Nonetheless, the thought of that idea sends a cold chill down my spine, not just because I like my perks — I do — but because the groups that might be calling for the change will be shooting themselves in the foot.  Getting the powers that be to “keep you from getting yourself into trouble” or to “protect you from that bully” , play big brother, or to keep that bully from picking on you is counterproductive, because the energy expended at complying with the powers that be are non-productive.  It’s a burden to everyone, and it hurts just about everyone.

The beauty of credit cards, if you have good credit, is that you can basically choose what terms you want and what perks you want. It’s a bit like ringtones. I have as my weapon of choice the I have the Chase Sapphire® card. Every once in a while, I get enough points that I can cancel a charge from my bill. I like that! Other people have airline cards, or Starbucks cards, or whatever. Why the heck not?  Whatever floats their float!

If merchants push for this, they’ll get bitten too

Supposedly the reward cards carry higher interchange fees than non-reward cards, and this directly hits the merchants’ bottom line.   So banning these cards will help the merchants, right?  Wrong.  When the merchant account providers are restricted in what they can do to make money, they’re not just going to sit there.  They’re going to make it up some other way.  Consider that merchant account providers can no longer demand that merchants accept all credit card transactions, regardless of amount.  Some merchants will set minimum charge amounts, and the issuers won’t see that interchange income.  If we ignore the fact that the merchant is probably going to lose customers, then the issuers will bump up their prices, charge extra fees, etc., to make up the new shortfall.

It’s the same thing with getting rid of reward cards.  Once the financial advantage of carrying a reward card goes away, then a number of things can happen.  First, the additional income that the issuers got from the reward cards will be made up somehow.  Second, the people who were using the card will use them less now that the fun has been taken away.  Less money flying around means less money for the merchants.  Third, it’s one more measure of oversight that is a non-productive drag on the economy.  The short-term gain in interchange fee expense will be handed back, and then some.

If there’s a ban on reward credit cards, what about low-interest cards?  High-risk (high-rate) credit cards?

What about credit cards in general?  That’s the danger of banning any kind of credit card.  It’s a step toward banning more.  It’s the erosion of choice.

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My classmate:  “[Son], what do you think the tooth fairy will bring?”

Her son:  “Maybe she can bring me a credit card!”

Out of the mouths of babes, huh? Needless to say, the tooth fairy did not sneak a Blue Cash® from American Express underneath his pillow. Alas, he must live within his means, as the tooth fairy only carries cash.

“Way back when” I had a Fisher Price cash register with a whopping 80 cents in change.  Two blue quarters, two yellow dimes, and two red nickels.  No checkbooks, no ATMs, and certainly no credit cards.

Also Way Back When, Monopoly ran on cash, as did The Game of Life.  Now, Monopoly’s gone digital, and it’s far easier to get play credit cards and play ATMs.

Being the father of a (very precocious) five-year-old I realize how carefully they scrutinize what we do as adults.  They have memories like steel traps, throw our words back at us with laser precision, and mimic our actions.  This isn’t odd; it’s just how they learn.

My classmate’s son probably saw his mom use her credit card a lot, and made the association that you use a credit card to buy stuff.  What her son probably doesn’t see (yet) is that the bills come in and have to be paid.  That happens on the back end, at some point after all of those purchases with the credit card.  He saw the goods come in, but didn’t see the money go out.

With his own money, though, it’s a lot clearer.  There’s only so much of it.  It’s the issue that my daughter is running into now; she doesn’t have enough money coming in each week (through her allowance) to allow her to buy a doll each week.  She has to start waiting when the money gets low.

As parents, it really is up to us to teach our children about money. TV encourages kids to buy (well, it encourages the kids to nag their parents to get them to buy).  I remember one year in elementary school getting a magazine called Penny Power that taught about checking accounts, buying wisely, and budgeting, but that was the extent of personal finance information I got in school.  The rest I got from my parents, and thankfully they taught me well.

A child asking for a credit card from the tooth fairy is cute.  That child growing up and getting into debt in his early twenties because they didn’t learn how to handle it is not.  Fortunately, there’s a few years between those two points to explain the truth about credit cards.  And about the tooth fairy.

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I’ve read a few of them, not because I’m a particularly fast reader but because they’re super-quick reads.  Truth in advertising: it even says so on the spines.  The ones I’ve read so far are The Skinny On Time Management, The Skinny On Credit Cards, and The Skinny On The Housing Crisis.

