Historically, credit card companies have made their money in several different ways. The most important way is the interest paid by people who charge on their credit cards and pay back what they charged over time. A rising component of their profits are late fees. As Congress plans to curtail both of those by limiting the interest and late fees that can be charged, credit cards are looking for other ways to profit by the business:
Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.
Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.
Count my wife and me among those who pay off their credit card balances every month. As far as we’re concerned it’s a convenient alternative to cash. If credit card companies start assessing interest from the date of purchase, they are sowing the seeds of their own destruction, at least as far as we are concerned. I wil pay an annual fee but I will not pay interest. Full stop.
I’m gonna ask you this because you always seem to know about this stuff. A week or two ago I read a comment on a blog that declared the commenter would *never* use a debit card and would *always* use a credit card, because debit cards have a much higher identity theft risk.
I’m confused by this. My debit card has the same liability limit as a credit card. (In fact, I’m technically able to use mine as a credit card, although I don’t.) Both are used identically when ordering online or over the phone. How is one safer than the other?
Having never owned a credit card, I just don’t get this. Can you explain it to me?
I suppose I could just go back to paying only with checks or cash. Still do that most of the time, anyway.
Kelly, I’ve never used a debit card (which I suspect shows my age) but my understanding is that debit cards are quite variable in their terms. Some impose limits on vends per day. Some impose limits on amount rung up per day. They may be absolute limits or they may charge fees for going over their limits.
My understanding is that the limitations on liability differ quite a bit, too. Some require you to notify the company of misuse within 48 hours or other restrictions.
I’ve always thought of debit cards as something like walking around with endorsed blank checks in your pocket. The thought makes me nervous.
Although I tend to agree with Dave’s response, my knowledge is based on less than completely factual information, I would like to hear from someone who has the expertise to answer Kelly’s question. As this turmoil in the banking industry continues it would in everyone’s interest to know all the ramifications of credit vs. debit cards.
I think your right, Dave. And the impact on merchants of convenience items is significant. I think there is a reason McDonalds began accepting credit cards at the same time it was pushing it’s dollar meal. McD wanted as few impediments to a transaction as possible.
“I’ve always thought of debit cards as something like walking around with endorsed blank checks in your pocket. The thought makes me nervous.”
I understand what you’re saying, but I still don’t see how walking around with a credit card doesn’t amount to exactly the same thing. Can you or some other willing soul make this clearer for me?
I’m not here to defend debit cards, especially; I just plum don’t get it.
Credit cards charge a credit account and you get a monthly bill. You can dispute a charge that is in error without paying for it.
Debit cards immediately charge you bank account and the cash is gone. It is up to you to prove to the bank that a charge is in error before you get your money back.
I reccomend the following (pdf) file on the differences between credit and debit cards.
usatodayeducate.com/wordpress/?dl_id=70
Personally, I’ve experienced fraud on my credit card about 10-15 years ago and can’t complaint about the credit card companies response at all.
This is a better link:
http://www.usatoday.com/money/perfi/credit/2008-07-31-credit-cards-debit_N.htm
It is very discouraging to read all these so called stories from people who are supposed to be experts in the topic, and then when you read their story about this “credit crisis”. I just have to comment, every one of you is just plain blind to your own scenario and think you have the answers.
Take the expert who claims they pay off their balances every month and because of this, they belong to the group that is called “responsible” as opposed to someone who caries a balance month to month is “irresponsible”. Well, you just wait til the day you get laid off from your source of income, from your employer or an illness that you can’t control, and all of a sudden the only source of money you now have is that last paycheck, the same monies you were going to use to pay off that months charges and other expenses. Now what are you going to call yourself? A victim will be one term, I’m sure. Will you now say you are also “irresponsible”? Will you begin being “irresponsible”, and pay only the minimum balance on your credit cards? Oh, I forgot, a responsible borrower has money put away for emergencies, and will tap into that when things happen out of their control (illness or lay off). JHC! (Yes, that’s exactly what JHC means!) Give us a break, and get real people!
