At What Cost Credit? And What It Is Worth?
After my post about Capital One raising our interest rate, I got a lot of interesting comments that made me wonder about the role of credit in our society and how it is changing. I’ll be the first to admit that I don’t pay much attention to news about credit cards in general. I am not strictly anti-debt but in the past I have not been as responsible as I wish I had been about using debt and accumulating debt, and I can finally see the light at the end of the tunnel, a world without monthly non-mortgage debt payments. I don’t blame credit cards for taking advantage of me - I am not claiming they always do the nicest things or are in the business of helping the consumer - but it was my attitude towards available credit and taking on debt that needed an adjustment.
Now, the rules governing credit cards are changing. Things like universal default (when you are late on one card, every card can penalize you) are being eliminated, and interest rates can’t be raised automatically when you pay late. Fees and penalties are being capped. Many things are being put into place to stop credit cards from taking advantage of those who are in over their head.
Which is good. But on the other hand, someone has to pay for it. And that someone seems to be those who use credit but do so without getting behind or paying late.
Annual fees - a yearly fee just for having a credit card - are expected to make a comeback. As I’ve already firsthand experienced, interest rates for everyone are being raised as a pre-emptive strike before the laws go into effect. Having a credit line “just in case” is going to cost me. Is that worth it to me? I don’t think of the credit card as my money any more, nor as an emergency fund. But I’m not in a place yet where I can say with conviction we can handle anything life might throw at us without turning to credit. I’m working on getting there, but we are definitely not there yet.
So on the one hand, I’m happy that preying on the most vulnerable will stop. For example (and again it is my “friends” Capital One), my middle brother is not the most responsible when it comes to managing his finances. He has a Capital One card with a very low limit, and he’d charged it beyond its limit. Totally his fault, and he was assessed a penalty for it. But the crazy thing was, his minimum payment due the next month wasn’t even enough to bring him below his limit! And he doesn’t pay attention to things like that, so he paid his minimum, then was charged another over the limit fee for being over the limit. This went on for three months until he asked me to take a look at things and I explained what was going on. I’d like practices like that to stop. It’s not illegal, but certainly unethical and just… tricky.
But at the same time I’m not really excited about paying a fee just to have a credit card. Someone has to pay somewhere, and that someone might be me. So, we’ll see what happens. But for now, I can only say I am ambivalent.
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May 27th, 2009 at 12:10 pm
Well, in the “old days” what happened to your brother and many others would have probably fallen under the category of usury; laws seemed pretty boring and straight forward, and no one imagined the credit hole we would all fall in. A 1978 Supreme Court ruling which allowed banks to abide by the usury laws of the state in which the bank was located (not the borrower) and a 1980 law allowing various federally regulated entities to totally ignore state usury laws have cooked our goose but good (in 1980 we were in an inflationary period). Some states, such as South Dakota*, virtually eliminated usury laws to attract CC businesses and of course, now, most CC companies/”banks” fall under the 1980 law. Of course, with easier credit, the cost of everything continued to soar.
Small but important history lesson! Like so many other aspects of our national economic life, it’s been no accident we’ve ended up in the mess we’re in!
(*Delaware, Illinois, Georgia, Nebraska, Nevada, Rhode Island, Utah are also pro CC companies–we must get these states to change their laws to really change anything!! )
Sorry for the rant, but … like I said NO ACCIDENT!!
May 27th, 2009 at 4:09 pm
Dear PaidTwice: You are smart to be reluctant to have a credit card for ‘backup’ in case of need for big dollars that you didn’t plan on. My advice: Get thee off to whatever Credit Union you qualify for and set up a line of credit (or whatever animal they have that’s similar) to just sit in the background and be available if you ever need it. It is SO much better than a credit card — credit unions are member-owned and their POV is the member, not shareholders looking for profit. Check it out. It’s the best alternative to being held hostage by some blood-sucking ‘lender’ whose only concern is to help you drive your balance to the moon, then charge you outrageous fees for every false step.
May 27th, 2009 at 4:19 pm
I’ve been wondering about this, too. I already have an annual fee on my CapOne card, but that’s not the case for my other two cards (which I’ve had for years and which have been paid off). I hope they don’t tack on a fee. They should reward long-term, responsible customers by waiving such fees.
May 27th, 2009 at 6:09 pm
Well, I guess, a little bit more on topic: I don’t know what we will do when they start adding fees. Don’t care much about interest rates, but the old advice to cancel any card charging a fee is tough to ignore. I wish credit ratings weren’t so tied into the debt ratio, but it is. I wonder if that will change? I guess I’ll wait and see. Don’t like having a lot of cards and think the whole thing is a gimmick to coerce folks into keeping credit cards even when they don’t need them or want the temptation. One would think job stability, net worth, payment history, etc. would be more important. Stupid Crazy.
