 PM

Great point, Matt. Like you, this was just one part of the reason we ditched ours. We’ve only been free for 2 years, though (we’ll always be chasing you on that end!).

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Gholmes August 9, 2010 at 1:27 PM

Ah debit card the lesser of 2 evils, I wonder when even the debit card will be evil? We have been cr card free for 3+ years and can attest to the benefits you list.

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Margot August 9, 2010 at 3:58 PM

A question unrelated to your main topic for discussion…

I’ve read several articles lately talking of ditching all plastic for numerous reasons in favor of using cash. My question is how to do you handle online purchases? Admittedly I haven’t tried to pay for an item off of Amazon with cash, but I didn’t even consider if possible. How do you handle these cases?

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Baker August 10, 2010 at 11:56 AM

Margot, I use my debit card for that. Sometimes when people say they use “cash” it simply means that they don’t use credit. If they really *only* use cash, then they probably wouldn’t purchase online! (There may be some top-secret way) :-)

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Margot August 10, 2010 at 12:34 PM

I’m considering my check card from my bank which does not require a pin at the store and has a VISA logo on it to be a debit card; it draws from our bank account. Is that the case (debit & check card are the same)?

A while back we stopped using our cards as debit cards (entering the pin) because we got hit with fraudulent charges twice in two months where a debit transaction was being monitored and someone got our number and pin and used the information to drain the account. Thankfully the bank was very good about both notifying us and reversing the charges, but imagining how devastating that could have been made us change our habits.

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Baker August 10, 2010 at 12:52 PM

Margot, it’s impossible to say for sure, but most times if there is a Visa logo your “check card” is also a debit card and can be used for online purchases, etc… :-)

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Margot August 10, 2010 at 1:18 PM

I guess my real question is how is using my VISA check card any different than using a VISA credit card if the credit card company (VISA) is the one charging. The store has to pay the fee whether I use debit or credit. I get the benefit of not having to deal with a credit bill later but I’m not sure it is helping anyone else.

While I find your point (and the subsequent discussion) interesting, I’m struggling with the idea or practicality of boycotting these fees. It seems that unless I go to a physical cash system or personal checks, I may not have many options.

MJ August 9, 2010 at 4:41 PM

“The credit card industry derives a large percentage of its profits from people stuck in a cyclical, destructive habit. They thrive on irresponsibility.”

“Credit cards don’t promote sustainability. They don’t foster focus or passion. Worst of all, they thrive on us prioritizing convenience over consciousness. As you might guess, if we don’t have to be a part of the credit card industry, we won’t.”

It’s interesting you make the assumption that they thrive on irresponsibility. As you mentioned in your post, credit card debt is a matter of personal responsibility. Why are the credit card companies being blamed for that? They’re a BUSINESS. What business doesn’t rely on some form of personal weakness? I’m sure the candy shop down the street or the purse store at the mall can attest to that (whether they’d want to admit it or not). People are driven by wants and needs. Sometimes, those things we “want” are thought to be “needs”. If someone can’t determine which are which, then yes, maybe cash-only is best for them.

Personally, I have had a credit card since I was 16. My mom knew it was the best way to create good credit. She taught me to not overspend and to only pay for things that I knew I would be able to pay off at the end of the month. When I graduated college, I moved to a new city and didn’t have a job. Credit cards saved me from going bankrupt. I was able to utilize a 0% interest card (6-month term I believe) and pay most of my bills with it. Yes, I racked up about $7000 in debt, but I was able to transfer it at the end of the 6-month period to another credit card with 0% on balance transfers for 12 months (for about a $50 fee). I was able to get these deals because of my great credit. By the time the 0% ran out on the second card I had gotten a job and paid off my debt. It was not easy. I had to only buy the things I needed (food, rent, gas to work and back, etc), and not buy the things I wanted (dinners/drinks out, new clothes, etc.). I think this is where most people get stuck and I’ll be the first to admit, if you can’t budget properly and live within your means, I have no issues with reaping the rewards of the system, because that’s MY reward for living within my means.

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Baker August 10, 2010 at 12:03 PM

MJ, thanks for the comment!

It’s fairly obvious we are on different sides of the preference aisle on this one, however two things to comment on:

First, I feel like there is a vast difference in degree when dealing with candy shops and the credit card industry. Although both may rely on “weaknesses” it’s a matter of severity. Your point is probably better taken as the Fast Food Industry vs. the Credit Card Industry. :-)

Second, I can tell you from personal experience that your story is a very, very small exception to the standard. There’s not a single person I know that would give someone the advice of move to a new town, with no job, and rely on 0% balance transfers and escalating credit card limits to save you as you job hunt.

You did an amazing job at managing that house of cards, but there are hundreds of thousands of stories that didn’t share the same ending as yours. In theirs the job didn’t come at the right time, the offers didn’t line up right, or they lost control.

You are right at the end. It *is* your reward for living within your means. My only suggestion is to think about where YOUR rewards comes from.

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MJ August 10, 2010 at 1:33 PM

“There’s not a single person I know that would give someone the advice of move to a new town, with no job, and rely on 0% balance transfers and escalating credit card limits to save you as you job hunt.”

Let me clarify this – I held a retail job in order to help make ends meet while I looked for a full-time job in my field. I would never expect the credit cards I was using to fully support me for any length of time. Nor would I ever sign up for welfare or food stamps when there is a perfectly good mimimum wage job available somewhere.

To your point – “You are right at the end. It *is* your reward for living within your means. My only suggestion is to think about where YOUR rewards comes from.” I think Kevin summarizes quite well below: “I’m not going to change the way I live in order to help out people who made their own beds. I’m not going to pass up tools that can help improve my family’s financial situation, just because some people are too disorganized or impatient for their own good.” If my rewards must come from others, i would EXPECT that they would come from those who are not following the rules of personal responsibility, and I have no issues with that.

