First, the primary “benefit” – cash back rewards – is mythical because the cost of these rewards is passed on to the consumer through merchant fees.  This is why the credit card companies use every means (legal and illegal) possible to discourage the use of cash in retail shopping.

Second, the use of credit cards is accompanied with an unplanned spending premium.  Several studies have shown that consumers are willing to spend more for a product or service when using a credit card compared to a cash purchaser. The relative indifference to higher cost when using a credit card can easily trump any cash rewards.

More recent research casts further light on the issue. The Journal of Consumer Research has published a study entitled “Do Payment Mechanisms Change the Way Consumers View Products?”.  The authors conclude that paying with a credit card increases the desire to spend compared to the use of cash in an identical purchase situation.  This conclusion is supported by some interesting data from consumers themselves.  Consumers who pay with a credit card make a purchase decision based on their perception of superior product benefits rather than focusing on the product cost.  Conversely, a consumer who pays with cash is more likely to choose a product based on cost, even if that product offers inferior benefits.  Stated more succinctly, credit card spenders are more indifferent to cost compared to cash buyers.  (Here is a link to the study article.)

Some of you so-called “responsible” credit card users are now crying foul, thinking that this is just a research study that does not reflect the real world use of credit cards.

You would be wrong – again.

The Javelin Strategy & Research’s Online Retail Payments Forecast tells us what happened on Cyber Monday:

Frenzied purchasing periods such as Cyber Monday can cause consumers to throw cautionary spending patterns to the wind and take advantage of the “deal” phenomenon. Javelin’s study shows that consumers spend more money on a single online transaction using credit cards than when using other payment options, spending an average $82.10 with a major credit card versus $58.29 using a major debit card.

Credit card users spend more. It’s that clear and simple.

Credit card cheerleaders also like to argue that credit cards provide more protection against fraud.  Really? I was intrigued by this statement, also from the Javelin report:  ”As credit card fraud rates are higher than debit card fraud rates, consumers should set alerts and monitor their accounts carefully during this holiday period.”

‘Nuf said about that argument.

I like using my debit card, knowing that such use supports the 3% interest we receive from our rewards checking account.

Debit cards > credit cards. It’s science.

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Someone with sense in the Obama administration has convinced their economic team that Freddie and Fannie brought new meaning to the term “mission creep” and therefore should slowly but surely be killed.

Amen.

I love this quote from a WSJ article:

Officials portrayed a housing-finance system that would include a role for both the public and private sectors, but would be different from the current system in that the government’s role would be smaller, underwriting standards would be tighter, and borrowers would be required to hold larger amounts of equity in their homes.

Can I get a double Amen?

And then this from the same article:

The cost of mortgages is probably going to go up, and homeownership is probably going to go down. Both of those things arguably could be a good thing.

Proper economic balance is always a good thing. How long have some of us been preaching that expanding homeownership by force-feeding goofy mortgages on unqualified buyers creates problems, not solutions?  In my case, this long.

We need government regulation of banking and lending but not intervention in a dynamic market of buyers, sellers, borrowers, and lenders.

I’m concerned that Barney (Frank) and his buddies will oppose this move but to do so, they will be pushing against a mountain of data showing that Fannie and Freddie bring a lot more trouble than value to the table.

Your thoughts about this development?

(More in this article: Obama Administration Proposes Fannie Mae, Freddie Mac Phaseout)

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The Business insider has compiled data of 20  U.S. foreclosure hot spots and presented that data as red dots on Google maps. As you might predict, California and Florida take most of the top foreclosure spots.  Las Vegas is holding on to first place, with 1 in 9 homes currently in foreclosure.

I believe the foreclosure problems today would be far less, if the government had not intervened with all of its futile “save the underfunded homeowners who over-borrowed” programs. All this did was delay the inevitable.

Here is the link to the satellite tour.: A Frightening Satellite Tour Of Americas Foreclosure Wastelands.

Do you think when all of this over lenders will remain steadfast in requiring substantial down payments and rock solid personal balance sheets? I think most will until some idiot politician renews the call for “homeownership for everyone.”

Your thoughts?

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Stop the whining already!

Taking on six figure debt to buy a home is not a constitutional right. It’s not even a privilege. It’s an enormous financial burden. You have to prepare for it. You have to demonstrate that you can bear the burden. Sadly, and particularly over the last 15 years, people in the real estate lending and borrowing industry decided to skip the preparation part. If you had a pulse and a job (or if you could successfully lie about it), you got a mortgage. And if you couldn’t qualify for a good mortgage with reasonable terms, they gave you a lousy mortgage with terrible terms. And you took it.

Now things have moved the other direction. No more liar’s loans. No more stated income loans. Few or no zero-down loans. Hallelujah and Amen.