I enjoyed reading these books for a few reasons:

• There isn’t a lot of filler. I’ve read some other book series aimed at beginners, and parts of them got tedious because the pace was too slow.  (I don’t need a full chapter explaining how to open a Microsoft Access database, thank you very much.)  Not so with these books.
• The key points are hit. I wasn’t a beginner on the topics that I read about, so I know that he hit all of the important points.  The key points were summarized in the back pages, so if I wanted a shortened short version, I got that, too.
• There’s an appropriate mix of story, facts, quotes, action items, and humor. Not too hot, or too cold.  Just right.  Other books I’ve read were a little much on story.  The story was there in the books, but the plot and the jokes were subordinate to the material, which is what I think is desirable in books aiming to convey information.
• The text is easy to read both in the way it’s printed, and in the way it’s written.
• There were a number of suggestions in each book for further reading. The books open doors to deeper understanding of the topics.  He points toward books and authors that go into more depth.

Jim Randel shows that you don’t need (a) a lot of pages or (b) a fine arts degree to cover the basics of a topic.  To give the skinny on it, if you will.

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Enter The Case of the Undead Annual Fee. Customers once enticed by the promise of a card “free of annual fees for life” now find themselves getting slapped around by anything but, counter to printed wording in marketing materials and pre-approval letters.  In the end, there’s probably little recourse beyond canceling the card, as marketing materials and the like aren’t binding on the issuers.  (Think “campaign promises.”)  The only thing that’s binding are the terms and conditions of the card, and they just serve to bind the customer, good and hard.

(Even if it were binding on them, they could just charge you a fee every month and they’d be off the hook.  It said “free of annual fees,” not “free of monthly fees.”   Or, as Jim suggested in his article, they can just close out that line of cards and issue a new one that boasts an annual fee.)

Like any business, credit card issuers should be free to offer whatever terms of service allow them to conduct business most profitably.  The free market should pull customers from the bad cards to the good ones.  Customers can still move around, but now we see that this kind of regulation hurts everyone, including the responsible customers.

Nonetheless, it does serve as a reminder that the rules can, and do, change.  Tax laws can, and do, change.  Terms and conditions can, and do, change.  The annual fees you thought you’d never have?  Well, you have them now.  Those Funland tickets that never expired?  Well, they expired. That sixty-day return policy?  What sixty-day return policy? Those taxes that will be lower in retirement? Guess again. Etc., etc.

Assume that the odds will turn against you.

Oh, and have a great evening!

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When going on holiday one of the biggest worries is money. Having a budget and overspending is done far too often as we get carried away.

Traveling abroad has special challenges.  It doesn’t help that for some bizarre reason we seem to think that we are not spending as much if the note is not in the currency we are used to.  (I’ve often referred to Euros as a form of Monopoly money!)

Unfortunately, these notes are what make the world go round. Without them, the closest we’d get to our dream locations is through travel brochures. Thankfully, finance companies understand this need and see the opportunity to make some money as well.  The result?  Travel related credit cards.

If you’re anything like most people, you’re going to be so excited about a holiday, getting currency or sorting out your finances will be one of the last things you’ll do. You may even end up paying exorbitant rates at the airport, or if you’re like me, not bother with currency and just take your credit card with you.  However, I must stress how important it is to research the various credit cards available before you fly.

Here’s a case in point.  One my first holiday I decided to do this without researching and was effectively slapped in the face when my card was declined trying to pay for my dinner that night.  (Surely there was some mistake?  So I tried it again. Declined.)  Embarrassment aside, I had no cash, and no way to pay for the rest of my time on holiday.

Thankfully I was with friends who loaned me money for the rest of the holiday.  Once I returned home I immediately inquired about my card declining, only to find it was the card itself that wasn’t compatible to be used abroad for purchases, but I could have used it at an ATM. As I did not know this I ended up borrowing money from friends and feeling guilty all holiday.

