Fabulous Financials

Congress recently passed the Credit CARD Act of 2009 to protect consumers from unfair credit card practices.  Here’s a good summary of the Credit CARD Act in laymen terms.  However, banks are scrambling for ways to protect themselves before the law becomes effective.  As a result, there are unintended consequences of the new law that will negatively affect consumers.

One, in particular, that concerns me is Bank of America’s plan to assess an annual fee ($29 to $99 per year) on consumers who are not profitable.  These are consumers who don’t use their credit card(s) frequently and/or pay their credit card bill(s) in full and on time every month.  They call us deadbeats because they don’t earn interest, collect late fees or over the limit fees from us.

Even though I chucked the deuces to Bank of America a long time ago, I’m sure other credit card companies will follow suit and I heard Citibank is one of them.  Thankfully, my favorite bank has never followed the pack during the market boom or subsequent bust.  In fact, their slogan is “we value people over profits.“  I love that!  But I want to be prepared just in case.

As I said on twitter yesterday:

I will never patronize a business that offers no value to me.  Especially one that focuses more on their bottom line than the service they provide to their customers.

I know I’ve blogged many times about how much I hate cash and why I prefer credit cards, but I refuse to give a credit card company my hard earned money as an annual fee without anything in return.  Apparently they don’t realize, the consumers they’re targeting (i.e. deadbeats) are the consumers who have the most choices and control over managing their own money.

As a trial run, this is what I’ve decided to do:

Effective tomorrow, 1 November, I’m going to use cash only for an entire month to test the waters.  I’ve paid all of my credit card balances in full today so I won’t have to think about them.  I’m preparing myself now because I want to be ready.  If any credit card I own sends me a letter that says, “Hi Single Ma! Here’s your new CC terms, and by the way, we’re charging you an annual fee” – I want to be confident that I can immediately say “KISS MY ASS!” in a language they understand. Close my card, please and thank you.

I received a lovely letter from American Express and want to share a portion of it with you all…

Like all companies large and small, our pricing has to be responsive to the business and economic environment.  As a result, we have found it necessary to increase rates and fees on some of our products.  Below are the principal changes to your account:

• We are raising the Annual Percentage Rate (APR) on cash advances.
• We are raising the Annual Percentage Rate (APR) on any balances that have a penalty rate because of a late payment.
• We are increasing the late fee.  Please remember that you can avoid late fees by paying on time.

In addition, we are pleased to let you know that we will not charge you a fee if you go over your credit limit. [redacted]

In other words, we want you to be irresponsible so you can always owe us money. Take cash advances, pay late.  And oh…that credit limit I gave you?  Not a big deal, don’t even worry about it!  In fact, we’ll make it easier for you.

Gee, thanks!

Although this letter doesn’t affect me at all, Amex, I’m ashamed at you.  You’re supposed to be “elite” and stand apart from the rest.  Now you’re just a run of the mill institution that’s following the latest trend.  I expected so much more.

This letter has validated my preference and daily use of USAA financial products.

As a follow up to yesterday’s guest post, here’s an article written by TIME that says the real problem with credit cards is the cardholders.

Credit-card companies, though, may not be the only ones we need to be protected from. Every penny of Americans’ nearly $1 trillion in revolving debt started with someone — some individual person — whipping out a piece of plastic and making a decision to use it. We could consider that free will and just call it a day, but there’s plenty of reason to believe the story isn’t so simple. There are piles of evidence that people are bad decision makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions that are not in their own economic best interest…

We can blame credit card companies all day for their sneaky profit making tactics, but no one is forced to use a credit card.  Many people view credit as free money and throw caution responsibility to the wind.  Even with the new regulations, there will still be tons of people with unmanageable credit debt.  Why?  Lack of personal accountability.  The government can’t protect you from yourself.

Today’s post is a guest article from Vik Tantry at Kanjoh.  Vik has a new blog that takes a video-focused approach to teaching financial concepts.  I hope you enjoy it. [-SM]

For a long time, the credit card industry has profited from charging extraordinarily high interest rates to consumers. But most people aren’t aware of the specific tactics used to target these consumers. Using client segmentation and marketing techniques, credit card companies can determine which consumers are most profitable, and then focus on retaining these consumers.

