Wednesday, October 14, 2015

Credit Card Bill

Credit card companies seem to be losing their patience with some of their less profitable customers:


  1. We should all aspire to be as big a Jerk as you...

    1. @Big Cajun Man: I don't mind if banks and credit card companies don't like me much.

    2. Think of the poor banks if we all paid off our credit cards every month! The HUMANITY!!!

  2. I think this tops the list for favourite blog post of 2015.

  3. is it true that people that continually pay only the minimum payments on their credit card but never miss a single payment actually have a better credit rating than those that never carry a balance? If so what is the point of having a slightly better credit rating if you are paying fees?

    1. @Joaquin: Financial institutions analyze the information they have about their customers in every way imaginable. They seek to figure out which customers are profitable and which are safe to lend money to. These two groups do overlap, but they have significant non-overlap as well. No single number like a credit score could capture all the information financial institutions seek.

      What consumers care about most is to be considered a safe credit risk so they can get low interest rates. If you pay off your credit card bill in full every month, it will help you be considered a good risk. Maybe some people who pay just the minimum payment on their credit cards are considered to be more profitable to banks. But so what? You're better off saving all that interest.

      I've never worried much about how all this relates to credit scores. I care about whether banks think I'm a good risk, but I don't worry about whether my credit score is up or down 10 points based on the latest changes to how it gets calculated.

  4. Paying interest isn't what gives you a better credit rating, posting a reasonably small balance is. Nothing says you have to let that balance carry over to the next month though (which is what charges you interest).

    If you have a balance, let it post to your statement, pay the bill in full when due, you won't pay interest, and the balance will be reported to the bureau showing that there is activity on the account, which is all you need.. just make sure that your utilization ratio (ratio of revolving debt to total available revolving credit limit) is less than 25% (preferably less than 10%).

  5. Hmmm calendar doesn't say it April Fool - they REALLY sent that ?
    The CSR will have to do some explaining to do IMO.
    I guess what's being missed is that the real profit to the banks is not the interest on balances but the 1-3% merchant charge on ALL sales that all eventually get baked back into the prices the consumer pays
    btw - I'm one of those jerks too - time using credit cards = 4+ decades - interest paid on balances = 0

    1. @GCAI: I try to make my April Fools' posts a little more believable. Yes, merchant charges are an excellent source of profits, but high interest rates are a great source of profits too.

    2. Well done, GCAI. I can't say I've never paid interest, but it's only due to a mistake on my part: missed payment, late to transfer money into my chequing account, etc. Very rare event now that I put all my bills into a simple spreadsheet every month, though. Guess I'm all grown up now. :-D

  6. Count me in the Group with GCAI.

    I got charged once but it was the banks error and I was reimbursed. I also like my Cash back rewards I have received from the C Card companies. Although most cards have washed out their rewards over the years, it is still good to get a few hundred bucks from them rather than giving it to them.

  7. @GCAI, @Gene, and @Paul: I'd like to say that I've never paid credit card interest, but I've paid late twice (maybe 3 times). The interest wasn't much, but I wasn't happy with myself. Congratulations to those who've never paid any interest.

  8. Interesting that credit card users pride themselves of not paying interest yet they are the generators of a portion of inflation which inflicts everyone. Banks and credit card companies make money simply because you use their product.

  9. SST @ I see your here now posting your odd comments about credit cards. Haven't you left enough on the subject on the million dollar journey blog?
    You simply have a warped issue with credit cards that no one will ever agree with. If you don't like them don't use them. When you go and purchase a car then go take cash. I suspect you might not like cars either. The rest of us will live in the real world and use all forms of credit to our advantage.

    1. I see you made it here, too, Paul. Welcome! Hope you aren't overly surprised by the incestuous nature of the tiny Canadian PF blogosphere. Anyway...

      Doesn't matter if you agree with my "warped issue" or not, truth is truth. And the truth is, credit card usage is mostly unnecessary and mostly damaging. Except most credit card users/consumers are not aware of the other half of the story, they are simply intoxicated by the marketed "free rewards".

      Truth is, the vast majority of credit card purchases are small in dollar amounts (e.g. not cars) and can be paid for with cash (yes, I did buy my car with cash, thanks). If you are paying off your balance every month, then it's quite obvious you have the means to pay with every purchase with cash. But you don't, you choose to induce inflation by utilizing your credit card. All your "free rewards" MIGHT merely get your personal CC inflation rate to a break-even point. I'll give it to the banks and credit card companies, they've done a masterful job at duping the consumer population, even those who claim to have beaten them at their own game.

      Besides that, I would think a person such as yourself might want to see the general public/consumer benefit from more financial education, rather than keeping them ignorant. Via the high readership of this website et al, hopefully the shared knowledge will change some unhealthy relationships with money. But most will ignore the truth.

