How to Make Credit Card Companies Pay You

Here's a piece I found from Money on why you should pay an annual credit-card fee. It's no a masterpiece (nor an article I agree with in most parts), but there are two pieces of information in it that I found interesting. The first is on how credit card companies make money:

A recent report from the Government Accountability Office estimated that about 70 percent of the credit card industry's revenue comes from interest and penalty rates, with penalty rates accounting for a growing portion.

No surprise here. Almost everyone know that banks love people to carry balances and they've been more aggressive than ever lately with the fees. That said, I had never seen the 70% number -- though it makes sense now that I do.

Here's the second piece of info -- also not a shock when you think about it:

Those who carry balances on which they pay interest and fees are subsidizing cardholders with no revolving balance who may even be in rewards programs, said lawyer Michael Donavan of Philadelphia-based Donavan and Searles.

Heh.

Yes, everyone has the same opportunity to spend what they want, charge what they want, carry what balance they like, and so on. Is it my fault if I never carry a balance and even use my credit card to earn almost $500 a year? In fact, I recommend others do the same: charge only what's in your budget, pay off your card every month, and get a credit card rewards program that pays off for you to boot.

Besides, the credit card companies still make some fees off those of use who pay our cards off every month. How? For instance, they earn merchant fees every time we charge. They also get the opportunity to sell us on alternative products like credit monitoring and the like. These are highly profitable and I'm sure some of us pay-every-monthers take them up on these services (I don't.)

But my bottom line is: don't pay the credit card companies -- make the credit card companies pay you! ;-)

Comments

[Phil]

Hmm. Should I as someone who takes advantage of a one-month interest free floating loan (i.e. I budget and don't overspend beyond my means) be forced to pay a fee supporting the bad spending habits of others? The lawyer Donavan from the article is said to represent "those who have unwittingly fallen into many of the sandtrap fees and penalties embedded in hard-to-understand credit card agreements". What? Unwittingly? It shouldn't take more than a couple of month's statements for anyone to realize that if they pay the minimum balance they will never pay off the loan. So I need to support someone's spending addictions and innumeracy? If there is a market for cards with annual fees and lower interest rates/penalties then let the bank issue it and compete, but don't force all cards to go this route.

The stated proposals later in the article for regulating credit card agreements are good, IMO: limit being able to change the rules with only 2 weeks notice and double cycle billing are unfair. I'm not so sure about zero-tolerance on late fees - get the payment in on time - that's your responsibility if you decide to borrow. I haven chosen my credit card so that I can schedule the (full) payment for transfer from my bank account on the exact due date - never late and always the longest possible float.

Also: I liked Sen. Dodd's "red face test" admonishment at the end of the article - not a bad rule for any business to follow!

[Teri]

I have been making reward money off of cards for years, never paid a dime to the credit card companies - though I guess they get a percentage of every purchase we make - hubby and I debate if we should just drop them sometimes out of protest, but we keep the rewards card to offset the increased costs we all pay on consumer goods as businesses pass along merchant fees to end consumers.

Anyway, rebates are great, but this year we are also going to borrow some 0% money down on cards and invest in the bank - take advantage of these improving interest rates. I expect to double or triple our usual $500 credit card reward - as we earn some decent interest on the cash. I don't see us borrowing much more than $10k - $20k or doing this as a long-term strategy, but on a smaller scale I think we will benefit greatly. Will bring in some extra money for the next couple of years. To me, it doesn't get much easier that this.

[Interrobanger]

Not bad... but that doesn't mean they won't screw you other ways. Take an issue I've been working on as a consultant -- the Merchants Payments Coalition (handy link behind my name below) has been highlighting the issue of the Interchange fee.

It's like an ATM fee, but for retailers, and of course that gets passed on to you and me. Has anyone who's never had a merchant account ever heard of this? Nope. Do they pay it every day, even if they studiously use cash? Yep.

It goes up and up and up, too. Visa just raised their interchange rate, and MasterCard just posted an incredible single-quarter profit. I'd still advise against getting a credit card except to build credit toward a home purchase (if you already own a home and a car, cut them up now) but be aware, they're still in your wallet.