Capital One was actually founded by using these techniques. Back in the late 1980s, credit cards were becoming increasingly popular. The founders of Capital One started looking at consumer data, and found three distinct groups:

1. Those who paid their bills on time
2. Those who made the minimum payment, but always keep a significant outstanding balance
3. Those who constantly defaulted on their credit

Of these three categories, only the second one was profitable. Capital One couldn’t make any money off of consumers who paid their bills on time.  They also lost money on the third group. But the second group was a gold mine. These were the people who could just make ends meet, but were unable to pay more than the minimum payments. As a result, they were prime targets for exorbitant interest rates.

Once Capital One figured this out, they created a targeted marketing plan. They used tactics such as low introductory rates, with steep increases in subsequent years. The plan was very successful, and soon other credit card companies were copying their strategies. Unsuspecting consumers were encouraged to meet the minimum payment, without blatant warning of the high interest rates to follow.

The recently passed credit card legislation may help reduce this, but it will not prevent credit card companies from trying to make a profit. Capital One and its competitors will continue to use tactics to find profitable consumers. Just remember, what’s profitable for them is a loss for you.

Last week, I explained why I don’t hate credit cards and tried to dispel common myths about credit card usage and credit scoring.  There were a few Die Hard D.a.ve Ra.m.sey fanatics that challenged my point of view.  So it was an interesting discussion indeed.

I think it’s pretty obvious I’m not a DR follower.  I demonstrate my belief in financial freedom by planning for our future with strict commitment and discipline, but I also spend money on what I value to make sure we enjoy the journey.  I also abhor consumer debt, but I prefer using credit cards.  Why?  Everyone knows there are rewards and cash back, so that’s a given.  Here are five additional reasons I prefer using credit over debit or cash:

1. Extended Warranties:

When I use my American Express, they provide an additional warranty that kicks in after the manufacturer’s warranty expires.  Because of this, I use Amex when buying big ticket items.

2. Extra Savings:

Many retailers offer additional discounts or free items when paying with a Visa, MC, Discover, or Amex.  These special offers are exclusive to the card holder.  So if I’m buying that product/service anyway, I use the card specified for the extra savings.  Here’s a perfect example: free movie tickets for Visa Signature card holders.

3. Safe Online Shopping:

When I shop online, I use the virtual number feature.  Basically, the computer makes up a fake credit card number and I get to establish the amount and expiration date for one time or recurring use.  This way, my real credit card number is never exposed on the internet.

4. Theft Protection:

If, by chance, my credit card number is compromised or my card is lost/stolen, the thieves may have a field day, but I have zero liability on my cards.  As long as I report the card stolen within 3 days, I do not have to pay a dime.  I just call up the credit card company to dispute the charge or report the card stolen.  In the past 7 years, I’ve only had to do this twice.  Both times, it was easy as pie.  But if this were a debit card, all of my cash would be gone and I’d have to fight for weeks (maybe months) to get it back…if ever.

5. Dispute Protection:

I recently bought a digital camera online.  When I received it in the mail, I changed my mind and returned it.  Based on the merchant’s return policy, I returned everything in its original box, packaging, etc. and within the amount of time they specified.  Because there was nothing wrong with the camera, I had to pay for return shipping – no big deal.  I even put insurance on the return package, an additional expense I will not get back.  With online tracking, I can see the merchant received the camera on 4/20.  Note it is now 5/11 (21 days later) and I still have not received a refund.

I called twice and was told, both times, the refund was “under review.”  WTF does that mean?  I really don’t know, and to be honest, I don’t care.  When I receive my credit card bill, I will pay the balance in full (as usual), EXCEPT the cost of the camera.  Further, if this merchant has not issued a refund by 5/20, 30 days after receiving the return (per the credit card terms – yes, I read them), I will dispute the charge.  If I can prove that the camera was returned, which I can, my bank will do a charge back.  There’s an additional fee the merchant will have to pay for a charge back, but I will have spent $0.  Again, easy as pie.

Remember this nightmare when the lady had no money to pay her bills because of a merchant dispute/error? *smh* Enough said.

Can any of the 5 things above be accomplished with ease and convenience by using a debit card or cash?

WARNING: If you disagree with my POV, no problem.  You are free to share your opinions in the comment section, but let’s keep it reasonable.  Any dumb ish about causing harm to others, not having a heart, needing to see the light, or praying for me because I use credit cards will NOT be tolerated on THIS blog.

Side Note: writing that was funny so I lost my train of thought. LOL Ok, where was I…

For those who don’t like reading about people who love credit cards and use them responsibly, this isn’t the blog for you because I blog about my credit and credit scores often.  There are many PF blogs that share your opinion and hate credit cards too. This isn’t one of them.