So I decided to tell my story and make sure others don’t have the same issue I faced.  Here are a few tips and points regarding travel credit cards:

• Apply for a travel credit card which earns points the more you travel. For example, one of the best value I’ve found is the BMI American Express Card, which gives you 20,000 bonus destinations miles. Pay for your holiday with this card, use this card whilst on your holiday too, soon enough you will have enough points to go on another holiday for free!
• Make sure you read the small print on every card you think about getting. You may think you know the withdrawal fees to use the card abroad, but there are certain companies that charge different fees depending on the country. If you’re unsure in any way, be sure to call them.  A little tip: record the call.  Make sure you tell them you are at the start and then record.  (MBH note:  Check to see if you actually need to inform them if you’re in the US.  In many states only one party needs to know that the call is being recorded.) This way if they charge you when they said they wouldn’t, you have proof, and they don’t have a leg to stand on!
• Find out whether you can load money onto a travel card at a fixed exchange rate. Major travel companies like Thomas Cook offer these types of cards, and if the rate offered is good enough, you’re laughing, however if you use all the money on there and try and reload, you may find the rate is substantially higher. This is why I’ve found credit cards to be a better option.
• It’s always a good idea to take a backup source of funds with you. Keep one card on you, and the other card back at the hotel in a safe place.
• Let your card provider know that you are going on holiday. You may think why should they know? However the more you think about it, the more you may think that it makes sense for them to know. If unusual activities (transactions from another country) start occurring on your card, they will block the card, unless there is a note on the system advising them it is okay, they may even call you to verify but make sure you call them back instead of giving personal details over the phone to someone who has called you!

Then it’s just a case of enjoying a stress free holiday, leaving all the worry for when you return!

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“Wasn’t a provision of the financial reform bill that passed this July that store owners are now legally allowed to not accept a credit card charge for less than $10? I’m almost sure it was.”

I hadn’t gotten wind of this at all, but I dug around to try to verify Paul’s claim.

Sure enough, Paul got it.  Payment card networks are no longer allowed to demand that merchants accept all payments, regardless of total amount.  They can only demand that merchants accept all payments not less than $10.

The bill Paul was referring to is  HR 4173:  Dodd-Frank Wall Street Reform and Consumer Protection Act, and was put into law on July 21st, 2010.  Section 1075 of this law (beginning on page 693 of this printing of the new law) amends the Electronic Fund Transfer Act of 1978.  The part that restricts payment networks as to the minimum charge they can force merchants to accept (which, up until about a month ago, was $0.01) is detailed in Section 920(b)(3)(A)(i)(II) of the amended EFT Act.  Beginning with the amended section 920(b)(3) (page 698 of the new law, for those of you who are following along):

(3) LIMITATION ON RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.  (A) IN GENERAL.—A payment card network shall not,
directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability (i) of any person to set a minimum dollar value for the acceptance by that person of credit cards, to the extent that (I) such minimum dollar value does not differentiate between issuers or between payment card networks; and (II) such minimum dollar value does not exceed $10.00 …

That is how the law is now.  In the amended section 920(b)(3)(B), it further goes on to say that this amount may be increased under certain process.  Meaning: There are avenues for making the allowed minimum greater, so down the road merchants could require $20, $30, or more before I can pull out my credit card.

If that was a bit hard to follow, I don’t blame you.  Here’s a simpler way of expressing the impact of this.

Let’s say a merchant has a sign next to the cash register that says “Minimum Credit Card Charge $10.”  Prior to July 21st, 2010, he would be violating both Visa’s and MasterCard’s merchant agreement, and could face heavy fines from the issuers if he refused to accept a smaller payment, and the customer reported it.  After July 21st, 2010, the merchant doesn’t have to worry about a customer ratting them out, because the issuers can’t demand it.

This is a game-changer, and not a good one, I’m afraid:

• It’s not at all a win for consumers, even though the law is advertised in part as “consumer protection.”  Ten dollars is not a particularly small amount.  I can easily get lunch out for less than $10.  It ultimately places restrictions on credit card use.  It forces consumers to carry debit cards, or cash, for some small purchases.  Payments may become more inconvenient.  Do you pay $10 at the pump for the $8 worth of gas you use to fill your motorcycle, simply because the merchant isn’t obligated to accept your $8 credit charge?  Or do you have to walk in to pay cash?  It’s more costly, less convenient, or both.
• It might be a small win for businesses that are not payment networks, as they have protection against merchant account agreements that demand that the merchant accept payments so small that they are a net loss for the business.  But if the merchant opts to avoid these kinds of transactions to the full extent of the law, then they could be turning away more profits than what they’re saving in losses by avoiding the small credit transactions.
• It’s a clear loss for payment processors. Their total transaction volume will go down, and along with it their fees.

This regulation hasn’t hit the stores a whole lot yet, but it will.  The law is barely a month old.  As a former eBay seller, I know how much these fees can run, and it’s likely not much different for brick-and-mortar stores.  I’m sure store owners will take secret pleasure (and relief) in being able to turn away customers that have been abusive with small credit card transactions.