That’s a good thing for a stable, sustainable housing market.

If real estate agents and builders had their way, easy money would be the norm again. They want transactions. That’s how they make money. Some folks with lousy finances still think they should be homeowners – now.

Sorry. The tough lending standards should be perceived by rejected borrowers as a message and incentive to clean up their financial house. Come back looking for a mortgage when you are 100% ready. Until then, rent and save. In the long term, that will help everyone.

Home Ownership Gets Tougher as Lenders Restrict FHA Mortgages

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Earlier this year, I wrote a post on the real cost of credit cards. That post discussed the fees charged to merchants by the rewards card issuers. Of course, the merchants pass those fees on to us – all of us.

The rewards card fans sometimes acknowledge this but profess not to care because they (according to them) are “winning” i.e. beating the card companies at their own game.

I’m still calling BS on this assertion. It now appears that the government is on my side of the argument.

Yes credit card geniuses, today the Justice Department filed an antitrust suit against American Express. The basis of the suit is that AmEx places contractual restrictions on merchants that impairs their ability to offer discounts to consumers for using a different card.

Let’s translate that for the card addicts: American Express is using your rewards card in a way that keeps merchants from offering you discounts and lower prices.

Let me quote the Attorney General to reinforce the point:

Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement. We cannot allow this to stand.

Visa and MasterCard have been doing this as well but they have already settled. That was quick. Do you think they know something you don’t about the anti-consumer effects of their own conduct?

The Wall Street Journal article I have linked below questions whether rewards card users would change their behavior even if offered a discount for using a different card or no card at all. I believe that some will (those who logically think through the entire issue) and others won’t (the short attention span thinkers).

Full disclosure: Mr. and Mrs. ToughMoneyLove use a rewards card. The card is a debit card. The reward is 3.3% interest paid on all checking deposits up to $25,000.

We are rewarded for the money we don’t spend. How about you?

U.S., AmEx in Antitrust Suit

Related posts:

1. Credit Cards are Bad for Your Financial Health: It’s Science

The credit card issuers had plenty of time to prepare themselves for the rule changes that went into effect this weekend. In the past, a lot of their money was made by exploiting the foolhardiness of card-holding consumers, e.g., late fees and instant rate increases.

The new rules constrain somewhat the ability of banks to punish the careless credit card users. So they have resorted to making money the old-fashioned way: increasing costs for all cardholders.

In particular, average interest rates on card balances have now surged upward to levels not seen since 2001.  Source: Credit Cards Are Exception to Lower Consumer Rates

Consumers are fighting back, first by reducing the number of  card accounts kept open. This number has dropped by 23%. That’s awesome. Only 391 million more accounts to go! (Source)

If you are smart and careful, you won’t care what your card interest rate is because you won’t carry a balance. The bank may retaliate against your “pay in full” good sense by imposing annual fees on your card. Do not let that happen. Take your business to a bank where your overall banking relationship gives you the leverage to insist on a no-fee card.

We have increased our use of debit cards for smaller, routine purchases (e.g., groceries, gas), thereby giving us an opportunity to earn 3% plus on our checking account balances. If your debit card is branded by Visa (as ours is), you can increase your fraud protection by allowing the purchase to be processed through Visa’s network. Some banks do that automatically. For others, you may have to select “credit” and sign when you make the purchase instead of entering your pin. Most retailers will give you this option.

When it comes to credit cards, be the punisher, not the punishee.

Related posts:

1. Credit Cards are Bad for Your Financial Health: It’s Science

I was relieved, however, that the lender did some serious underwriting of the loan. There was a full appraisal, credit check, verification of income, a request for two years of tax returns, etc.  They even required that we immediately escrow a full year’s worth of tax and insurance payments.  All of this for a very low risk transaction in which the loan to value ratio was a mere 20%.

Our interest rate declined to 3.875%, cutting our total payment in half.  We will be using the extra cash flow to fund some interior upgrades. We are still not sure how long we will be in the house but it will definitely be beyond the six month payback period for the closing costs.

I had an interesting conversation with the owner of the title company that closed the loan. He and his business partner started the business in the summer of 2007, just before the bottom fell out of the residential housing market. Almost immediately, their start-up business went from 40 closings per month to six. They were able to survive because they were small with controllable overhead and because of heavy reliance on technology. Many much larger title companies went out of business.

During the closing the question of an owner’s title insurance policy came up. We had already purchased owner’s coverage when we built the house. Beyond that, we’ve owned the house for so long that the statute of limitations on prior title defects has expired.

With the economy stuck in neutral I think mortgage rates will remain low for the foreseeable future. Take advantage of them if you can.

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