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Credit Card Issuers Reimposing Annual Fees in Response to New Card Regs:

Some of the provisions of the the Credit Card Accountability Responsibility and Disclosure Act of 2009 are now effective. CEI's Hans Bader has an excellent summary of some of the unintended consequences of this "consumer protection" measure--well, actually, most of them, such as the return of annual fees, was fully predicted:

In response to the new law, some credit card companies are starting to charge annual fees on their credit cards to protect themselves against potential losses. Others will likely drop their rewards programs, or stop giving customers' percentage rebates on credit card purchases. For example, I and my wife get 3% to 5% back on most of our credit card purchases.

One of my co-workers just emailed me that since the new law, he will now be charged an annual fee on what he calls "the best reward card I ever found." It's the same card I use for many of my purchases.

The new law is supposed to "protect" cardholders. But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, (or have good enough credit that the credit card company would not likely have increased their interest rate anyway) to people with bad credit who have run up big balances.

If you make it harder for credit card companies to charge risky people higher rates than responsible people, they'll increase rates for everyone, or make it harder for people to get credit cards in the first place.

Let me stress one point: annual fees are a uniquely pernicious form of term re-pricing by credit card issuers to deal with limits on their ability to price other terms at market rates. First, they dampen market competition because once a consumer pays an annual fee he has essentially made a capital investment and is locked into that card for the year. And if he switches cards, he has to pay another annual fee. Second, they dampen competition because they are a tax on multiple-card holding. Right now card issuers compete for my business every single time I make a purchase and I can decide which card to use for every transaction. Third, consumer surveys over many decades show that annual fees are the least-liked term by consumers of all credit card terms. Finally, as Hans suggests, annual fees are imposed on all card holders, good and bad risks and responsible and irresponsible users alike. Thus, they have extremely questionable redistributional consequences among card users.

More regulations go into effect next year, so look for more offsetting changes to your credit cards: more annual fees, higher interest rates, less-generous rewards, higher penalty fees, lower credit lines, and less access to credit.

Perhaps someday somewhere a free lunch will be discovered, but it won't be with respect to this legislation.

Mark N. (www):
This looks like a good way for credit-card companies to shoot themselves in the foot. They offer rewards not only to compete with each other, but to compete with cash, debit, and checks; that's one reason the rewards are often higher for types of purchases where the competition with alternative forms of payments is fiercest, like for groceries and gas. And I suspect charging annual fees will lead to many outright cancellations of cards; I would certainly never pay one.
8.21.2009 8:59pm
vc_site:
The financial institutions stink.

I have a large balance on a credit card, but I have never missed a payment on a TARP institution credit card in the 5+ years that I have had the card. My interest rate skyrocketed in July 2009.

I have a TARP institution home equity line of credit. I have never missed a payment in the 4 years that I have had the line of credit. My line of credit was frozen with no prior warning in July 2009. I did get a letter after the fact that spewed lies about the date the freeze on the line of credit would take effect.

I have timely paid my other bills over the years, also.

Unfortunately, I know many people who are also having credit card interest rates hiked and lines of credit frozen.

I wish that the federal government would have let the financial institutions go bankrupt. Or if the government had to do something, it could have cut me a check!

BTW, my TARP institutions recently announced healthy profits.
8.21.2009 9:10pm
mga4 (mail) (www):
I wish the Democratic Party would repeal the bylaw that requires every person running for public office as a Democrat to be economically illiterate.
8.21.2009 9:11pm
PatHMV (mail) (www):
I oppose the federal regulations, but I have to say how much I dislike "rewards" cards. Those "rewards" come out of the fees charged by the cards to the merchants. Not only are they hidden from the consumer, but pretty much all of us pay for the "rewards" you and your wife get through the higher card processing fees the merchants must pay. I imagine they are also subsidized in part by the interest paid by those who don't or can't pay off their cards in full every month. I don't know that it makes a lot of good economic (or moral) sense to subsidize rewards to the relatively well-to-do with fees and interest charged to all, including the poorer card users.
8.21.2009 9:14pm
PatHMV (mail) (www):
By the way, here's a link which discusses the connection between merchant fees and rewards programs.

