23 February 2015
You Can’t Afford Not to be a Deadbeat
Last summer I had the dubious pleasure of having my credit card declined—at a laundromat. Not so long ago such a scenario would not have been possible for a number of reasons, not the least of which being that laundry machines only accepted quarters or tokens.
But we live in a new age, the age of smart phones and bar codes and instant digital communication. Back in the day, credit card authorization required a long distance call and a tense, awkward wait at the cash register; it is now completed in seconds without any contribution from a live person. And while I’m not suggesting this state of affairs is all bad it’s not without its drawbacks.
If you’re younger than 25 or so (I’m not) you might not remember how things used to be “back in the day.” In the day I’m talking about, merchants were not inclined to accept credit cards for small purchases so they often, arbitrarily (and illegally), posted “minimum purchase” requirements for their customers paying with a credit card.
This practice was most common among low volume merchants and those whose profit margin was low (grocery stores, convenience stores, etc). You can see their point; credit card companies charge merchants a small percentage of each transaction and maybe even a flat transaction fee. On a small purchase, where there is a thin profit margin, the merchant could conceivably lose money on the transaction. Even so, until July of 2010, it was illegal for a merchant to impose a minimum purchase amount for credit card users.
I don’t believe that most consumers felt that this was a huge problem. We had a different mindset back then. We actually carried cash. (No, really.) Most people I knew would not have considered paying for a small purchase (say, under $10) with a credit card. Was this only because the merchant would not like us for it? I don’t think so. For most of us there was a feeling that you shouldn’t use a credit card for things such as a cup of coffee (and it was nowhere near as expensive as it is today). We tended to save our credit card accounts for larger, more significant purchases.
So, what happened to change our collective mindset? As always, we should follow the money. After all, that’s what the banks do. And if you think banks don’t understand how to separate you from your dollars then I suggest you give your credit card agreement a thorough, critical read through.
Bank fees net banks well over $150 billion annually, which comes out of your pocket, dear consumer, one way or another. ATM fees, late fees, overdraft fees, minimum balance fees, a monthly fee that relieves you of paying ATM fees (They create the fee then create another fee that gets you out of the first fee? Should we feel grateful?), a paper statement fee, lost debit card fee, returned mail fee, even a fee for using a human teller. (Google “bank fees.”)
Banks may still be reluctant to lend money but they’re creative enough to come up with other ways to squeeze a buck out of their customers. But credit card transaction fees are a different animal since these are charged to the merchant. They generally range from 1% to 3.5% of the purchase. Sometimes there is an additional flat fee per transaction as well. These are mostly based on the volume of purchases so they are most onerous for small businesses.
Banks promote the use of credit cards for small purchases as a convenience. And it relieves the consumer of carrying around cash, which could be lost or stolen. But hold on a minute. While I would not be happy about losing $500 cash through a hole in my pocket, that really isn’t what we’re talking about here. We’re talking about very small purchases. Rather than carry around five hundred or a thousand dollars to buy, say, a new computer, I’ll gladly put that purchase on my card. Less hassle, less risk.
Think of it this way; would you prefer to lose the twenty you shoved into your pocket (the one with the hole you didn’t know about) on your way to Starbucks or would you prefer to lose your credit card? Your liability for the credit card charges would be limited to $50 in most cases, so maybe you feel like that’s a reasonable price to pay for years of convenient purchasing.
But what about all the phone calls you’ll have to make? The monthly accounts with Netflix, iTunes, Hulu, etc. that have to be re-established? What about the rather large copay to your OB-GYN that will now be denied and most likely incur a hefty penalty when the charge comes back on your doctor’s billing service?
And that’s only your personal stuff. Who do you think pays the transaction fee the banks charge the merchants? Do you think the merchants pay for that? Or do you think the merchants might, possibly, sneakily, hide those fees in the inflated cost of the item you just charged? If you’re one of those people who think that most merchants wouldn’t lower their prices if, suddenly, the transaction fees went away, well, you’re probably right. If they can get that extra 3% now they will continue to try to get it.
But this system has been in place for decades so it isn’t really fair to postulate a counterfactual. Look at it another way. If the price of Florida oranges suddenly went through the roof because an unstoppable bacterial pathogen was decimating the orange groves (citrus greening) do you think that your local grocers would hesitate to pass on their higher costs for orange juice? Production costs matter—no matter where they come from.
Fortunately, I guess, when my credit card was declined I was at the laundromat and not checking into a five star hotel on the first leg of a European vacation—in which case I would have been in big trouble. Another merchant whom I paid with my card had been hacked and my identity, or part of it, had been compromised, along with the identities of some thousands of others. This is no longer such a rare event and a lot of the responsibility for the problem of identity theft lies squarely with those who benefit from the (over)use of credit cards. Banks, and merchants too, (think Redbox) have brainwashed us into believing that the convenience of card purchases is worth the cost.
And the banks are winning. The percentage of small purchases (under $10) that are being accomplished with credit cards is steadily rising—as are the fees we’re paying to the banks.
You think inflation is someone else’s responsibility?
Don’t kid yourself. Banks only value you as a customer while they make money from you. Google “credit card deadbeats.” That’s how banks refer to cardholders who pay off their balances every month. What, you thought you were being responsible? (Google “naive.”)
So, the next time your bank fails to honor a transaction because it is “outside your normal pattern of spending” and then when you frantically call them up, humiliated for being made to look like a real deadbeat, and they tell you that they refused the transaction “for your protection,” remember who you’re dealing with. They’re not your friends.
Things worth knowing:
“Low utilization” using a smaller proportion of your available credit looks better to creditors (your credit score)
Minimum $10 purchase part of Dodd-Frank Wall Street Reform Act
Beginning Jan 2013 merchants can charge swipe fee up to 4% (except in ten states)
NYTimes article July 2, 2013. Some employers are now paying lower wage workers with debit cards. This forces the workers to pay a fee to get get cash or accomplish other transactions. Saves the employer some payroll costs.