Credit Card Chaser

Last week, Joel published a feature article about credit cards and international travel titled “Hong Kong Phooey”, a subject that I have been writing about this summer. Joel concluded his international travel blog post review of the “Hong Kong Phooey” feature article by asking, “Do YOU have any humorous stories or words of advice for those traveling with a credit card, cash, or other type of payment?”

Yes, I Do Have An Interesting Story

It was the summer of 2005, and I was getting married. For over a year, my wife and I had been simultaneously planning a big wedding in Denver, and a subsequent honeymoon in Brazil. With the help of a travel agent, I constructed a fantastic three week trip including such sites as Rio De Janeiro, Iguazu Falls, and the Amazon jungle.

The wedding went without any major hitches, and two days later we were off to Brazil. On one of our first nights there, we decided to splurge on a traditional Brazilian steakhouse. Being on our honeymoon, we naturally went to the finest one in town.

If you have been to a Brazilian steakhouse, or churrascaria, you know that the food is served table side, and it is priced all you can eat. The idea is to sample as many entrees as possible, and we did. We knew the prices ahead of time, and we had taken enough cash to cover the meal, leaving a larger amount and most of our credit cards in our hotel for safekeeping. This strategy worked well for me when I was a student traveling internationally.

The meal was incredible, and we even left enough room to try the desert cart that was brought to our table. Again, not wanting to miss out on any aspects of Brazilian cuisine, we tried to sample as many deserts as our appetite would permit. Everything is going great, until we receive the bill. Imagine our surprise when we realized that the deserts were not included part of the fixed price for the rest of the meal, a fact I am sure must have been clearly explained to us in Portuguese. It turns out that the deserts were quite pricey, nearly doubling the tab! No problem, I thought, that is why we brought a credit card with us.

Now perhaps I had not used that particular credit card on our trip at that point, but that was the moment our bank decided to suspect that our card had been stolen and was being fraudulently used all over Brazil. In the madness surrounding our wedding preparations, I had neglected the first rule of international travel with a credit card; Always call your bank and tell them where and when you are planning to travel. Rule number two might as well be to always carry more than one credit card, in case one of your banks didn’t get that memo. Make sure you at least have an Visa credit card or a MasterCard as they are accepted more internationally.

In a panic, my new wife and I dug through our wallets, eventually finding a hundred dollar bill we had tucked away for just such an emergency. Fortunately, the restaurant was glad to accept American Dollars rather than employ us as dishwashers for the evening. They were even kind enough to give us change in Brazilian currency so that we could pay for a taxi back to our hotel.

Since that time, I have learned so much about credit cards and international travel that I am embarrassed that I was ever foolish enough to be put in such a desperate position. Earlier this month, my wife and I had a second chance to visit Brazil. This time we made sure to bring multiple credit cards and to inform out banks ahead of time of our plans.

On the last evening of our trip, we again decided to splurge on a traditional Brazilian steakhouse. To our delight, the restaurant that was recommended to us was a new location of the same steakhouse that we had visited on our honeymoon. Upon realizing this, our thoughts immediately returned our memorable evening, laughing at the naivete of the young newlyweds who dined there five years earlier.

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The current state of the economy has put Americans in a new frame of mind – one that says it isn’t fun anymore to be in debt. Some folks are even trying to go “all cash” to get away from the danger of checking overdrafts and/or identity theft.

But, you never know when you might actually need to use credit, whether you want to or not. There are times when the car engine blows up, or the furnace goes out in 10 degree weather – and you don’t have enough savings to cover repairs or replacement.

Owning and using a credit card will help keep you in a position to access credit quickly in that kind of emergency.

First, it will give you instant access to funds up to your credit limit. That might be all you need to cover the cost of a furnace repair man or a rental car to use while yours is in the shop.

But just as importantly, wise use of your credit card will help you keep your credit scores high – so if that car is beyond repair and you need a new one, you’ll not only be able to get a car loan, you’ll pay a lower interest rate.

The way you pay bills accounts for 35% of your credit score. So using your credit and paying your bills on time helps build higher credit scores.

You do have to be careful. Use the card sparingly, and pay it off when the bill arrives. Be careful never to charge over 30% of your credit limit – less than 25% is even better. Do use the card every 2- 4 months, so that you continually demonstrate your bill paying abilities – and so that you don’t get hit with an inactivity fee.

If you have to charge a higher percentage of your limit because of an emergency, and have to carry a balance, pay it down as quickly as possible.