There's nothing for free in this world, as any good libertarian knows. Those rewards bonuses come out of somebody's pocket. Some is out of yours, but a good chunk comes from the rest of us, who use more sensible, non-rewards cards and debit cards. I REALLY dislike subsidizing your 5% cash back bonus.
8.21.2009 9:19pm
PatHMV (mail) (www):
By the way, as best I can tell, the specific interchange fee charged to a merchant for use of a particular card by a customer can vary based on the specific card used. In other words, "rewards" cards actually charge higher interchange fees than more basic cards. But the customer isn't told how much the interchange fee is, nor (of course) can the merchant charge more for the sale based on the interchange fee. And with the "honor all cards" requirement imposed by the Visa and Mastercard networks, the merchant must accept all cards bearing those logos, regardless of the interchange rate for any particular card.
8.21.2009 9:24pm
Mark N. (www):

There's nothing for free in this world, as any good libertarian knows. Those rewards bonuses come out of somebody's pocket.

In particular, many of them are kickbacks, since the rewards on reimbursable purchases by employees traveling on an expense account, or business purchases by small business owners, generally go to the spender personally, rather than back to the entity that paid the bills. They're somewhat like frequent-flyer miles in that respect.
8.21.2009 9:27pm
ShelbyC:

This looks like a good way for credit-card companies to shoot themselves in the foot. They offer rewards not only to compete with each other, but to compete with cash, debit, and checks; that's one reason the rewards are often higher for types of purchases where the competition with alternative forms of payments is fiercest, like for groceries and gas. And I suspect charging annual fees will lead to many outright cancellations of cards;


I'm not sure it's shooting themselves in the foot. How are they supposed to make money? If they can't make any money having you as a customer, they want you to cancel.
8.21.2009 9:33pm
Steve:
There are no "consequences" here, as if the legislation were the proximate cause. They're just using the legislation as an excuse to impose a term that competitive forces had induced them to get rid of.

Inevitably someone will reoffer a card with no annual fee, consumers will gravitate towards that issuer, and the majority will have to follow suit again. In the meantime I guess everyone can have fun saying "blame Obama for your annual fee!"
8.21.2009 9:43pm
PatHMV (mail) (www):
I just read Bader's article, and while I remain opposed, as a matter of principle, to the regulation, I just have little sympathy for those who will be forced to pay the annual fee, etc. It sure looks to me like the "pay off the balance every month" folks have been getting a nice free ride for some time now. Free use of money for 30 days plus cash back? Sweet! The only reason credit card companies could afford to do that is the merchant fees and the interest payments from those who don't pay the balance off every month. They've been subsidized by the rest of us. If they actually have to start paying for what they've been getting for free, I'm not losing any sleep at night.
8.21.2009 9:51pm
ShelbyC:
Steve:

There are no "consequences" here, as if the legislation were the proximate cause. They're just using the legislation as an excuse to impose a term that competitive forces had induced them to get rid of.


But Steve, the competitive forces haven't changed, have they? What's changed is that the cards have to move from an equlibrium price where the S&D curves were based on the risk of being a sucker, to one where the fees are more straightforward. So of course the prices are going to go up for the non-suckers.
8.21.2009 9:57pm
byomtov (mail):
Gee. If you don't like paying credit card fees you could always just pay cash for purchases.
8.21.2009 10:01pm
Steve:
So of course the prices are going to go up for the non-suckers.

That's a different issue from the annual fees. They could increase their margins without re-instituting an annual fee.

The argument that consumer protection measures are a tax on non-suckers is standard libertarian stuff that is intellectually valid, but not something to be taken seriously as a political argument.
8.21.2009 10:07pm
Psalm91 (mail):
Look, Mr. Bader is a CEI corporate lobbyist paid very well to write anti-regulatory articles. This stuff is entitled to no respect in any academic or empirical context. Until he demonstrates that absent regulation there would be no predatory conduct by banks (overdraft fees) and credit card companies, this commentary is just pure apologetic ideology.
8.21.2009 10:10pm
Curt Fischer:
byomtov: What a thought! If only you had piped up when people started complaining about "predatory" lenders...
8.21.2009 10:10pm
PatHMV (mail) (www):
byomtov... even if you pay cash, you're still helping to pay for card use; the merchants aren't allowed to charge one price for cash and a different price for credit, even though they have to pay upwards of 2% (or more) on every credit card purchase.