      Look forward to visiting your website! :)

    2. It's certainly true that the charges to merchants by credit card companies drive up prices. This is one of the many cases where the collective good and individual good are at odds. We'd all be better off if the cost of using a credit card were added to the purchase price (i.e., no hidden costs to merchants). However, in the existing system, each individual is better off using a credit card and getting back rewards.

  10. @SST

    What is your alternative to credit cards? Do you honestly think people should stuff their jeans with money and make all their purchases with cash? I certainly don't want my wife on a subway with a large sum of money on her. People are killed for iPhones. The small price you pay for convenience is far worth it.

    Should we use valcambi gold wafers and break off 1 gram pcs and try to pay with those? I see your vague message, but there is no practicality to it.

    My card gives me rental car insurance, doubles my warranty, gives cash back, if I lose it in a strange country it's replaced in a few hours. Just to name a few features that are practical and I actually have used.

    There is a cost for that but every service in the modern world has a cost. Why single this out? QE has caused far more inflation then my credit card. Do you get as outraged about that? I get outraged that I lose 50% of what I earn in some form of tax every year and some people think it should be more...

    I would like to know WHY this comparatively small cost is such a big deal for you? You must have had something happen personally to be so passionate about this.

    What will you do when cash starts to be refused by merchants? It's starting in other parts of the world, and it will come here. Using debit has costs too. Transaction costs and maintaining your account. Some people pay quite a bit per month and their transactions are limited or they pay more if they go over a set number.

    Lay out your alternative solution... Please I would love to read it.

  11. Oh, hey, Paul! Didn't see your post until now.

    Yes, I am passionately anti-credit card and James already said it much more succinctly, and politely, than I could:

    "This is one of the many cases where the collective good and individual good are at odds. However, in the existing system, each individual is better off using a credit card and getting back rewards."

    A credit card is first and foremost a CONSUMER PRODUCT, thus utilization of a CC is a deliberate choice. The use of this product causes higher prices across the board, for everyone, thus you are deliberately choosing to create inflation. Those people who do not use the product, and more importantly, those people who cannot use the product (e.g. the poor) must bear the cost of your choice. What you are doing, by deliberate choice, is making the poor even more poor. Well done.

    That's just the tip of the iceberg. If you'd like a more detailed analysis, I'd gladly provide one; email, perhaps? I don't want to sully MJ's site too much!

  12. @SST

    I think Micheal's ok with people discussing issues as long as it does not regress into trash talk.

    I'm just repeating myself so i will keep it short. Governments since 2008 have created the most inflation by design. Far more then any credit card. Why is your bacon or pack of cheese 1/2 the size and cost quite a bit more more since then? Then people complain they cant afford to buy groceries.. Then governments vilify business and claim they have to raise their minimum wages...? Pretty smart game plan... Who are really the biggest culprits here?

    That's why I personally feel - and you of can disagree - your distaste of the credit card industry is misplaced, as it''s a tiny source of inflation in comparison. I don't think a lot of people look for the sources of our ill's, they lash out at the symptoms. Often at the wrong targets.

    1. @Paul: My thoughts fall into the middle here. I would support laws to prevent credit card companies from forcing merchants to offer the same price for cash, credit, or debit. But I would have rules governing how much merchants could charge for using debit or credit -- they should be allowed to recover costs, but not make it a profit center.

      However, when it comes to individuals, we can't realistically expect them to act against their own interests. People use cash-back cards because it reduces their costs. The system is broken, but it's unrealistic to expect most people to act against their interests when the harm each person causes is tiny. The collective harm may be great, but each individual's use of cash-back cards causes only a tiny amount of harm.

      Focus on fixing the system instead of blaming individuals for inflation.

  13. I'll try to keep it brief:

    First, merchant fees represent a minority portion of the credit card induced inflation, the bulk is produced by infusing debt into the economy. The static merchant fees are the part of the problem which government must fix (e.g. Australia, America); stemming the influx of expanding debt rests on the decisions of the individual.

    Credit card purchases made up nearly 75% of all retail sales (2014). Current outstanding CC debt is equivalent to 10% of Canada's M1 money supply. If total transactions are continuously revolving, credit card debt is 45% of M1. On average, the government pumps out 8.5% more money each year; the credit card consumer produces 13% more with no signs of slowing down.

    That level of new money (and velocity) is going to cause more than a "tiny" degree of inflation. (And no, gov't post-2008 QE did not ratchet up inflation.)