Another big factor in your credit report is the length of time that you’ve had and used credit. So don’t wait to get a credit card until you think you might need it. Get it now. And don’t just take the first card that is offered to you. Do some research and choose the card that has the lowest fees and interest rate.

No matter how determined you are to be debt free, don’t cancel any old cards. Keep them, and use them just often enough for them to remain active.

The first step in building and maintaining your credit is to know your scores. So get your free online credit report with scores and see where you stand. Be sure to check for errors, and get them corrected if you find them. Then read the suggestions for improving your scores.

It’s very wise to stay out of debt – but it’s vital to have credit available when you actually need it.

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In Michael S. Derby’s Wall Street Journal article titled “Credit Cards Take from the Poor, Give to the Rich” a ridiculous study is highlighted that claims a number of very interesting things, chief of which is that credit cards serve as a form of “Reverse Robin Hood” to take money from the pockets of the poor to give to the rich.

The title of the study is, “Who Gains and Who Loses from Credit Card Payments? – Theory and Calibrations” by Scott Schuh, Oz Shy, and Joanna Stavins. Here is the abstract:

“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.”

Should We Believe the Study’s Conclusions Blindly?

Much has been said about this study but it seems that most writers are blindly accepting the conclusions of this study simply because, well, it’s called a “study” and Schuh, Shy, and Stavins must know what they are talking about, right? Well, not so much.

What the Study Gets Right

The study is right on the mark when they point out that credit card users typically end up paying less for a given item (after credit card rewards are taken into account) than someone who is paying cash. The study is also right on the mark when it points out the fact that most merchants (aside from gas stations) do not set different prices for items based on the payment method (meaning that the credit card processing fee is already built into the cost of the item).

What the Study Gets Horribly Wrong

There are a number of different issues that I take with the study and it’s conclusions but here are two major things that the study gets horribly wrong: the “Give and Take” issue and the “Rich vs Poor” issue. Let’s take a look at each in turn.

“Give and Take”

Is it even proper to frame the issue like “give and take”? Every different type of cost that a store has is priced into the purchase price of the products it sells. Why should the convenience of credit cards be treated any differently?

What about bathrooms? Bathrooms are convenient yet some people choose (probably wisely) to never ever use a gas station bathroom. However, whether they use the bathroom or not then the cost of having a bathroom available to customers of the gas station is a part of the price of every single item in the gas station convenience store. Does this mean that gas station bathroom users “take” from those who choose to not use the gas station bathroom? Of course not. The convenience of using the gas station bathroom is available to all and the cost borne by all just like the convenience of using credit cards is available to all and the cost borne by all.

Pretty simple stuff right? We could go on and on with all kinds of other examples of things that are available for everyone to use at a given store but only used by some and yet still not free because they are baked into the price of every item but I hope that the bathroom example gets this simple point across clearly enough. Let’s take a look at the second major error with the study’s conclusions.

“Rich vs Poor”

The second area where the study goes horribly wrong is when they insinuate a poor to rich transfer via credit cards. Let’s take a look at the thought process used:

The price of an item is the same for both cash buyers and credit card buyers.
For cash buyers the price of the item is likely higher than it would be if there were no credit card processing costs built into the item’s price.
Credit card use is highly correlated with being rich.
Therefore, credit cards take from the poor and give to the rich.

See anything wrong with the above reasoning process used in the study?

If you guessed “Lurking Variable/Confounding/Correlation Does Not Imply Causation” then you are right! The higher someone’s income is then the more likely that they are to use their credit cards more BUT that does not mean that credit cards take from the poor and give to the rich it simply means that credit cards “take” (see the above “Give and Take” section to see why I chose to use quotation marks) from the cash users and give to the credit card users (and in fact – credit cards also GIVE even to cash users via economies of scale through easy efficient payment processing, especially online, that lets more stuff get sold at an overall cheaper price to everyone but that is a discussion for another day).

If someone makes $6 an hour or $600 an hour then the price that they pay for an item is exactly the same AND if they have the same rewards credit card then the credit card rewards that they receive are exactly the same too. Income is not a causal factor in the equation. Choosing to use or not use a credit card is the causal factor. Those who use credit cards are rewarded via credit card rewards and those who use cash are “penalized” (in a sense) because of the passing up – the foregone benefit of credit card rewards that they are neglecting to receive by virtue of them paying with cash instead BUT-

BUT, BUT, BUT

It’s very important to understand that the people who are choosing to pay with cash rather than a credit card are presumably paying with cash because of some other real or perceived benefit to them (i.e. they are a hard line believer of the Dave Ramsey view of credit cards and are able to be more responsible with their money by only using cash or some other reason that makes sense to them). Assuming that pretty much everyone can get a decent credit card (and yes, there are even student credit cards and bad credit credit cards that offer rewards of some kind) then isn’t it just as ridiculous to demand separate pricing for cash payers as it would be to demand separate pricing for non bathroom users?

