New Credit Card Rules and You

January 13, 2010 by  
Filed under Debt and Credit

A hot topic among personal finance writers and bloggers is how the new credit card rules will affect existing credit card owners. I have already received a notice from our credit card issuer (yes – we have one). Mr. ToughMoneyLove scanned the document to make sure that it did not impose random fees just for the privilege of owning the card. Then I threw that mess of boilerplate away. I knew it was sent merely to inform us of the “new rules.” I have already read enough about the “new rules” to know that they were written in an attempt to protect careless consumers from their own carelessness. That leads me to write this brief post on my proposed rules for dealing with the new credit card rules.

The Mr. ToughMoneyLove Guide to the New Credit Card Rules

Rule 1: If you must have a credit card, get one that doesn’t charge annual fees and pays you some kind of reward (even though rewards cards increase prices for all of us).  The government is not regulating annual fees and more card companies are likely to impose them. Also, don’t chase low interest rates because they will be meaningless if you also follow Rules 3 and 4.

Rule 2: Be always mindful of consumer spending research proving that buyers who use plastic tend to buy more stuff and to pay more for the stuff they buy. Don’t be one of those millions of silly people. Instead, try to feel the pain of every discretionary purchase – at the time of purchase – so that maybe you won’t spend so much. Imagine the amount you charge being taken out of your wallet at that instant. Don’t be deluded into thinking that you are being “rewarded” for your spending.

Rule 3: Always transmit your credit card payment so that it arrives by the due date printed on the billing statement. It’s not that hard – really. Get some software that automates your payments and you are good to go.

Rule 4: Always pay your credit card balance in full. Ignore the urban myths about keeping a balance to help your credit score. Who makes up that crap and who can logically believe it?

Rule 5: Don’t be concerned with any of those other rules, even the “new rules.” Let the careless consumers worry about those.

Isn’t that easier than reading 5000 words of credit card boilerplate?


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17 Responses to “New Credit Card Rules and You”
  1. Rick Beagle says:

    My wife and I cut up our credit cards recently (zero balance), and there is NO desire to go back. Lightning fast credit card changes prompted us to get out of the game all together. Like many of you, we had been holding onto the cards for those “just in case” moments, and after some rather abusive changes in terms by Wells Fargo (on a zero balance, always paid on time and in full when used (rarely)) we decided our cards weren’t worth the hassle.

    I realize that not everyone is in a position to do this, but if you can get there, do it.

    Peace.
    Rick Beagle

  2. kitty says:

    “even though rewards cards increase prices for all of us”

    If you are talking about interchange fees that merchants pay for credit card use, then you must be aware that the merchants pay these fees regardless of whether you use a reward credit card, a credit card with no rewards, a charge card or even a debit card. So unless you have some information showing that merchants pay more for reward cards, I don’t quite understand this.

    “consumer spending research proving that buyers who use plastic tend to buy more stuff and to pay more for the stuff they buy”

    As I explained about zillion times in the past “spending more on average” is not the same as “everyone who uses cards spends more”. Have you seen actual data? Have you actually read the studies? Do you know what the standard deviation is? I just love it when people keep citing the studies without actually reading them in detail to understand the limitations, flaws and what the studies actually showed. Or not showed.

    Now, it’s always a good idea to be mindful about spending and thinking in terms of price and value for the money instead of method of payment.

    @Rick – I don’t know about “many of you” but I use credit cards for convenience and rewards. As far as “just in case” is concerned, I have more money in my savings than credit limits on all of my credit cards combined…

    None of the changes affect me in any way. I don’t care about interest rates, I still get my rewards, and I haven’t been affected by any abusive charges. And with autopay of full balance, I don’t see any kind of a hassle.

    • Kitty: Do you think that the money used to buy rewards (such as airline tickets) is extracted from thin air? Fees charged to merchants are adjusted to create a profit for the card issuers. So the costs of rewards are passed on to all consumers as part of increased merchant fees paid for rewards card swipes. I suggest you read this article http://www.nytimes.com/2010/01/09/your-money/credit-and-debit-cards/09money.html

      And yes I have read the studies that show that plastic users pay more. I cited to one of them in the earlier article linked above. Did you read it? You and everyone other cardholder that reads my blog claims to be the exception. It’s always the other guy that spends more. Why don’t you try going cash only for six months and do your own experiment? I think you will surprise yourself and also learn that your reduced spending more than offsets the “rewards.”