May 27th, 2009 at 8:15 pm
I disagree. I think it is each individual’s responsibility to pay attention to what is happening in their finances and ensure that they use their credit cards responsibly. I got myself into trouble by making late payments and having fees compound over credit limits, but I also recognized the situation and corrected it. Over years of hard work.
The credit card companies are out to make money. Not to help people. The government is trying to protect the (not-so) innocent, and it is responsible people who will now have to fund the credit card companies.
May 28th, 2009 at 11:19 am
What if all cc issuers starting charging annual fees?
Those of us who remember the days of “No Annual Fees” will scoff at the idea. We’ll say things like “Well then I’ll just close my accounts then!” and “I’m not paying for something I don’t use!”. We’ll be the only ones complaining though and after enough time has passed nobody will even remember or think about what things *used* to be like. If it happens (and nobody actually knows that yet) then it will only be “a change” for so long before it just becomes the norm - the standard way of doing business when using credit cards.
I hate the idea of paying annual fees. I hate the idea of paying money for something when I don’t get some form of tangible value in return. With that being said, I pay for crap all the time that I don’t necessarily use. I pay an annual Home Owners Association Fee - never use their services. I pay for 70 cable channels, of which I watch maybe four of. I pay auto and home owners insurance - never had to use it (thank god). My point being that annual fees on credit cards isn’t such ridiculous concept. We pay for things all the time that we don’t necessarily use - we are paying for the luxury of using them if we *want* to…
Don’t get me wrong. I’m not a fan of credit cards and I think it is very shady business. They do provide a value though and I don’t feel that something like 25.00 dollars a year is too much to pay for that value. That’s a much better deal than I’m getting from some of the other things I pay for.
May 29th, 2009 at 8:44 am
Jay is absolutely right. (I wrote a story about it here, if you’re interested: http://www.creditfyi.com/Credit-Library/Articles/Credit-Laws-and-Legislation.htm
No other industry gets away with charging interest rates of upwards of 36%. It gives new meaning to the word “usurious.” It just shows that profit and greed will rule the day if business leaders feel they can get away with it.
If my cards begin charging annual fees, I will simply cancel them. If consumers passively allow card issuers to continue gouging them, they will.
Credit score formulas do account for both the ratio of debt utilization to available credit and payment history, among other things.
When we’re talking about credit cards, it would be impractical and just not possible to look at things like net worth and job stability because most card issuers these days are large global companies. How are they going to gauge or get access to your net worth and job stability (subjective) and would most consumers consent to providing that info? I think not. It’s a little too invasive for me.
May 29th, 2009 at 1:48 pm
Interesting comments, Kev and Dawn. Kev, I concede you’re getting a value, an offer of credit, but maybe the fee could be tied to use, or level of credit offered? Right now, I bet the quiescent accounts will be the first targeted, with maybe an offer to defer if you USE the account…
Dawn, you’re right, of course, but FICO could reformulate how they weight the values of what they have, and maybe ask for info (there’s an IRS ROI form you can sign) if someone wants a “larger” credit line? As a side note, just as folks faked mortgage info, it’s just too easy for someone to fake the minimal information asked for on the CC apps. Seems like now one gets offers for more credit based on how much credit you already have, or easily falsified info. Still crazy stupid to me, but who am I? I guess it’s all some sort of financial calculation of risk for these mega companies.
Excellent series of articles, Dawn, hope everyone reads them.
May 29th, 2009 at 3:36 pm
In most cases, you’re getting a little more than just an offer of credit. You getting a totally unsecured line of credit that is interest free for the first several weeks. You are getting the ability to make reservations, rent cars, etc. without having a hold placed on your checking account. You are able to participate in rewards programs that allow you to earn cash back, travel miles, and merchandise - for FREE! In some cases, you even get extended product protection and extra assistance for dealing with faulty merchandise.
Please realize that I am playing the Devil’s Advocate here… I’m in no way trying to promote the idea of annual fees or anything else they do for that matter. I hate that industry as much as the next guy (or gal). I’m just trying to point out that credit cards can provide a valuable service when used responsibly and I don’t feel that 25 bucks a year is too much to pay for that service. You mentioned that maybe the fee could be tied to use… Do you have that same luxury with say your cable bill currently? Do you really have that luxury with anything? You could argue that some services charge you based on use (cell phones, internet in some cases, etc…), but I would be quick to point out that 99.9% of those things still charge you a base fee whether you use them or not. As I said before, you are mostly paying for the luxury of having the option to use - not the actual use.
May 29th, 2009 at 3:46 pm
You’re right, Kev. Thanks for the insight.
May 29th, 2009 at 10:04 pm
Someone “has” to pay only if you believe the credit card companies “have” to maintain their same ridiculous profits, even at the cost of gouging people. It’s not like the credit card business can’t be profitable without ripping people off–the industry was just fine until the deregulation discussed above. Me personally, I don’t consider the maintenance of multimillion-dollar bonuses to financial executives a social good worth worrying about maintaining.