Imagine this scenario:

You walk into a gas station convenience store and say, “Hi, I would like the no-credit-card-convenience, the no-bathroom-convenience, and no-trash-can-convenience special pricing for my gallon of milk, please. Is that possible? Oh, and one other thing, can you please reduce the price a little more and give me the no-customer-service-for-asking-stupid-questions pricing as well?”

To which the reply is: “I am sorry sir, but the pricing is the same for everyone – and you would not qualify for the no-customer-service-for-asking-stupid-questions pricing even if such a thing existed, my friend.”

What do YOU Think?

Do you agree with the conclusions of the study?

What do you think about the “Give and Take” framing of the argument?

Why do you suppose the authors of the study chose to imply this “robbing of the poor to give to the rich” type of effect?

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Everybody needs credit at some point or another in their lives. If you use it responsibly, it can be one of your greatest assets. While balance transfers can sometimes save you from a horrible credit situation, it can also be a convenient ally if you understand how to capitalize on its benefits.

The Pitch

Many credit card companies offer low introductory APR on balance transfers to entice you to opening an account with their bank. While you might not be considering a new account presently, you should know that this could be wise move on your behalf. That’s because consolidating your credit on one card can not only save you a lot of money, but time and heartache too. With all of your credit in one place, you should be able to make more significant payments, more often, which can, in turn, pay your balance down faster than expected. Typically, these offers are introductory, meaning that you open an account with a variable rate that starts as low as 0% but adjusts to something higher after 6, 9, or 12 months. If you manage your money properly, though, you can pay these balances off before the adjustment settles.

The Promise

By consolidating your credit card balances on one account, you immediately reduce your interest rates. Since you likely had multiple cards, you were probably paying more than one interest rate, and none of them were even close to 0% APR. These add up quickly and can cost you thousands of dollars by the time you finally pay off the accounts. However, under one rate, you will know exactly how much to pay and you can more easily calculate how long it will take to pay it off. This gives you the power to make payments according to a schedule that you determine.

Also, when you consolidate your credit, you decrease the likelihood of encountering a fee. Although you are responsible with your payments, sometimes things come up and you have to miss a payment. If you miss all of your credit card payments, you get hit with as many fees, which can quickly send you spiraling out of control. However, consolidating cuts your payments down into something that should be much more affordable, and if you hit a snag in your budget, you end up with only one fee. This won’t set you back so much that you can never catch up, and within a month or two you will be back on track.

The Progress

There have been some significant changes to credit card policies this past year. One of the most important is how your payments are applied to your account. Credit cards carry multiple interest rates for the three basic types of activity: purchases, cash advances, and balance transfers. Before 2010, your payments were being applied to the accounts with the lowest interest rates, leaving your high-yield accounts to fester and keep you in debt longer. The new laws, however, force credit card companies to use the excess of your payments to pay down your highest-interest balances first.

The Possibilities

When you have credit, you are held by the bank as a liability. The more credit you use, the more likely it will be that you will default. Unfortunately, that’s the way that they think. The more consistently you make payments and the longer you do so, the less they view you as a liability and the more likely they are to reward you with more credit if you need it. By consolidating your debts into one account, you manage your budget better and commit to more responsible activity on your account. You also open yourself up to a better credit standing. By leaving your old accounts open after you transfer money, you will immediately appear more attractive because it will appear that you have a better credit-to-debit ratio.

The Payoff

In the end, all of this should result in an improvement in your credit score. Reducing the amount of your overall minimum payment allows you to make more substantial payments and decreases the likelihood that you will default. By keeping your credit limit high and increasing your available credit through regular payments, you will appear responsible and trustworthy. While there are many factors that go into determining your credit score, the ability and likelihood of making payments bear the most weight. Keeping this in check will keep you in the clear.

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It is even possible to travel internationally with just a credit card or can you find yourself in a pinch if you don’t have cash or traveler’s checks?  That is the question we explored when one of our writers recently visited Hong Kong and attempted to survive without cash for three days.