      • kitty says:

        TML – 1. Yes the reward cards may have slightly higher interchange fees, but the difference is small.

        By the way – you use a debit card from one of those high interest checking accounts. Where do you think the money for this high interest comes from? Why do you think your debit card issuer requires a certain number of transactions? This is the same thing – if you say that reward credit cards increase price than so do high yield checking accounts with debit cards. It’s rather hypocritical of you to claim those of us who use reward cards cause higher prices when your own use of a debit card from high yield checking is likely to do exactly the same.

        2. Yes, I read the referenced studies in details and looked at the numbers – number of people, how the studies were done, mean, deviation. Do you understand statistics? Do you understand the difference between averages and individuals? Do you understand what distribution means? Do you understand that if I take 10 people, one of whom spends 100% more and 9 of them spend the same, I’d get “people spend 10% more on average”? Do you understand how the total spending in a group of people would be affected by people who carry balances, especially large balances? Do you understand that not a single study looked specifically at people who pay their balances in full or even bothered to correlate spending patterns to payment patterns? No, I don’t claim to be “an exception” I simply claim that while there is a significant number of people that spend more with cards, there is a significant number of people who don’t; the total amount of spending is more with cards but there still is a large number of people who spend about the same or slightly less. Is it so difficult to understand? Can you show me a single study that showed that EVERY SINGLE INDIVIDUAL including those who pay balances in full pays more with credit cards?

        Finally, do you understand that “studies show that people spend more ON AVERAGE” is not the same as “studies showed that every single person spends more?

        I’d imagine if one did a study of how woman’s weight is affected by age, one would find out that on average women gain weight after the menopause. But this doesn’t mean every woman would gain weight after the menopause, does it? Another example: people say that hormone replacement therapy causes breast cancer. But it doesn’t mean that every single woman on HRT would get cancer, in fact, most women wouldn’t. It simply means slightly increased risk. This is very similar.

        A few things that jumped at me from looking at these studies in detail:
        1. They included small number of people
        2. They used students – not the most responsible segment of population
        3. Many of them used questionnaires or psychological models – the most unreliable way to do a study
        4. The distribution of the answers was fairly large – i.e. there were answers that showed more spending and they were answers that showed less spending.
        5. None of the studies looked at payment behavior or try to correlate the answers with whether or not balances were kept or paid in full.

        It’d be helpful if knowing a little bit of statistics had been a requirement for citing studies…

  3. averagejoe says:

    I’ve read that the Reward Programs are going to eventually be eliminated. Want a link on that?
    I gave up all credit in 2001. Haven’t looked back. I pay cash or use my debit card. But now, my bank charges a $1 fee for each debit card use and $0 for the credit option (still tied to my checking account.) Makes no diff to me, I use my debit as a credit card and avoid the $1 fee. If I need cash, I go to my bank’s ATM machine (no fees. still.)

    It never ceases to fascinate me how credit card users hold onto their way of life. They come up with a zillion reasons to hold onto their credit cards. It’s disgusting to see. Their last bastion of hope are those f***ing rewards. Ridiculous!

    As TML said, go buy your own airline ticket! Have you seen the sales on them? Some airlines are practically giving them away.

    People who use credit cards or get rewards YES, they spend more!

  4. averagejoe says:

    Kitty,
    Just from the way you ‘speak’ I am 100% positively sure, you’re an annoying person. Don’t need no stats on dat.

    Also, I am 100% sure you should get a life.

  5. MasterPo says:

    Joe – Why on Earth do you stay with a bank that charges you for debit card use?!

  6. averagejoe says:

    MasterPo-All i had to do, as my bank advised me to do, is use my debit card as credit and I avoid any fees. So, the bank is not looking to make fees off of me (probably the charge card company-Visa or Mastercard is, off the vendors). Doesn’t make any difference to me how I use my card, it all comes out of my checking account instantly, so there you go……..(my other bank charged the $1 fee for credit use and debit was free…it’s just reversed)I’m not switching anymore. Let the banks duke it out. All I know is that I’m not paying out a penny.

    • MasterPo says:

      Doesn’t make sense to me that by using it as a debit there’s a fee but as a credit there isn’t.

      • kitty says:

        I wonder if the interchange fee charged is higher when the card is used as credit or if interchange fees only apply when debit cards are used as credit. I.e. when the card is used as credit, bank gets money from the merchant. When the card is used with a pin, the bank either doesn’t get the money from the merchant at all or gets significantly less.

        Hence, the bank charges the customer.