    Second, and to reiterate, credit cards are not an organic element of the economy -- they are consumer products developed and sold by companies. They don't actually do anything beyond instantaneously monetizing your liability into their asset. The scary part is that they are on their way to supplanting sovereign currency as the norm. If you choose to keep using corporate issued "money", soon you may not have the choice to stop using it. Think Gresham's Law.

    Lastly, because we choose to be exceptionally lazy, we willingly allow the creation of higher prices for everyone. We can choose not to use credit cards. Remember, the average CC transaction is ~$100, so why not use cash or debit card? You don't really think all your "rewards" are actually "free", do you? Of course no one wants to be the first to stop, because it would cause them financial pain. But if this pain is only "tiny", then why not assume said pain if you have the capacity (read middle-class+) instead of pushing the cost onto those who cannot (read poor)? This option can only raise all ships. For a group of people (PFers) who pride themselves on being logically and behaviourally superior to the masses, continuous use of credit cards is adopting the very mindset you seek to avoid. Funny that Canadians can be so proud of things like Universal Healthcare and Welfare, paying our share for those who cannot afford it, and in the same breath defending the virtues of credit card use by inflicting financial repression on those who cannot afford it. But then again, no one ever said humans are intelligent creatures.

    I'll end with MJ's closing: "Focus on fixing the system instead of blaming individuals for inflation."

    Good idea, except in the case of credit cards, the individual is the sole and direct cause of the inflation. By changing individual choices, the system will "fix" itself.

    I guess in the end it is wholly unreasonable for the consumer to cease their easily manipulated (and now habitual) behaviour even it it means a win for everyone (minus the credit card companies and banks). Such are the ills of Capitalism.

    Shop 'til ya drop! :)

  14. Here's a fun research paper on the very topic:
    (note: the paper only discusses merchant fees and reward costs, but not monetary inflation)

    From the abstract:
    "On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.

    On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year."

    Money creation-wise, credit card transactions in Canada constitute 18.5% of the GDP. Balance-carrying cards make up 7.5% of GDP, current outstanding balances making up 5% of GDP. With credit card issuance, usage, and average transaction all on the rise, the portion of GDP comprised of credit card driven debt (i.e. voluntary consumer created inflation) will also continue to expand and at the same time erode social welfare.

  15. Really SST?

    65 pages including formulas that almost no one will read? Again I disagree that this is any sort real world problem. When I add up all my taxes and I see it's getting close to 50% of my gross pay, that to me is a real problem. When I see it mismanaged and spent in an inefficient way, that's a problem. I will continue to respectfully disagree that QE did not cause most of our inflation. QE is still an ongoing experiment that is not working. It simply has created an illusory economy in an attempt to create what they call "the wealth affect". Like priming your snow blower with gas with the little rubber bellows you push with your thumb. The problem is there is not much more gas in the tank to keep it going. I find it surprising that 19 trillion in debt and 200 trillion in unfunded liabilities in the US is not a bigger concern to the whole world.. Your credit card issue is a pittance comparatively to those credit issues.

  16. Odd, but not surprising.

    Just because the man on the street won't read it or doesnt understand math doesn't mean it does not exist. How many have read Einstein's comparatively short 46-page Theory of Relativity? Yet it's all around us. Or this single formula (not even one page long!): F = G*((m sub 1*m sub 2)/r^2)? I'd wager much less than 1% of the population could tell you what that is, let alone explain it, but it's 24/7.

    I was unaware that vacancy of math and popularity were the hallmarks of truth. Perhaps if a Kardashian did a few Twitter blasts about credit cards things might translate into a "real world problem".  

    Confused by the straw man that is your personal tax rate (and QE). The corporate credit card industry has nothing to do with government legislated taxation. MY consumer payment choices do not increase YOUR taxation level, the two are wholly unconnected. However, YOUR consumer payment choices do increase MY expenditure levels. The government is making you more "poor", whereas you are making me more -- and the actual poor -- more poor.

    Quickly addressing, you can definitely take action to lower your tax rate. If Ross Perot can get his income tax rate down to single digits, anything is possible! Don't like how public money is being utilized, you also have choices to alter those actions. In both circumstances, complaining won't do the trick, unfortunately.

    Concerning QE, I can point you to some great literature which explain how it actually works, but fair warning, there are some formulas and the readership is far less than a Harry Potter novel (but just as lengthy), thus it might not seem a "real world problem".
    (It's also odd you state QE "has created an illusory economy in an attempt to create what they call "the wealth affect" ", when that's pretty much what credit cards have done for the past 30+ years.)

    It's obvious my individual powers of persuasive exposition are far weaker than widely held beliefs and habits (marketing definitely beats math!), so keep on using credit cards to make your life better and I'll keep on not using credit cards to make everyone's life better. :)

    Have a spooktacular Halloween!