Check out our latest feature piece titled “Hong Kong Phooey: How I Survived Without Cash in Hong Kong for Three Days” and then let us know what you think.

Do YOU have any humorous stories or words of advice for those traveling with a credit card, cash, or other type of payment?

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How do the various credit card companies stack up in the customer service department? We weren’t really sure so we set out to conduct a little test. We called up Visa, Discover, and American Express and posed as a difficult potential customer to see how they compared. Check out our Credit Card Customer Service Deathmatch to find out how they did!

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Hmm, am I allowed to say: “I told you so” yet? One of my chief concerns with the CARD Act was that rather than focusing on financial transparency so that consumers can be educated and have many different choices in credit cards the bill devoted much of its legislative girth to loading on more regulations for credit card companies.

Unfortunately for consumers, many of the new credit card regulations do nothing to protect consumers but have the opposite effect of decreasing the options available to consumers when looking for credit.

There are certainly some great things in the CARD Act and it’s ridiculous to say that no oversight or regulation at all is needed but since when is it the government’s job to coddle all of it’s citizens and deprive them of the right to pick and choose the products and services that they want to use or not use?

The most recent example of some of the adverse consequences of government intervention into the credit card and banking business is cited in the Wall Street Journal and it’s twofold:

1. It’s Harder to Get a Credit Card – The new burdensome regulations in the CARD Act make it harder for credit card companies and banks to accurately price risk when issuing credit cards (i.e. the regulations prohibit certain types of fees like universal default, double cycle billing, etc.) so many banks are just saying, “OK, if we can’t make any money off of those consumers then we will just say thanks but no thanks and tell them to get lost.” This then leaves many consumers in the position of having less options for credit – do some of them then turn to even worse options than high fee credit cards like payday loans?
2. Consumers are Getting Soaked with New Fees – Even consumers with great credit who have managed their finances impeccably for many years are still getting hit with new bank fees. From monthly maintenance fees on a checking account to inactivity fees on a credit card the new fees are just piling up. Why all the new fees? Simple. If banks are not allowed to single out those who are high credit risks and charge them higher fees than the average consumer (i.e. universal default, etc.) then guess what? We all get charged the higher equilibrium fees.

In the great attempted equalization of American consumers where those who make poor financial decisions are bailed out by those who make responsible financial decisions then guess what – we all lose.*

*But hey, why don’t we just keep giving more power to Uncle Sam without addressing the root cause of any of the problems…

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According to the Vancouver Sun a 15 year old boy was recently arrested at a Richmond gas station as an integral part of a credit card skimming ring (see the article: “What is credit card skimming?” for more information on how credit card skimming works). The boy was arrested for possessing hundreds of stolen credit card numbers and an illegal credit card skimming machine.

The boy is accused of copying credit card numbers from gas station customers (without their knowledge of course) and then turning around and selling the credit card numbers to the mob who would then use those stolen credit card numbers to make online purchases.

The Mounties estimate the fraud to be in the millions but after a 6 month investigation the boy will appear in court on August 18th and will likely be facing charges of unauthorized possession of credit card data and possessing a credit card forging instrument.

Check out the below video that gives a demonstration in skit form of how this type of credit card skimming could potentially take place at a gas station or other similar location (the video is set to auto play at 2:30 where the demonstration is just about to begin but feel free to watch the entire video as well).

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The average American household receives a credit card offer every 10 days. (If you’re on Capital One’s mailing list, more like every 10 hours.) That average American household accepts a lot of those offers, and carries a balance of about $10,000 on an average of 12 cards, which is at least 10 too many. The average interest rate on credit cards is around 18%. Twenty percent of those cards are maxed out, and 35% of their holders pay a monthly late charge.

A helpful rule in your economic life is to think about every transaction from the other party’s perspective. In this case, look at the handsome annuity that your credit card balance becomes in the eyes of the card issuer. And if you can find an investment that pays a consistent 18%, let me know. Not only will I refund you the price of my book, I’ll retire from creating personal finance books and put all my money in that investment instead.

If you couldn’t pay your bills in 18th century England, you didn’t get to “call and work something out,” nor could you sue in civil court because your bank made its credit card application so pretty and the envelope so easy to open that you couldn’t say no. Instead, you went to debtor’s prison. Sometimes it seems as though the threat of incarceration might be the only way to get modern Americans to spend with discretion. You’re carrying more debt now than when you were 15 and working at Hot Dog On A Stick. Ever wonder why?