Just because one pays month to month does notmake them irresponsible, nor does someone who falls into a predictiment that is not in their own control. THEY ARE VICTIMS! And, get real about our lenders too. They want you to pay monthly, and they want you to default, so thay can raise fees and increase your debt! They make their profits on monthly fees and payments of interest over long terms. Why ever would they create a “variable” interest rate if it was not to profit from its creation? Why would they ever change your “due date” if it were not to profit from doing so? Why would thye ever create a deferred interest program, if it were not to profit from doing so. And why would they lend to someone “IRRESPONSIBLE” is they did not make “OBSCENE” profit from doing so. Reality in this whole picture and what not one of you has discussed: This is not about “month to month” interest and fees, it is about how many accounts they can have at once to package into a marketable portfolio to sell and trade in the markets. Every account they start gets sold in that same system that has brought down the “Mortgage Industry”.
If these changes go through, I will likely stop using all of my cards and cancel most of them except for maybe one, as I am not interested in paying interest on purchases and an annual fee.
I may keep one card just to have a backup line of credit, however, and consider the annual fee to be a cost of keeping credit available.
Patrick, I don’t recall anyone using the word “irresponsible.” I’ll say that Congress was irresponsible in passing the Bankruptcy Reform Act of 2005. Congress is acting irresponsible if it starts regulating the credit card companies in a way that makes credit less available to lower income people and less attractive to higher income people.
For those who are concerned about debit card safety, shop around to various banks. A good bank will limit your ddebit card liability just like for a credit card, and will issue automatic credits for disputed charges. I have been using both Citibank and Chase debit cards for many years. I have had to dispute fraudulent charges on both and have never had any issue getting the problem resolved quickly and to my satisfaction.
It was the cheapening of credit, and the accompanying sense of entitlement, that got us into this mess. If credit becomes a little less available and a little more expensive to consumers, in the long term that can’t be a bad thing. Financing our consumer economy with play money is unsustainable, whether that play money is credit card debt, HELOCs, or liar loans. Surely we’ve learned that much by now.
Yeah, Leigh, that’s exactly what my bank does with my debit card. I’ve never had a moment’s trouble. (Knock wood). But since I’ve only ever been with the one bank, I have nothing to compare my experience with.
I was with them when they went to the whole debit card thing and basically *forced* everyone to take one. I use mine mostly when there’s no other way.
I really didn’t know that some banks charge all kinds of wacky fees and don’t do anything to protect the user. Geez, I wouldn’t like that, either.
Cash looks better all the time.
Spare me, Patrick. If you go out on a limb, you know the risks you are taking. Else, save for a rainy day. But cut the victim crap.
Many years ago I didn’t have the proverbial pot to piss in. I managed my affairs accordingly, and took the risks I did knowingly. Do the same.
Credit cards are a lucrative business for the banks. If people don’t like that, they don’t have to use them. But now government is effectively making the decision for the consumer. They will be too expensive. I haven’t run a balance in 25 years. And I certainly won’t start paying fees etc because the Feds dicatate it. However, once again, the little guy gets it in the shorts.
Same as it ever was.
One unanswered question for me from the article was that it was my understanding that different credit card companies market themselves to different credit risks. And that there were credit card companies that market themselves to people like Dave, Steve & Drew that pay their monthly bills and pose less risk of default. I assumed they got their revenue from the fees paid by merchants. Taking two percent of a transaction and giving back up to one percent to the cardholder in points or other benefits, ain’t necessarily a business loser.
If it’s true that such a business model has been viable in the past it’s not clear to me that the legislation being proposed hurts it. It seems more likely that that the (normally) dependable-pay model is being hurt by a decreasing volume of transactions and above-anticipated defaults.
If that’s the case, then Congress can’t be blamed for the lost privileges of the dependable pays, that’s a function of the economy. It can only be blamed for decreasing the credit options for the less dependable pays.
Same as it ever was.
I suspect that they’re making money from float, too, PD. Maybe the message here is that the credit card business has flourished in what is actually a fairly narrow niche, bounded by liberal limits on interest rates and fees, prime rates that are higher above zero than they are now, a stock market that’s rising, certain levels of consumer spending, and predictable levels of risk.
This is a subject I’ve been meaning to post on for some time. Lots of businesses that seem solid have a business model that depends on highly specific circumstances over which they have little control. Fast food, for example, depends on a continuous flow of entry wage people. Voice over IP companies like Vonage are completely dependent on the pricing plans of carriers (abetted by the state regulatory boards). And so on.
“It can only be blamed for decreasing the credit options for the less dependable pays.”
Bingo.
And as much as I might admonish people to use this expensive credit wisely, it does not follow that it should not be available.
Is Congress that bone-headed that they think the market, the credit card issuers, will not react in a way to maintain their profitability?
Wait. I retract that rhetorical question….