Oh, and even though all credit issuing organizations can all operate together through Visa and Mastercard to set the rules for merchant participation, anti-trust laws prohibit the merchants from organizing to collectively negotiate the terms of the fees charged. Large merchants like Amazon can negotiate special deals for themselves, but small merchants can't. They either take credit cards, and abide by ALL the rules of Visa/MC (including paying whatever merchant fees they decide to impose for particular cards, accepting all cards with those logos, and not charging less for cash), or they forgo accepting credit cards altogether.
8.21.2009 10:12pm
Angus:
But Steve, the competitive forces haven't changed, have they?
Actually, they kinda have. Smart credit card issuers have used financial turmoil post-9/11 and in the current financial crisis to swallow up competitors. I currently have 4 Visa/MC cards. Ten years ago they were all issued by different banks. I still have the same four cards, but now three of them are JPMorganChase.
8.21.2009 10:13pm
EPluribusMoney (mail):
It sure looks to me like the "pay off the balance every month" folks have been getting a nice free ride for some time now. Free use of money for 30 days plus cash back? Sweet!

I don't think so. Merchant pays about 3%, I get back 1%. No one needs to subsidize that. Except maybe people who pay by cash or check.
8.21.2009 10:22pm
PatHMV (mail) (www):
EPluribusMoney, where does the merchant get the 3% he pays? From you and me, in all our other purchases. That's not just the cash and check payers, but also those who use debit cards and non-rewards cards. As I said, as best I can tell, rewards cards charge higher interchange rates than non-rewards cards. But the merchant can't charge different prices to their customers. So we all subsidize the free ride of those who heretofore have not been paying a penny for using other people's money free for a whole month, plus getting cash back.
8.21.2009 10:27pm
PatHMV (mail) (www):
Yeah, if the merchant were specifically charging YOU 3% and the card company was giving you back 1% out of that, then sure, no subsidy. But that's not how it works. The interchange rate varies by card issuer, and merchants, to be competitive, may only be able to charge, say, 2% on all cards (because some issuers charge 1% interchange rate and others charge 3%). And Zywicki reports he and his wife get 3 to 5% back, not 1%.
8.21.2009 10:31pm
PlugInMonster:
If my credit card issuer suddenly decides to impose an annual fee on me, I'm taking my freeloading elsewhere!
8.21.2009 10:36pm
Gramarye:
Ironically, Todd and I agree on the economic effects of the new regulations, but some of the the things he would call bugs, I'd call features:

(1) A "tax on multiple card-holding." I'll leave aside the point that taxes go to the government and, TARP notwithstanding, the government does not actually own credit card companies nor receive this money. More to the point: a disincentive to be walking around with eight cards and the ability to leverage yourself to 100%+ of your annual salary in unsecured debt on the spot doesn't sound overly frightening to me. I sometimes look in my own wallet and wonder what on Earth I'm doing with three general credit cards and two store credit cards.

(2) Lower credit lines. Same concept, including the effective "lower credit line" of zero (i.e., some consumers being turned down for cards altogether when they might have been approved under the old regime).

As for the return of annual fees: if it's true (as seems plausible) that "consumer surveys over many decades show that annual fees are the least-liked term by consumers of all credit card terms," then competitive pressures should keep at least some credit card companies--the more competitive ones--from imposing such fees, since they know that that's the most likely to convince consumers with exit options to exercise those options (i.e., switching to companies that don't impose such fees).
8.21.2009 10:43pm
Soronel Haetir (mail):
Pat,

You are absolutely right that different cards charge the merchant different rates. I was amazed at how many card issuers there are when I was shopping for credit processing services. That is one area you have missed in your discussion though, the processing market is very competitive. Many debit transactions are actually worse from a merchant standpoint unless your typical transaction is over $25 or so. And that figure keeps changing as well. For my liquor store the typical purchase is just under the cutoff that would make switching to debit-dominated processing worthwhile.