Money is a commodity, but it’s also a tool. A tool that can help you build a house, a career, a life. Lose control of your money, and it’s the credit card issuer that’ll determine how hard your nails will be hammered and how frequently. So when you get a mailer that reads:

“Instead of 18.9%, apply now and we’ll give you a fabulously low rate of 14.9%!”

understand that means

“We’d like an investment that pays 18.9%, but then we’d also like it to rain beer. An investment that pays 14.9% is still fantastic, though. Almost no investment in the world can guarantee that, besides the atrocious saving habits of the American public.”

Never carry a credit card balance. Sacrifice a month’s groceries and beg for orange peels if you have to. Regard paying your bill in full every month as an imperative no less important than locking your door every time you leave home. Depending on what neighborhood you live in, doing the former could save you more money than doing the latter.

If you carry no balance, it costs the issuer to keep you around. You’re a low-revenue customer. (Or better yet, a non-revenue customer.) Let the irresponsible borrowers with the $25,000 balances pay the salary of the MasterCard CEO and put the fuel in VISA’s corporate jets.

With a zero balance, you can look at the issuer/borrower relationship in a new light. You’ll notice that credit card companies plug their low interest rates and balance transfer rates like they’re being eleemosynary bighearts. “Act now, and pay just 9.9% on balance transfers!”

In other words, if you’re irresponsible enough to have rung up debt on a competitor’s card, come to us. You’ve proven yourself to be a juicy fish. You’re actually far better than that, because a 50-pound chinook salmon can only be eaten once. We can feed off your bloated carcass again and again. The issuer is saying, “Hooked on cocaine? That’s for losers. Instead, give our pure crystal meth a taste and you’ll never go back.”

If you pay in full, annual percentage rates and interest-free introductory periods become meaningless. The credit card company has to profit off someone. Let it be the ill-prepared next person, not you.

The longer your record of paying your balance in full, the bigger the limits your issuer should allow. Most introductory credit cards will only let you charge up to, say, $3,000. After you’ve paid in full for a few months, they’ll increase your limits. This isn’t to reward you for being a profitable customer, as you’re anything but. It’s in the hope you’ll slip up, charge more than you can afford, and that’s when they’ve got you. Another debtor on the hook.

This is not a condemnation of credit cards, says a man who would use his Hilton Honors AmEx at the neighbor girl’s lemonade stand if she’d only accept it (62,760 points and counting!) Credit cards are wonderful. They’re convenient, discreet, trackable, replaceable and inconspicuous in ways cash can never be. But if you use them without regard to their possible consequences, you’re the equivalent of a parent who thinks her baby’s nursery has just the right mix of temperature and humidity for storing loaded firearms.

Editor’s Note: Check out the True Cost of Credit Calculator to see just how much carrying a credit card balance will really cost you (and then check out the Cash Back Credit Card Calculator to see just how much money you can earn in cash back rewards with responsible credit card use!)

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On Thursday Senator Sheldon Whitehouse’s proposed measure that would have forced credit card companies to abide by the state of issuance’s credit card interest rate rules (for a detailed explanation of how the law is currently set up then read our in depth guide to credit cards and usury) was shot down in the senate by a 35-60 vote with 21 Democratic Senators joining Republican Senators across the aisle to shoot down the measure.

As we mentioned in an earlier post about some of the negatives of the CARD Act and how the CARD Act will likely leave many people in even worse position than they were prior to the CARD Act it’s very rare to see any type of arbitrary outside regulations help consumers without hurting them in some way, shape, or form at the same time.

One example would be that if there were more intensive caps placed on credit card interest rates then of course we all know what would happen:

A) Credit cards would be harder to get approved for

B) Credit card limits would be decreased for many

C) Credit card rewards would be reduced

And on it goes – thanks to many well meaning (sometimes) politicians that want to exert more control over every situation they come across rather than simply getting out of the way to allow people to make their own choices and live with the consequences of their actions (oh, the horror!) – both good and bad.

I am 100% for getting rid of abusive and deceptive marketing practices but as mentioned in negatives of the CARD Act article:

CARD Act Regulations for Transparency in Credit Cards = Clear Understanding of Credit Card Features and Options = GOOD!

CARD Regulations for Forcing Companies to Cap Fees/Interest Rates and Underwrite Credit in a Certain Way = Less Options for Consumers = BAD!

What do YOU think?

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