Tuesday, May 26, 2009

Credit-Card Predators Unite

It's amazing how those of us who try to handle our money intelligently — try to do things the right way — end up getting tsk-tsked for the plight of those who are now squarely behind the eight-ball of life (financially-speaking).

WaPo: Revealing the Hidden Cost of Credit Cards

If you, like me, are one of the privileged few who somehow manage to pay zero interest on your credit-card spending each month, you need to know that you are a cold, heartless bastard who is enjoying those zero-interest, 30-day loans on the bruised backs of the poor and downtrodden.

Here's how Michelle Singletary, in the above article, lays it out:

You probably never considered that the credit pushers made your access to "free" money possible by gouging the less fortunate with hideous penalty fees and wicked double-digit interest rates. Effectively, the most financially vulnerable consumers have subsidized the low interest rates and rewards programs that the more financially secure enjoy.

Well, Michelle, I actually have considered that. Several times, in fact. And you know what?

I never really cared.

You see, I carried credit-card balances for quite a long time, too. For ten years I paid my share of interest on said balances. Then I did something crazy: I got smart. I took responsibility for our future. I worked harder, learned more, and finally paid the cards off in December, 2004. (Whilst dropping from a dual-income household to a "single-income household w/kid," I might add.)

Hideous penalty fees?

Wicked double-digit interest rates?

Yes, both are integral parts of the card companies' playbooks.

However, if you're paying them — or if you're continually faced with those blasted bank overdraft charges — well, Life is trying send you a message. And that message is:

You're doing it wrong.

As Larry Winget notes in You're Broke Because You Want to Be, where you are in your life right now is the sum total of the choices you've made up to this point.

"Your life is a reflection of the choices you have made," he writes. "If you want a better life, then make better choices. When you do, you'll find that taking credit for your successes feels a lot better than blaming others for your failures."

We Own U
Make good choices; get good results.

Make poor choices; get poor results.

"I didn't have the money to pay my car insurance bill," the common tale goes, "and when the bill went late my card company saw it and jacked my interest rate up to 45 percent! What was I supposed to do?"

Uhh ... work more? (I did, and still do.)

Sell stuff. (Done a little of this, too.)

And move forward with the understanding that if you won't do these things, the world won't be forgiving. Reality will be only too happy to wail on you again.

Because that is how it works.

As Phil McGraw wrote in Life Strategies (see my related "Life Laws" page), "Many people fail to grasp that, when you choose the behavior, you choose the consequences."

I Know: Let's Change Some Laws!

Note that I'm not at all against the changes which are about to smack the credit-card industry. On the contrary: They're long overdue.

For instance: Throwing credit lines at college kids who don't have jobs is something that should've been snuffed out a long time ago.

And requiring cards to give 45 days' notice before raising a customer's rate? Seems reasonable to me.

But over the years, I've also developed quite a respect for the ability of banks to create their own reality via rules changes. They're masters at finding profits over here to make up for the profits they gave up over there. (Darned if the Federal Reserve doesn't help 'em do it, too. What — you think dropping rates to the floor was done with the public service in mind?)

Will these new laws cut into banks' bottom lines? Yup, I betcha they will.

Will the banks then dig and scrounge and find profits somewhere else? Also yup.

After giving it fair consideration, I'm now assigning better than 50/50 odds that the cash-back rewards and 30-days-no-interest credit which my wife and I enjoy as "convenience users" of Visa and Mastercard will be in serious jeopardy in the coming months. Ms. Singletary is probably correct when she writes:

Now that Congress has sent Obama a bill intended to rein in unfair credit card practices, it won't be long before the industry responds with new or old ways to make up for lost revenue.

At the very least, I'm expecting to see annual fees be initiated on the cards we carry now.

And them giving the proverbial boot to cash-back programs wouldn't surprise me, either.

Now, depending on how much those annual fees (or other newly-created arbitrary charges) are, we may or may not continue using plastic as our primary means of payment.

Note to Chase and Citibank:
We CAN Do Cash

For the month of June, Lisa and I will be shelving the credit cards and going back to the way our grandparents did it: Cash and checks. (I suspect the cashiers at Sam's Club and Target will think we've gone batty.)

I like to think of this as something of a practice run for what may be coming down the pike. Also, it'll be interesting to me to see if our grocery and household-item spending declines at all simply by virtue of us using cash at the checkout desk.

But I would like to address this to Ms. Singletary: I'm not going to apologize for being a "convenience user" of credit cards. Nor will I apologize for taking advantage of balance-transfer arbitrage to make myself a few bucks over the years.

I understand that nothing in life is free. Whatever you've been given, someone, somewhere is paying for it. That goes for lunches, t-shirts, magazine subscriptions.

And credit.

This doesn't mean the system is evil. It doesn't mean the world is evil.

The world is just the world.

Learn the rules. Play the game. Minimize losses. Don't be a victim.

And most of all, reap rewards where you can.

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— Posted by Michael @ 8:25 AM


Michael, I'm with you on this. Credit card companies dont give you 0% credit promos for the love of it. They give you the 0% promo, hoping you will bite the bait and not be able to pay it back at the end of the promo, thus making a slave out of you! Going on a vacation or buying a big screen TV with the borrowed money is the dumb way to use it. Paying off high interest loans would be a better use of the money. There is nothing wrong in taking advantage of the strategic greed of credit card companies if you put the money to good use. Payback all of the loan before the rates adjust. Declare independence from debt


I second msoori's comments. My husband and I put everything on a credit card and pay it off every month. If they initiate an annual fee, or eliminate the grace period, there goes the card and I will have no problems paying with cash. When I was in my early 20's I paid my share of interest (no punitive interest rates, though, and no over the limit fees, late fees, etc.) I know better now.
Please blog about your cash experiment; I'd like to hear how it goes.



As usual, excellent comments. This legislation seeks to save people from themselves. When use wisely, credit cards serve a purpose in our society. Quite frankly, I think those absolutely dependent on credit and known as revolvers are about to get a rude awakening prior to the February 2010 deadline for implementing this new law.

Anonymous Michael M
, at 4:59 PM, May 26, 2009  

Amen, Amen and Amen! I haven't carried a balance in years and I don't feel bad about my 1 - 2% cash back that I've been getting. It still doesn't even come close to the amount of interest I paid during my 20s. If I get stuck with an annual fee, I'll close my card and go back to cash. I'm not worried about my FICO score (too much) because I don't plan on buying anything else major on credit! I have my house, my cars are paid for and I intend to stay put for the next 50 years. Sorry if that offends the majority of middle class America, but that's the way it is.

Anonymous Anonymous
, at 10:42 AM, May 27, 2009  

Michael, I'm trying to reach you with a question about one of your spreadsheets, but none of the email addresses I have for you are working. Could you email me so I can shoot you my question? jmslivak AT gmail.

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]