The only advice I can give is to carry around more cash for the little things so you’re not caught by a nasty surprise when a store won’t accept your credit card.  Sorry!

(Thanks to Budgeting In The Fun Stuff for including this post in the Carnival of Personal Finance!)

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Update:  The “no minimums allowed” rule is no longer legal in the US. Here’s what went down.

It’s clear that the TJ Maxx where J. Money charged $0.10 to his card understood this.  They certainly lost money on that little transaction; the fixed fee per transaction is almost certainly double that.  But setting aside the risk of huge fines for not accepting it, the store gains in the long run, as credit card purchases are typically 12% to 18% higher than cash purchases at a given merchant.

But what struck me more was seeing the kinder, more sensitive side of J. Money.  He was “not proud” of doing that. He took it as a bit of unpreparedness that he didn’t have enough cash to cover the purchase.  And that’s all well and good, because I’m not about to deny him his moment of self-loathing.

But seriously, though in my meaner years I would have enjoyed making a sport out of that.  Now that I understand the costs of running a business, and in particular the cost of accepting credit cards, I try not to charge less than a dollar unless I absolutely have to, especially at places where I go often.  It isn’t worth being put on an unofficial black-list of evil below-zeros (customers that cost the business rather than bring money into it).

So what do you think?  Is charging a 50-cent candy bar good or bad cardsmanship?

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frequent flier (n.): a credit union member who makes regular use of overdraft privilege on their checking account.

Our credit union currently offers a couple of similar services:  overdraft protection, and overdraft privilege.  Overdraft protection is an automatic transfer of money from a savings account to a checking account in order to cover a withdrawal from the checking account that would cause it to go negative.  Each transfer costs a small(ish) fee of $5, but this is way better than bouncing the transaction.  Overdraft privilege goes a step further and covers overdrawn transactions, up to $500 at a time per month, even if there is no money in the linked savings account. There is a higher fee for this ($25 per transaction) but even this is better than an NSF (non-sufficient funds) fee of $25 plus whatever the merchant tacks on for a returned check.

A small percentage of credit union members rely on this service to get by.  It’s an expensive way to go about living, but as long as the fees (and the owed advance) are paid back, everyone’s happy:  the credit union who get to collect the fees, the “frequent fliers” who get to spend (mostly) on their terms, and the more responsible part of the membership who gets subsidized service from the income off of all of those overdraft privilege fees.

However, as of mid-August of this year, unless a member has voluntarily opted into these overdraft services recently, they will no longer have them. It was the case that members could be opted in automatically, and it was also the case, and remains the case, that members can opt out at any time.  Now the opt-in must be in writing, and it must be in by mid-August to avoid any lapse in the services.

It’s an offshoot of the CARD Act and it will likely hurt everyone mentioned above:

• Credit unions and banks will see reduced income. Some part (maybe even a majority) of the membership will re-opt in to the services, but not everyone.  Some will refuse.  Others won’t opt in because they don’t understand the service.  Others just won’t hear about it.  The banks and credit unions face an uphill member and customer education battle to regain some of the membership coverage they had.  Income from the fees will drop relative to what it was.
• Members who were frequent fliers may get some nasty surprises. Let’s say that one of the members who took advantage of the overdraft privilege for some reason didn’t hear about the opt-in.  (They were living under a rock every time they got their statement.)  They go out to dinner in early September, close to the bone on their checking account as usual, eat a great meal, and their debit card is denied.  How embarrassing!  “But it worked last month!”  Not any more — until you opt in again!
• Responsible members will see fewer service rollouts. Less income for the credit union means fewer new ATMs, shorter hours, fewer ancillary services, longer waits, harder loan qualification criteria.  What was possible courtesy of all of those fees is a little tougher without them.

If people want to fly dangerously low on their checking account balances, and if they’re willing to pay the price to do so, why shouldn’t banks and credit unions be able to afford them that ability for a fee?  Why do banks and credit unions need to be forced to be babysitters for these folks?

Without losers there can’t be many winners.

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About 97 percent of these donations will actually make it to the designated organizations — but the other 3 percent will be skimmed off by banks and credit card companies to cover their “transaction costs.”  Thanks to this hidden fee, American banks and credit card companies are making huge profits — somewhere in the neighborhood of $250 million a year — off of people’s charitable donations, according to a Huffington Post analysis.

Oh, please.  Spare me.

First of all, $250 million per year isn’t that much.  This is only about one-half of one percent of the total processing fees collected from credit card transactions (if the number on TrueCostOfCredit.com is to be believed).  This does not include all of the other fees that can be collected from the consumer side, like late fees and interest fees.  So, calling $250 million “huge profits” is stretching it.