I will gladly reap the benefits of my decisions while others live with the consequences of theirs. If you’re not physically/mentally/financially able, why would that matter to me? I believe in survival of the fittest. Without it, we run the risk of “dumbing down” the gene pool…which I believe may have already started here in America. It all boils down to people taking responsibility for their own actions.

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Baker August 10, 2010 at 1:45 PM

Doh! Sorry for jumping to conclusions. :-) I thought you were saying that you used them to live completely while job hunting. If it came down to feeding myself of family, I would do exactly the same thing (retail job + whatever was available). Still, relying TOO heavily still got lots and lots of people in trouble. :-)

Also, I do understand where you are coming from. This is one area where I’ve compromised, but there are plenty of others where I don’t. It’s a balancing act we each choose how to unfold. :-)

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Kevin M August 9, 2010 at 4:46 PM

$1,482 seems high for the average reward household – that’s about $150k of charges using the common 1% cash back assumption. Did I miss something?

Also, should we not negotiate a lower price by asking for a discount if we can? Because that eats in to the retailer’s bottom line and indirectly raises prices for everyone else, right?

What about businesses that take a 2% discount for paying invoices early? That takes advantage of other businesses that don’t have the cash flow to pay early by raising prices overall.

Get my drift?

I understand your choice Baker, but the fact that the group that did the study are calling for possible government intervention here is ridiculous. What happened to personal responsibility?

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Kevin M August 9, 2010 at 4:48 PM

I forgot to commend you on your excellent use of Lego photography.

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Baker August 10, 2010 at 12:12 PM

Kevin, you are right. It does seem a little high, but I don’t know where the math is coming from in particular. There are some really extensive sections to the documents, that may be over my head (barring hours of study) on the math side. In this case, I’ll assume the professionals did the math right and that any credit card lobbying firms will jump on any errors before I could find them. ;-)

I also not a fan of government intervention at this point on transaction fees (you prob remember I wasn’t a huge fan of the last intervention). Still, I think the spotlight isn’t a bad thing.

On the discount issue, I don’t think it’s the same. In most cases, percentages are offered directly in exchange for a benefit or a perceived benefit. For example, you may receive a discount at the register, but it’s likely because they want to retain you or think you’ll walk without one. They are banking on more profit down the road than if they didn’t offer the discount. (Or have you pay early because THEY want the cashflow and/or eliminate the off chance you don’t pay at all).

Offering credit cards for payment is the same, EXCEPT for the fact that everyone… regardless of payment type… pays for them. I’d be a big fan if it just cost 3.5% more to use credit cards, but that’s not how it’s set up. I don’t like the lack of options the industry gives small businesses. :-)

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NerdWallet August 10, 2010 at 3:48 PM

You’re dead on here, the math doesn’t seem to make sense, which is actually why I read the whole document. Most of the math is actually fairly simple, it’s just built on a variety of statistical assumptions (they don’t have complete data on credit card expenditures, etc, so they have to estimate), and a lot of the assumptions are questionable. For instance, how many people do you think pay for their cars or mortgages with a credit card?

While I don’t necessarily disagree that there is a subsidy from the *irresponsible* to the *responsible* (note the distinction), their paper seems to be off by many orders of magnitude in terms of the actual dollar amount.

Also, keep in mind that the Boston Federal Reserve is not an impartial academic institution, this is a political body. And it’s actually part of the same political body (the Federal Reserve Board) that was handed the responsibility of regulating debit interchange, and will likely be given credit interchange if/when that goes on the regulatory chopping block.

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PT Sloan August 9, 2010 at 4:48 PM

“Instead of being able to pass these fees on to only those consumers that use credit cards, businesses are now forced to raise prices for everyone. For example, if an average credit card transaction costs a business $0.50 they can’t charge credit card users an extra $0.50 charge. Instead, they raise prices $0.35 (as an example) for all customers, regardless of how they pay, to cover this cost.”

I’m definitely not on the side of credit card companies, but I’m not understanding the logic here. Those fees that businesses who accept credit cards get charged are a business expense they get to write off at the end of the year. Why should they be allowed to pass those fees onto consumers when they get to write them off? There’s nothing to pass on to consumers when something is a write-off and they would be unfairly making money off fees that were a business write off in the first place.

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Baker August 10, 2010 at 12:17 PM

Having something be a business expense means they can deduct it before they pay tax on the profit.

It *doesn’t* mean they get profit as if the expense doesn’t exist…

Obviously, accepting credit cards costs business extra money. These days, it’s hard to run a business without accepting them, so many have to make up the extra cost by raising prices (or lowering some other cost or benefit).

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Joel August 9, 2010 at 5:25 PM

I was following along semi-interested (i’ve seen the study from you & JD on twitter) but I love how you actually brought it home with your final question. Yes, there are technicalities with your analogy, but you brought home the big idea.

Would you really pass up the free ticket?

You don’t know until the situation actually happens. This is going to be some good food for thought…

I’m ondering if it’s too late to try & opt out of the whole credit card/debit game altogether. With the advent of so many online stores, are there any good payment services that aren’t credit card based? (paypal doesn’t count).

Also, how much of the responsibiility falls on the vendor…they’re the ones who accept the CC in the first place after all…

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Baker August 10, 2010 at 12:20 PM

Thanks, Joel! I’m not sure about any alternatives to debit cards, as well, for online purchases. A *lot* of places do offer PayPal, but it’s market share isn’t quite big enough for me to ditch my debit card. :-)

And yeah, the vendor does have some of the responsibility, but it’s almost impossible to run many types of businesses today without a credit card unfortunately.