May 30th, 2009 at 8:12 am
I hope, but doubt, people will learn to use credit cards as a backup or emergency medium. However, if we all do that these companies will invent new ways (fees) to make money off of us.
June 1st, 2009 at 9:26 am
Kev, how could you even say that an annual fee of $25 or so would be worth it for benefits received, particularly in light of the outrageous interest rates card companies charge? they make enough profit as it is, on the backs of struggling families who get nailed if their payment comes in 1 day late.
As usual, mega corporations profit at the expense of hardworking people. Very sad.
I have a perfect record of paying all my bills on time, and just recently i noticed Amex has now shortened my grace period to just 2 weeks!
June 1st, 2009 at 10:09 am
I don’t ever have a late payment, and I always pay the full amount due, so I expect to be charged a fee in the future. I think that’s fair, because the person getting the benefit is me. We track expenses religiously — we download the statement from the credit card site into Excel, then use a macro to rearrange and classify the entries, then a pivot table to show a month-by-month by category listing. Paying by cash would remove the ability to do that segmentation. That ability, plus not having to send in bill payments to four of the routine providers (they charge the card directly), is worth something to me. I don’t know how much of a fee is too much, but if I had to swag, I’d say about $50 a year sounds fair.
June 1st, 2009 at 12:31 pm
@Dawn
I was simply trying to illustrate that there is a value to owning a credit card and that value is worth something.
I already listed a few of the benefits of having a credit card in my previous post. So, it’s for you to agree or disagree on whether or not the things I listed are worth an annual fee of twenty-five dollars. To me they are. I just spent a fifty dollar best buy gift card that I received last month from my rewards program and I’m already getting close to another one. So that’s 100.00 - I would gladly spend 25.00 for it. As far as the outrageous interest rates they charge, you’re right - that’s why I don’t let them charge me interest. I don’t pay them a dime currently, yet I use their services all the time. Name one other thing in the world that gives you that same luxury?
I agree with something that was said earlier. I have a feeling the annual fees will mainly be directed to people like me. The people who are consuming their services and profiting from it. I understand that and I’m OK with it - nothing in life is free. I would hate it if they started charging people annual fees who are currently carrying balances, but they are still two separate things.
June 1st, 2009 at 1:01 pm
If you are financially stable and the only hazard is missing the ending of a grace period (I exploit this feature at lot: make payments, esp for medical care -usually one day after the CC closing day, then take the at least 2 weeks, more likely 4 weeks, to let my $ collect its pitiful interest before paying) then I’d suggest an automated payment service/plan using your instructions to pay x amount on x day. I use PayTrust, drawing on a segregated ING account, but there are tons of online and desktop Apps available.
but will *never* charge anything on it.
BTW, I think AMEX particularly s***ks; I have a low interest balance transfer with them and will be taking my sweet time paying it back
June 1st, 2009 at 1:29 pm
Two other thoughts: I bet others will follow Amex, to try and beat folks like me; and a reminder, CC companies charge businesses a fee for the “privilege” of offering their customers the use of a credit card, so reliable income there! That’s why many don’t offer Discover–they charge a higher fee.
Wonder if this will change, too.
We’d better all start reading the fine print.
June 3rd, 2009 at 9:23 am
Kev, i understand what you’re saying, that since you always pay in full, it doesn’t cost you a dime and in fact you’re getting some rewards cash to spend.
the problem is the sneaky and deceptive tactics CC companies use to trip people like you (and me) up. Like shortening the so-called grace period, the time you have to pay your bill. If you head off on vacation and forget or don’t realize your credit card bill is coming, too bad, sucker. You’ll get hit with a $39 charge, or whatever it is.
On top of that, if the due date happened to occur on a Sunday and your payment arrives on Monday, too bad for you. Zap! Another late fee.
And while I, too, always pay my balance in full, I have big problems with an industry that routinely charges usury rates simply becus they can get away with it due to loopholes int he law. Ethically, it really rubs me the wrong way. Yeah, i know, it’s a business. But does that mean we should all just feel free to fleece everyone else out there?
I could go on, but i’m guessing you may know this already. I am one of probably millions of credit card users, and consumers generally, who are just so soured and turned off by the business ethos of this industry that i really dislike them intensely. It’s not that i can’t afford a $25 annual fee; it’s that i’ll be damned if I’m gonna hand them over more of my hard-earned money when they rarely cut consumers slack.
June 5th, 2009 at 5:54 pm
Jay has a very good point. The credit card companies make the majority of their income from merchants, not the customer with the card. For instance, Visa charges the merchant around 1-2%. Discover and AMEX charge the merchant more, I believe around 3%. So there is no need for the credit card companies to charge a fee. They will do it enough people allow it. If fact most credit cards will waive the fee if you call them.
I personally am not willing to pay a fee, the merchant covers that. I have one card that charges a fee, but I call and get it waived every year. BTW, I don’t have a cable TV or a cell phone simply because I don’t like paying for a service I do not fully use.