Next, these fees aren’t “hidden.”  They’re well-known to every merchant (and most charities) that accept payments by credit card.  If consumers don’t know about these fees, then it’s probably because it doesn’t affect them directly.  In fact, merchant account agreements typically forbid merchants from refusing credit card transactions or tacking on “service fees” for the transaction, as it is a cost to be borne by the merchant, not the consumer.  The consumer need not care about it.

Next, the only reason that people can put their donations to a particular charity on a credit card is because the charity agreed to accept donations by credit card.  Furthermore, the charities are very wise to do so: according to the article, Oxfam and Operation USA pull in over 85% of their donations by credit cards.  Some of those donations could have been paid by check, but some of them just wouldn’t have been made at all.  Additionally, just as people are likely to buy more if they have a credit card as opposed to cash or check, people are likely to donate more if they donate with a credit card.

Charities aren’t profit-seeking like businesses are, of course, but there is competition among charities for a finite pool of money from donors.  Anything that makes it easier for people to donate makes it easier to tap into that scarce resource, and if there are costs associated with doing that, well, that’s the way things work.

Why should credit card companies and banks be compelled to do all of this for free? If I make a donation of $100 and put it on my credit card, it carries exactly the same risk to the credit card company as if I had bought $100 worth of groceries.  The issuing bank paid my donation to the charity almost immediately, and now they’re left with collecting it from me, which I could choose to not pay (granted, at my own peril).  Yet, that’s exactly what was done:  the credit card companies have bowed to pressure and will waive transaction fees for donations to selected charities for a few months.

If businesses want to contribute to rescue, repair, and aid efforts, that’s great.  You rock!  But if not, hey, you’ve counted the cost, and it’s your business.  I don’t fault airlines for profiting from transporting aid workers to and from Haiti.  I don’t fault oil refiners for profiting from selling jet fuel to the airlines.  I don’t fault companies selling first-aid kits, blankets, water, whatever, to charities to distribute to those affected.  And I don’t fault credit card companies for charging charities to make the donation process smoother so all of this great rescue can happen more quickly, and probably on a grander scale, than without it.

This objection to merchant fee profits is just another day in the credit card provider witch hunt that got the CARD Act through in the name of protecting consumers.  This will actually hurt us all in the long run.  Now a few more tens of millions of dollars have been shamed away from the credit card providers at a moment of opportunity.

If these transaction costs bother you (they might) the solution is pretty easy:  Write a check, mail it in, and bear all of the transaction costs yourself.  (Which actually isn’t true either:  workers have to open your envelope, record the check, take it to the bank, etc.)  Or charge it to a credit card that’s currently waiving its fees for donations to your chosen charity.

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Banks punish perfect customers

The article is another one on how credit card companies are hitting otherwise conscientious users with annual fees.  The users that are being targeted now are those who pay their bills on time and don’t carry a balance.

These are not perfect customers as far as the bank is concerned.  They are close to the worst, actually: just one step above those customers that declare bankruptcy and discharge their debts.  Convenience users are not very profitable for the credit card companies, and could well cost the companies money.

Who are the best customers?  Customers that pay the minimum balance each month for years and years.  Even better are ones that do so while going over their credit limit and occasionally are slightly late on a payment, triggering more fees.  They’re the profitable ones for the banks.  If it weren’t for the profitable customers, the credit card companies couldn’t afford to hold onto the unprofitable ones.  But what’s happening now is that the CARD Act is clamping down on a number of these very profitable practices, and everyone suffers.

The tone of the article is interesting, in that it suggests that credit card companies exist to make the lives of responsible people easier.  That’s just not true.  They exist to make money.  They don’t make money by letting people like me get three weeks’ use of their money, interest-free, and a rebate to boot.  They tolerate people like me because I might fall on hard times, carry a balance, and then they’ll make money off of me.  They’ve kept me around only because I’ll go elsewhere if they make life too difficult for me.  (Perhaps they already want me to go elsewhere.  I don’t really know.)

If most people are responsible with credit and pay their bills in full, then we’ll mostly be convenience users and will have no choice but to pay fees.   But the convenience users are starting to pay fees now because banks are needing to look for sources of income, as it’s been made clear that credit card users shouldn’t have to face the full consequences of their misdeeds.

Thanks to Canadian Finance Blog for including this post in the Carnival of Personal Finance.

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