I guess it’s easy to live your personal life without a credit card than it is to run most businesses without offering to take them! :-)

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Neal August 9, 2010 at 5:56 PM

Good points in your article! One thing was missing, and that in the USA the fees that are charged to merchants are at least 2% higher that the actual cost of the transaction. This is where the “free miles” come from. I own a pharmacy, and have no ability to pass this on to anyone, since my prices (copays) are set by the insurance companies. Credit and debit transactions in Europe cost the merchants only about one half of one percent, as opposed to 2.5 to 3%.

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Baker August 10, 2010 at 12:21 PM

Yep, they have to be able to pay those rewards and still churn a profit! That point specifically is the reason why the money transfers from poor to rich in the study.

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Anthony August 9, 2010 at 10:14 PM

I’m one of those fools who was duped into signing up for a credit card in college. That was 12 years ago. Since then, I have paid off my debts totaling over $40K, saved up thousands in cash, cut up credit cards, closed accounts, then reapplied, more vacations, more debt, struggled, paid off again, more cards, less cards, more debt, still paying off, sworn off credit for life, cut up some cards, reapplied… and STILL after all these years can’t get ahead. It is nobody’s fault but my own – I love to travel, and I would estimate that 80% of my debt is due to the ease of booking travel online with a credit card. Credit cards have kept me on an exhausting treadmill, and have complicated my finances to such an extent I cannot even describe.

I have almost no debt again (for the 3rd time), but I MUST learn to save for my trips beforehand and travel on cash only. Anybody have any tips?

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Baker August 10, 2010 at 12:23 PM

Cut of your cards completely. Freeze your credit report so it’s hard for you to apply for new ones.

Without the ACCESS to credit, you’ll find a way to save up and have money on hand. One way *we* try to limit ourselves is just ensure it’s not an option. Even though I consider myself to be responsible (these days), when there is no option… there is no option.

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Financial Samurai August 10, 2010 at 12:10 AM

Free riding is the American way! Go USA!

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alwaysLovely August 10, 2010 at 12:14 AM

Baker,
I like this article as I learnt a few basic matters regarding Credit Card usage.
Despite me living in Singapore, I believe credit cards companies work in a similar fashion regardless of country.
I use 1 credit card and 1 debit card. I settle my credit card bill diligently on time every month through automated process called GIRO. That credit card collects reward points on payment and only recently was I aware that having a credit card tend to increase spending (unnecessary sometimes) due to the (irresistible) discounts provided. I’m learning how to pause and get out of that temptation slowly.
Personally I still find responsible (and conscious) usage of cards is still beneficial for me.
Thanks for the post.

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Baker August 10, 2010 at 12:24 PM

Sweet, I’m stoked to have such a diverse audience. Thanks for chiming in on the international similarities!

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Betty Kincaid August 10, 2010 at 12:25 AM

” There’s only one catch, I’m not actually paying for it myself… I’ve recently walked door to door in the poorest neighborhoods of Indianapolis and squeezed $23 out of every household to pay for your ticket.”

These credit card companies didn’t hold a gun to their customer’s head and force them to use their product. Nor did any of the other evil industries you mention in this post- gaming, alcohol & tobacco. People are weak and have little to no self-control. My responsible use of a credit card will not change human nature.

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Baker August 10, 2010 at 12:28 PM

No, but your use is funded by those who struggle with “human nature” the most.

And I didn’t mention anything about guns.

A homeless person who is sleeping on street is there likely because of bad choices they made… “human nature” if you will. Just because they may be sleeping in my walking path, doesn’t mean I step on them. I usually try to walk around…

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Greg McFarlane August 12, 2010 at 5:21 PM

Betty didn’t mention anything about guns either, except in a metaphorical way.

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Greg McFarlane August 10, 2010 at 2:50 AM

Disclosure: I have no connection to anyone in the credit card industry.

My biggest grief with the credit card industry isn’t the way they charge transaction fees (as retarded as that is), but instead the fact that an even larger portion of their profits are being derived from the ridiculously high interest rates and fees they charge many consumers whom are trapped.

So how much interest would you like credit card issuers to charge? Is it a rate other than the one stipulated on the agreement that a cardholder has to sign before holding a card? If you think credit card companies earn too much of their profits off interest rates, then presumably you think they should be earning more of their profits in other areas – which is to say, transaction fees. There aren’t a lot of other places for credit card issuers to earn money.

Greedy? If I’m a merchant, and I don’t accept VISA or MasterCard, my customers will go elsewhere. If I do accept VISA or MasterCard, I pay those companies 1% for the privilege. I’d rather get 99% of a sale than 0% of a sale. The credit card companies are helping me gain a competitive advantage here, and they expect to get paid for that. How is that greedy?

My lone credit card is an American Express Hilton Honors card. I carry it because
a) it has no annual fee,
b) I stay in Hampton Inns a few times a month anyway
c) I like the idea of buying something today and waiting 30 (and as long as 60) days to pay for it
d) it’s far more convenient than cash.

You know what the interest rate on my card is?

Because I sure don’t. I have no idea. They could charge me 784,293% and I wouldn’t care. They’re getting 0% off me, whether they like it or not. The agreement that I read before signing for the card stipulates that the card will never carry a fee for use (or non-use.) If that wasn’t in there, I wouldn’t have applied for the card. Yes, I read the agreement…it seemed like an important thing to do.