  7. kitty says:

    @averagejoe: “Just from the way you ’speak’ I am 100% positively sure, you’re an annoying person. Don’t need no stats on dat.”

    Yes, ad-hominem attacks is a great way to show that you are right. Very compelling argument. I didn’t understand your second sentence, either. Must be my bad English.

    “It never ceases to fascinate me how credit card users hold onto their way of life. They come up with a zillion reasons to hold onto their credit cards. It’s disgusting to see. Their last bastion of hope are those f***ing rewards. Ridiculous!”

    Why it is disgusting? But really, if you are so smart with money and I am so stupid – as I use credit cards, have been using them for years, long before rewards were introduced – you must be rich and according to you I must be drowning in debt. Would you care to compare net worth, debt level and saving rate?

    I’ll start. My debt is $0 (paid off my mortgage several years ago). My net worth is in low seven digits. My saving rate is 50% of net after max 401K contribution. Now, name me one single reason (not zillion) why I should personally stop using credit cards.

    • Kitty – I’ll give you a reason: Because credit cards and rewards increase retail prices for you and for all of us. If you could get a 3-5% discount for paying cash, wouldn’t you take it? Of course you would. Well, many merchants would like to give us cash discounts but the merchant agreements with VISA and MasterCard prohibit that. So you are just another tool of Visa and the banks that cost all of us a lot of money.

      • kitty says:

        TML:
        1. Sure I’d take 3-5% discount. Wouldn’t you? Then why are you still using your debit card from your high yield checking? Now, I mentioned your own reward checking in my post, but you conveniently ignored it.

        2. Where did you get 3-5% number? The only numbers I found are here http://business.theatlantic.com/2009/11/the_gao_report_on_interchange_fees.php (see table 2)
        which lists the range at 0.95 to 2.95% for Visa and 0.9 to 2.95% for Master Card. The article says these are Federal Reserve numbers.

        If you have a more reliable source – e.g. Federal reserve data, not some newspaper article, please, show it. Also if you have specific breakdown by card.
        Keep in mind, the difference is not just for different types of cards, but also by type of business

        3. Since you don’t advocate going to cash but to debit cards, the amount you’ll save the merchant is not your full interchange fee amount, but only the difference between credit card and debit card. This number is likely to be a whole lot smaller.

        4. Even if everyone forgot all debit and credit cards and went to cash tomorrow, do you really think the merchants would immediately passed all the savings to you? Now, when the price of commodities dropped last summer, I don’t remember stores passing their savings to me. So why do you think the merchants would pass these savings to us and not just pocket them?

  8. Rick Beagle says:

    I do not understand the frothing at the mouth here, though it strikes me as particularly troublesome that Ms. Kitty is the target of this inexcusable and entirely inappropriate hostility.

    Ms Kitty, I sense that you use the tools available to maximize your return (in its various incarnation). Based on your comments, you have done the research and understand the pros and cons of the situation. Thank you for sharing.

    Though, honestly… I’m going to stay in the shallow thinkers part of the pool on this issue. It is entirely possible that I am missing out on some great opportunity, but -bleh- it works for me.

    BTW, the “just in case” was poorly explained. We like to travel a bit with the kids, and for a long time, credit cards were required to book hotels and rental cars (amongst other things). Now debit cards can provide the same function, and even provide points.

    Have a GREAT day.
    Rick Beagle.

    • kitty says:

      Rick – thanks.

      ” I’m going to stay in the shallow thinkers part of the pool on this issue…”
      LOL. I often disagree with you, but I do enjoy reading your posts. You are an interesting person to argue with.

      Regardless, everyone should do what works for them.

      Studies and their (mis)interpretation is a bit of a pet peave of mine. For personal reasons, several years ago I got interested in a couple of medical subjects that got me reading a bunch of studies-related papers in medical journals – study description, results, reviews, and “rapid responses” criticizing them. This taught me a lot about getting to the bottom of what studies really show or don’t show as well as the common flaws in studies’ design that often get pointed in these papers and rapid responses. While some of terminology are only applicable to medical studies, a lot of basic logic and statistics is applicable to all studies. This is why I jump on what I perceive as a mis-interpretation; also why I don’t just trust “studies showed this”, but try to always look at details. Plus, it’s a bit of a hobby – I find it enjoable.

  9. MasterPo says:

    “I’m going to stay in the shallow thinkers part of the pool on this issue.”

    Home sweet home?

    😉

    (couldn’t resist! 😀 )

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