Baker, everyone reading your blog has at least a passing interest in financial responsibility, right? Then why not tell them the truth: the credit card companies will make money off someone, but that someone doesn’t have to be you. Plenty of companies have free riders: for every person like me who pays Google a few bucks a month (for AdWords), thousands more get to enjoy search and maps and Blogger and YouTube and Picasa absolutely free.
The manager at my gym once told me that 85% of members, he never sees. They pay their annual dues, come in in the first week of January, then disappear. And bless those people’s fat-laden hearts: if it weren’t for them, I’d be paying $700 a year.
Let the credit card companies profit off the other suckers, not you.

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Baker August 10, 2010 at 12:49 PM

Usury rates and limits have been around for a long time. I’m not one to judge where the limit on rates should be on this issue, however claiming that any rate is fair based soley on the fact that someone signed to it originally is silly. There should be limits to prevent abuse.

Also, 1%? What business are you in? I’ve not heard of many that are only charged 1%. Either I’m way off here or you are (maybe it’s me). If they charge 1% average to merchants and offer 2% to consumers… um, how?

Obviously, the interest rate doesn’t matter if you don’t carry a balance. Nothing is added by bringing this up. Unfortunately, most of America isn’t a savvy as you. They don’t ensure that there is a guarantee a use fee will never be charged (I’ve actually never heard anyone mention they specifically looked for that until the recent changes). Many didn’t understand that there 10% could go to 35% if they paid at the wrong time of the day on their due date either. That was probably in that agreement, too.

Just because something is agreed to in writing doesn’t automatically make it ethical, right, legal, and/or good for the general population.

“Then why not tell them the truth: the credit card companies will make money off someone, but that someone doesn’t have to be you.”

Because I don’t tell “them” that “they” need to do anything. I simply provide the choices I’ve made and the observations based on what I see. I’m not in the business of telling people what to do. I’m in the business of opening up the conversation.

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Greg McFarlane August 12, 2010 at 5:33 PM

Okay, fine, I’d rather get 98% of a sale than 0% of a sale. Or 97.5%. You’re missing the forest for the trees.

claiming that any rate is fair based soley (sic) on the fact that someone signed to it originally is silly.
It’s not silly, it’s the very definition of fair: two parties mutually agreeing to something.
Just because something is agreed to in writing doesn’t automatically make it ethical, right, legal, and/or good for the general population.
Where do I start assailing this rehashing of the previous quote? First of all, why should an agreement I enter into with a credit card issuer have any bearing on the general population? There are only two parties to our contract – not 300 million. I don’t treat the issuer as my superior, waiting to turn me around and grease me up. They’re my equal, and each of us brings obligations to and receives benefits from the agreement.

Your argument that people can’t be expected to read something that could end up costing them tens of thousands of dollars is awfully curious for a guy who writes “I’m a big fan of personal responsibility.”

How about one more quote? I’ll quote myself for good measure:
“Then why not tell them the truth: the credit card companies will make money off someone, but that someone doesn’t have to be you.”
Because I don’t tell “them” that “they” need to do anything

Nowhere in that quote am I telling you to tell people to do anything.

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Rob August 10, 2010 at 11:18 AM

I use a credit card for just about everything. I hate carrying cash for two reasons:

1. I lose it
2. I forget what how I spent it.

Of course I pay off the balance every month. I’m in the same boat as Greg. I have no clue what my interest rates are because it does not matter. I’ll never pay an finance charge.

I also HATE debit cards. They offer less protection against fraud than credit cards. If you lose your wallet, you are in more trouble if there is a fraudulent charge on your debit card than on a credit card. With the debit card that cash is gone right away, straight out of your bank account. Sure you can dispute it and eventually you will get it back, but how long is that going to take? With a credit card, most likely the charge will be reversed before you have to make a payment.

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Baker August 10, 2010 at 12:51 PM

Rob, great insight into one of the downside of debit cards. Honestly, it’s the biggest upside for us (bigger even than 2% rewards) now. It is the only reason I’d ever consider getting a credit card.

Still, for now, the benefits of debit/cash still outweigh the downside for us! :-)

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Kevin August 10, 2010 at 12:02 PM

“The funny thing about this study is it doesn’t account for interest earned off of low-income households (correct me if I’m wrong)!”

Probably because you’re making a common mistake: assuming that credit card companies get the interest charged.

You’re talking about 2 completely separate things here. The credit card companies make their money off those merchant exchange fees, and the client membership fees. But they don’t actually lend any money or collect any interest (except for American Express). That would be the role of the BANK backing the card, not Visa or Mastercard themselves.

The banks lend the money and charge the interest. That’s completely separate from the credit card companies themselves. Visa and Mastercard don’t see any of that money, or take on any of the risk of lending the cash. That’s why this study focused strictly on the role of the transaction fees and the credit cards.

Focusing on the absurd interest would require a different study, and would involve the banks, not the credit card companies. It’s incorrect to blame credit cards for the interest being charged to low-earners. The banks are to blame for that.

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Baker August 10, 2010 at 1:02 PM

Thanks for the great insight. You are right. What I meant to reflect on was that showing the interest, too, would increase the transfer of money shown in the study.

Obviously as you pointed out well, that would have required a completely different study! In my dream land, it would be included though. ;-)

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Kevin August 10, 2010 at 12:08 PM

“My biggest grief with the credit card industry [is] the fact that an even larger portion of their profits are being derived from the ridiculously high interest rates and fees they charge”

Again, this is incorrect. The credit card companies don’t charge/collect the interest and fees. That’s the banks.

“The recent credit card reform and legislation helped shine a light on some of the most shady practices in the credit card industry.”

You keep saying “credit CARD reform” and “credit CARD industry,” but this is incorrect. The new legislation actually targetted lenders of all types, and banks were the primary offenders when it came to onerous practices involving jacking up interest rates, and applying payments in an order that was most beneficial to the bank.

When you make a payment on your credit card, you’re not sending the money to Visa – you’re sending it to Citi or Chase or Wamu. Because the banks are the ones lending the money and charging the interest.

I’m not saying it’s fair or ethical – I’m just saying, “aim your gun at the right target.” While you’re unfairly blaming the credit card companies for interest rates they have nothing to do with, the banks are getting a free pass from you.

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Baker August 10, 2010 at 1:08 PM

Again, great point. When I say “industry”, I meant it to be inclusive of all the parties involved. I’m not sure if it technically correct terminology, but I consider both to be in the industry.

I’m also under the impression that Chase, Wamu, and Citi *do* make money off their relationship with Visa. I’m not 100%, so maybe my impression in that regard is ill-informed.

For clarification, my gun is pointed at both. I think the transaction fees should only be charged to people who use the service directly. I also am happy with the majority of reform changes that targeted the lenders (increased transparency, time delays on rate changes, stricter limits on rates, etc…).

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Kevin August 10, 2010 at 12:25 PM

OK, now that I’ve nitpicked your linkage of credit card interest to credit cards, I’ll just make a brief counterpoint about the content of the article itself. ;)

My first reaction when I saw this study linked on GRS was, “Duh.” It’s already common knowledge that merchants pay a small fee to the credit card companies for processing a credit card transaction. Of course the business is going to build that cost into their prices. And since their merchant agreements prohibit them from passing that fee on to the credit card users, that means that everyone shares the cost.

Now that people are suddenly talking about this, the knee-jerk suggestion is for our benevolent, all-knowing government to step in and make it illegal for the credit card companies to forbid vendors from passing the cost on to their credit-card-using customers. Golly gee, is there *any* problem that can’t be solved with more regulation?

The only problem with this is, it completely disincentivizes the use of reward credit cards. Currently, I use my card as much as I can, because it decreases my cost by 2%. I get 2% off all my groceries, 2% off my gas, 2% off any gifts and clothing I buy. If the businesses started passing on the 3.5% cost on to me, why would I ever use my card at all? Why would I pay 3.5% extra, to get 2% back? And for cards with an annual fee, why would I PAY $50/year for the privilege of having a card that makes everything I buy more expensive?

People would dump their credit cards in droves. The credit industry would lose billions overnight. Thus, I don’t think this solution has a prayer of ever happening. With so much money at stake, the lobbying would be relentless. Morever, I don’t think this solution SHOULD happen. As I see it, this is the free market at work. If the poor, cash-paying victims feel like they’re being left out, let them get a rewards card of their own and share in the money with the rest of us. The only reason they can’t is because of their own poor decisions and sloppy financial habits.

I’m not going to change the way I live in order to help out people who made their own beds. I’m not going to pass up tools that can help improve my family’s financial situation, just because some people are too disorganized or impatient for their own good. At least, not until the ever-advancing march of Socialism *forces* me to do so, with the regulation implicitly advocated by this study.

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Baker August 10, 2010 at 1:12 PM

Another good comment. I do agree with most of it… charging directly WOULDNT work, because the entire system is built on being supported from non-users.

So restricting business owners options to the point where they have to charge everyone for a service only certain people use is the only way that “rewards” exist in the current form… now you can see why I’m not a fan of rewards. :-)

“I’m not going to change the way I live in order to help out people who made their own beds.”

I’m not perfect, but I *am* open to changing the way I live to help out people, even if it’s their own fault. I have plenty more areas in which I can approve in this, but this is one where I feel it’s an easy enough change that I should make it. :-)

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gail August 10, 2010 at 2:05 PM

i read about this study just this weekend in my local paper so its gettingt some traction. glad you wrote about it.

a couple things: we have a regional gas station that does place a 45 cent transaction fee on debit cards vs cash. they don’t take credit. not sure how they get away with that if its against the law???

also, some companies just don’t take credit or debit cards. cash or check only. and some are cash only. we had a grocery store that only recently decided to accept debit.

personally, i hate the idea of fees and across the board “punishment” but i know i couldn’t live without my debit card.

good topic and discussion

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Tracy August 10, 2010 at 3:43 PM

It seems like another very bad system. Credit Card awards are just kind of ridiculous. In order to have a credit card you have to have the income to be able to pay off the debt you create with a credit card. It just seems like a huge waste and it really the only works out for people who have a ton of money

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Suba @ Wealth Informatics August 10, 2010 at 6:57 PM

I agree with Erica!

I really liked the article. The question you finished with is thought provoking. But you are assuming those people would not have lost $23 if you are not getting it for buying someone’s ticket. And you are saying the poor did not receive a cent from that $23 and the rich(?) do not contribute anything too. Without basing it on the study, this is an excellent question all of us should ask ourself. But if you are going to see it with respect to the study- then the lower income households contributed (cash users) $113 and the rich contributed $348. Lower income folks collected (card users) $809 and higher income household got $2812. And out of the 17% that used credit cards, 7% were lower income and 10% was higher income (Table 5 & 6 of the study). It doesn’t look impressive enough to come to the conclusion that rich is taking from the poor. But that might be just me reading it wrong.

Do you think a reform or another restriction will force retailers to reduce the price? It is free market, they will set the maximum price the market will pay. People can choose to ask for discounts, or frequent stores that give a discount for cash. If every store starts doing that, it will put credit cards out of business. People make a choice, I am not saying everyone should be punished for a few bad choices. But they should be ready to take responsibility for their action and THEN blame others. I do thing these things could be a lot more transparent. That way you can make an informed decision on what to use when. A little bit of personal responsibility and transparency will fix a lot of things.

For some cash might be the best thing to use, but that doesn’t make credit card evil. It is convenient and more than anything protects me (at least partially) from fraud. So I will continue using it. I might be biased though, as this is coming from a opportunist credit card/cash user (I use whatever is cheaper).

(on a side note, the credit card companies do prevent merchants from charging fees for credit card use, but the retailers are free to provide a discount for cash/check users, that has always been the case)

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Jonathan August 10, 2010 at 10:27 PM

First some points of interest. The credit card companies may charge the merchant a higher transaction fee when a rewards (or business) card is used. In my business i’ve seen as high as 3.5%(and i’m sure it goes higher). And yet the merchant has no way of knowing if they are going to be charged the more typical 2% or the 3.5% “non-qualified” rate (and no way of discriminating if they could, based on the “rules”)

Second, the math of those making $150,000 earning $756 every year in rewards. I assume small businesses (at least sole proprietors) are included in this statistical average(no way to exclude them). They may spend many times their income in expenses. In my small business, if I was earning a $150,000 income I would be earning $9000 in credit card rewards(on CC expenses of $450,000 at my 2% rewards), without even counting my personal credit card spending (much of which earns 5%). Credit cards are often the only form of financing available to small business and in that sense they are a “good thing” that benefits the “little guy.”

I would like to suggest another way to think about CC rewards. Think of them as near universal coupons or rebates (this is in fact how they pass untaxed by Uncle Sam). The merchant is offering you an incentive to shop there (either get 2% discount, or pay later, or both). Would you say that a business that offered coupons is preying on those without self-control? Are they enticing people to buy what they don’t need just because it’s a great deal? Hard to think of coupons as preying on the financially or mentally weak, IMO. The ability to use a credit card is an incentive (in the form of a convenience or reward) offered by the merchant to attract your business. Low income people might not spend enough to offset fully the annual fee of the card, but that doesn’t mean they get no benefit (you may also forfeit your rewards if you default). Low income people probably don’t save as much using coupons either, because they don’t spend as much on groceries.

In short, if you don’t use a credit card then you are just shopping without using coupons. This is a luxury, in my opinion, that most people should not afford. The other big thing is the consumer protections offered by using a credit card. If you dare shop (online especially) without one then it might be because you don’t fully understand how they are protecting you compared to debit cards.

I could go on and on about the consumer benefits. I am a small business that accepts them and a person that uses them at every opportunity, so I know both ends of this game. If you need to use a mental trick on yourself like putting a check in an envelope, making on online bill pay to your CC bank, or stuffing cash in a piggy bank every time you use one, then go ahead an do it.

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jpcobalt August 10, 2010 at 11:40 PM

I like generally with what you are saying here and was once part of the problem by being caught in the credit cycle by having the maxed out cards and only making the minimum payment. To solve that I got a loan from lendingclub.com and payed off the cards.

Now, I only ever use the cards to finance large transactions that I plan to payoff with in the next month. I know everyone is not so lucky.

You cannot say; however, that the rewards some credit cards have is solely financed by the merchant fees that are produced by using the card. I’m sure a *lot* of it is financed by the interest that they are charging the users that are still caught in the debt cycle.

I am also not opposed to the banks charging these fees to accept the payment. If a merchant has bought/leased a credit card machine for the purpose of accepting credit cards as a form of payment, the merchant has just agreed to allow the bank to charge a fee for the convenience accepting those cards. I know of a lot of small businesses that would have to turn away customers if they became a cash-only shop. *I* have been turned away from a cash-only shop (I generally only use a debit card).

You also need to understand that the fees and interest rates banks charge, while it can seem extraneous, go to the real live people that work in those banks including, but not limited to, the fraud department, tellers, and the phone-bank customer service representatives.

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Bridget August 11, 2010 at 1:20 AM

We’ve used just one card – a reward card – for years. We used it to purchase everything and the air miles became an almost essential way to visit distant relatives. We never left a balance on the card since our purchases were always for basics, so I did feel rewarded when we got the air miles. Now I’m supposed to feel guilty for what has always been judicious use of a credit card? Dang. =O)

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Kevin August 11, 2010 at 8:49 AM

@jpcobalt:

“You cannot say; however, that the rewards some credit cards have is solely financed by the merchant fees that are produced by using the card. I’m sure a *lot* of it is financed by the interest that they are charging the users that are still caught in the debt cycle.”

JP, as I mentioned in other comments further upthread, this is actually a misconception. Yes, the rewards actually ARE funded completely from the merchant fees, and annual membership fees of the cards themselves.

Any interest charged on purchases goes to the bank, not Visa. But the rewards DO come from Visa. Thus, Visa must pay the rewards out of the pool of money collected by merchants and membership fees. Visa doesn’t see any of the interest or penalty money.

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Joshua August 11, 2010 at 9:55 AM

When I started working as a financial advisor, I started to see the vicious effects of credit card use on hundreds of families who all had their theories.

Here are the two questions that ultimately led to my making the decision to live free of them.

1. “Name me ten ways that a credit card can be a BLESSING in your life.”
(I can’t name one way that they can ever be a blessing.)

2. “Name me ten ways that a credit card can be a CURSE in your life.”
(I can name dozens of ways.)

Those words BLESSING/CURSE are very important because they put the conversation in a right context. 1% cashback never made anyone wealthy but I’ve seen it curse hundreds of my clients.

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Paul August 12, 2010 at 3:43 PM

@Joshua +++ Well said.

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Rawsee August 11, 2010 at 10:58 AM

I went all cash in 07…by force. I now have a bank account again. And a debit card as well. But I TRY to only use the card for purchases that can only be done online. Like last minute bill payments. I doubt that I will go back to having a credit card again. Not because of where the rewards come from, but rather because it is so easy for me to go overboard without noticing. Something ought to be said for me having to go to the bank every time I want to make a purchase of over $100.

Good write up.

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NerdWallet August 11, 2010 at 12:10 PM

I disagree with the notion that rewards are funded by Visa. It’s simply not true. Visa takes in less than 30-40bps of every dollar spent, as a contractual payment from the issuing bank.

The best way to shed light on how much of a credit card company’s income comes from various streams is by dissecting a closed loop issuer’s financial statements. Discover is a better example than American Express because they have less GNS business (3rd party banks issuing Discover cards).

Pre-financial crisis, in 2007, DFS was making 79% of their pre-opex revenue from “net interest margin” and “securitization”, both of which are basically collecting interest. They made 11% of their pre-opex revenue from “network fees”, “merchant fees”, and similar items that are basically what the merchant pays DFS for accepting the card. And finally they made 9% of their pre-opex revenue from things like annual fees and late fees.

While it’s difficult to assign the “rewards” expense to a certain bucket, and while it’s true that network fees are greater than rewards opex costs in isolation, DFS wouldn’t be able to cover overhead without huge assistance from net interest margin and fees. In other words, rewards probably wouldn’t exist if the company made 100% of their revenue from user fees and merchant fees.

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Bradley August 11, 2010 at 4:05 PM

“Credit card companies prevent merchants from charging fees for credit card use and/or providing discounts for cash to help recoup costs”

You know, the gas stations in my area charge more if you pay via credit card than if you pay via cash. Is that legal?

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Debra August 26, 2010 at 5:43 PM

Merchants are allowed to give a discount to cash paying customers. They are essentially passing along the savings from not having to pay the network/bank transaction fee.

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Credit Card Chaser August 12, 2010 at 2:40 AM

I say that this “Reverse Robin Hood” credit card study is a load of crock and here’s why: http://www.creditcardchaser.com/why-the-reverse-robin-hood-credit-card-study-is-a-load-of-crock/

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Len Penzo August 12, 2010 at 8:19 PM

Wow. Congrats on the provocative piece, Baker! It looks like you’ve kicked a hornets’ nest. :-)

As someone who blogs regularly on the virtuousness of personal responsibility – and often pilloried for my views – I am going to echo Greg’s observation: you simply can’t be a “big fan” of personal responsibility AND believe that consumers are being essentially “trapped” and hoodwinked by the very credit card companies that they signed agreements with.

Personally responsible adults understand the ramifications of the contracts they sign – and if they end up getting screwed in the process, they accept their error, learn from it, vow to never do it again and move on. (I only say adults because, at least in my state, minors can’t legally enter into binding contractual agreements of any kind).

I also have a lot of problems with this study. I guess the biggest one is the assertion that transaction fees raise prices for everyone; that is a gross oversimplification of how a business operates and I find the claim to be specious. Here are just two reasons why:

1) Who says that all merchant prices would automatically be 3% (or 2% or whatever) higher simply because they accept credit cards? Perhaps their business depends on drawing customers in who prefer to only pay with CCs, which means the customers who like to pay cash depend on those CC users to keep the business alive. I guarantee you CC transaction fees are treated by many businesses as just one of many costs of doing business anyway (and a very small one at that).

2) Now payroll is usually one of the biggest costs of doing business – if not THE biggest. What about the people (like me) who go to the grocery store and pay for their groceries 100% of the time in the self-checkout line – using a credit card, no less? Should we complain that we are being forced to pay higher grocery prices to cover the payroll costs of people who like to pay cash and have their groceries checked out by a human being?

All the best,

Len
Len Penzo dot Com

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Caroline August 15, 2010 at 12:37 PM

I wonder when Thomas Jefferson came up with that maxim…before he got into debt or after?

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Trace Mayer August 20, 2010 at 1:20 PM

Brandon wrote, “For example, I buy conventionally (read non-organic, non-free range, from a factory farm) raised chicken and beef, even though I abhor the practice of factory farming.”

Brandon, another reason to use cash is to increase your privacy. The last thing you want is for a transaction to appear in a transactional database if there could be potential legal issues which is happening with the criminalization of raw food in many jurisdictions.

http://www.howtovanish.com/2010/08/taking-raw-food-recipes-underground/

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Jpcobalt August 20, 2010 at 3:10 PM

Trace, I’m having trouble following your argument, even after following the link you provided.

To me, if you’ve ever used a credit or debit card, you are already in a transactional DB and nothing is going to change that. Now it might be nice to say at some point that no one can obtain a record of that, but the story about the fresh produce seems a little off topic and hit a strange key with me.

What were you trying to get at?

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Kurt August 22, 2010 at 2:03 PM

Say that! I have been telling people for years there is something wrong with an industry whose business is lending money, but they only make a profit if the borrower screws up. You default, out go those rewards and that teaser interest rate. Minimum payments designed to make them money, and NOT to pay off the debt they are supposedly trying to collect. I have no study either; my assumption has been that they break even with their merchant charges in, and rewards stuff out, and those who pay on time. The vast majority of their profit comes from people they hook, who somehow pay late, for whatever reason, and get stuck in the treadmill where making the minimum payment every month leaves you with a higher balance at the end of the year. Great stuff.

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Jon case August 23, 2010 at 5:36 PM

I have experienced a number of merchants who pass on the credit card fee. In most cases this is as a percentage of the total bill. Not sure if they are just flauting the restriction.

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Debra August 26, 2010 at 5:39 PM

With the new CARD Act merchants can offer a discount to customers who pay with cash. That sounds like a good deal for consumers and particularly for small merchants. However, many people are like myself and shop online because convenience and necessity. These transactions have to be done via a method that will incur a transaction fee of some sort, whether you use a debit card, credit card, or online payment system like PayPal. The use of network electronic payments are not going away anytime soon, and neither will the padding of the purchase price to pay for operating costs.

I think it is great that you want to pay your fair share of fees for using cash instead of a credit card. The next time you need to pay for a trip, these are the fees that you will probably fee in the near future if not already: a fee for withdrawing your money at a teller window, because the amount you need may be more than allowable from the ATM; a fee for booking the ticket with a travel agent or at the airline counter (if you’re not getting a vacation package, you better book your hotel with the agent, because you can’t pre-book one with cash directly with the hotel); and, an extra fee for not pre-paying your baggage fee before getting to the check-in counter. Also, while on your trip you may have to pay an ATM fee if you have to get cash at a machine that’s doesn’t belong to your bank.

Aside from fees, here are some inconveniences that you may encounter: You also better buy your snack/meal/drink at one of the restaurants before getting one the plane, because they don’t accept cash on-board. You will not be able to rent a car with cash, or depending where you go, pay for a taxi (especially at night time). If your trip is to overseas, and you run out of local currency, you may not be able to buy something you need when you need it. Lastly, you put yourself at risk if you have to carry large sums of money with you at all times during trip.

Merchants are in business to make money, and I doubt that there would be many who’d lower their prices across the board if the banks and transaction networks were to lower their merchant fees.

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Miss Britt August 28, 2010 at 9:16 PM

Damn. This is really good food for thought. We are basically a 100% cash household – even going so far as to go mostly ACTUAL cash vs. debit in the last week. But I’ve been considering getting a credit card just for rewards. We travel a LOT – and plan to start traveling even more this summer (a year trip, actually), and I’ve been thinking about the “free money”.

But..

Well, you brought up a lot of valid “buts”. Thank you.

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Daved September 7, 2010 at 3:36 PM

Wait a sec… So, low-income households are victims of the CC companies because (1) they are charged high-interest for carrying CC debt (let’s ignore the fact that this is a choice) or (2) because they *don’t* use credit cards and miss out on the rewards. Victims if they do; victims if they don’t. Is there a scenario where just maybe low-income households aren’t victims?

Posit: the CC company is a merchant selling you (and your local shopkeeper) a service. They set a price on that service–fees and interest. Sometimes people use that service and refuse to pay. Since those people aren’t paying, CC companies have to raise their prices (fees & interest) on the ones who do. If your local shopkeeper doesn’t like the “no-surcharge” rule or the cash discount option (which is common at most gas stations here in CT), he’s free to stop accepting credit cards. Why won’t he? Because the CC company provides him and his customers a valuable service.

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money mom September 8, 2010 at 4:09 AM

I never read the whole report since it was too long and I hail you for putting it to me more clearly. I didn’t know credit cards operated that way. I don’t think credit cards are evil because they can help me out in times of needs. When I had a poor job I would pester my siblings to lend me some easy money to get by. Now that I have a stable job and a credit card I don’t beg for it anymore and I have the capacity to help them out. And if I would give up using my rewards card this won’t change anything at all won’t it. Call me greedy but I make myself worthy of the reward because I can handle my finances well.

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Royal September 27, 2010 at 6:24 PM

Questions:

1) How do I pay for a flight without a credit card?
2) What about Zipcar?

Thx,

R

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Kira February 25, 2011 at 12:01 PM

I completely agree with this. It is a redistribution of wealth hurting the ones that are already in a financial hole and helping those who are not. The “poor” who cannot afford paying off their credit cards in full pay the 20% interest, which the bank turns around and distributes as rewards to all for their spending on credit cards. This is an observation I had the very first time I was introduced to credit cards (4 years ago) and my opinion has not changed. It is good somebody actually made a study to show people who decide to not think about it, or completely ignore the repercussions of a certain set-up in an industry.

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luke smith April 23, 2011 at 4:32 PM

I haven’t read any comments. So it may seem like I am coming out of nowhere. The author of these articles needs to eat some meat, use a credit card, and stop hugging trees. I have no debt. I use my credit card for all my purchases. It is very convenient and way of the world today. Get with the program. I could go on for pages but I wont. Only people who can’t manage money shouldn’t have credit cards… everyone else should.

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James August 17, 2011 at 7:52 PM

Hey Baker…I know this post is a year old, but I just saw it for the first time today. I almost never blog, but have to agree wtih the minority in this case. If you and your wife have given up credit cards, then perhaps you should consider giving up similar activities that cause merchants to “pass along” costs to ALL their customer:
1. USING COUPONS IN GROCERY STORES OR RESTAURANTS: Merchants have certain revenue and profit numbers they need to meet to stay in business…where they have a business “cost” (i.e. coupons), they simply MUST include that cost in their product prices – it is call successful business. So if you use coupons, you are passing higher prices to all those that don’t (most of these are lower income).
2. ASKING FOR A DISCOUNTED PRICE: Same logic…you get a discounted price, the merchant makes less (or no) profit and prices are raised to counter this activity.
3. TAKING A DONATION AS A TAX DEDUCTION: If you don’t pay taxes on this money, somebody else does…probably not the super-poor, but even those in the 10% bracket might only be a 9% bracket if we all didn’t take “advantage” of all legal tax code.
***
I could continue with more examples (and several others have commented above) but I think you get the point.

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