The processing market may be competitive, but the terms are variant enough that it is also difficult to make apples to apples comparison.
8.21.2009 10:48pm
Chem_geek:
Y'know, it's sad; it's like the bankers aren't even trying to come up with new and inventive ways to shaft their customers anymore. Instead, they're just going to their old armamentarium.
8.21.2009 10:54pm
neurodoc:
It sure looks to me like the "pay off the balance every month" folks have been getting a nice free ride for some time now. Free use of money for 30 days plus cash back? Sweet! The only reason credit card companies could afford to do that is the merchant fees and the interest payments from those who don't pay the balance off every month. They've been subsidized by the rest of us. If they actually have to start paying for what they've been getting for free, I'm not losing any sleep at night.
That's me, one of the "pay off the balance every month" folks, someone for whom it is anathema to pay a penny of credit card fees, save perhaps for an annual fee, and only then when I expect to come out ahead on the reward program (e.g., $35 annual fee for Starwood Amex card). I have no misgivings about takng advantage of the float opportunities, nor the rewards that come with use of several different credit cards. Should I feel some twinge of guilt for any of this?

I'm sure the credit card companies don't profit nearly as much on my business as they do on that of a great many others. They know, though, whether I result in red rather than black ink for them, and they are free to cut me off at any time if it is the former (red) rather than the latter (black). So by using credit cards, and credit generally, in the way I do, I am somehow exploiting others, be they merchants who accept the cards for goods and/or services or other cardholders who pay late, exceed their credit limits, carry balances, or do the other things that are more profitable for the credit card companies?

I am getting less in rewards than I did a couple of years ago because of fewer miles/points per $1 charged (last month went from 5 Chase points per $1 on gas, food and pharmacy to only 3) and less favorable redemption schedules for points (e.g., hotel stays) and frequent flyer miles. And I will be sorry to get still less in the future, if that's what happens, but my response will simply be to reassess and adjust so as to still get the best deals I can find. That's the rational thing to do, isn't it, and other cardholders are free to do exactly the same. (BTW, I am not a social Darwinian, and I am against predatory financial practices of the sort these consumer protection measures are meant to address. I think we would be collectively more secure and better off if people were not so greatly encouraged and "enabled" to spend beyond their means.)
8.22.2009 12:12am
ShelbyC:

The argument that consumer protection measures are a tax on non-suckers is standard libertarian stuff that is intellectually valid, but not something to be taken seriously as a political argument.


Of course not. The whole point was to prevent the companies from milking the suckers, but to do that you have to shift the costs to the non-suckers.
8.22.2009 12:26am
Obvious (mail):
Gee...if only the government would pass some regulations to help the credit card consumers...
8.22.2009 12:38am
Dan Weber (www):
I lost all respect for Hans Bader when I left a comment respectfully correcting one of his articles and it stayed in "your comment is awaiting approval by the blog owner" status for a week before I gave up.

I have 1 card I pay an annual fee on, and I was planning on killing it anyway. If any of my other cards try imposing an annual fee, I'm kicking them to the curb.
8.22.2009 12:50am
Lib (mail):
PatHMV,
the merchants aren't allowed to charge one price for cash and a different price for credit
At least in California, it appears that merchants can offer a "cash discount" and a couple nearby gas stations do this. Small merchants may be willing to do so as well on a case by case basis. I think though that if only one price is shown, it must not reflect a cash discount.
8.22.2009 1:28am
Cornellian (mail):

The new law arbitrarily limits credit card companies' ability to increase rates on credit card balances, even when a cardholder's balance has been rapidly increasing


I'm instantly suspicious of any article that makes a claim like this without ever explaining the nature of the "arbitrary limit." Almost invariably, the reason the author isn't explaining it is that he knows if he does, you won't buy his argument.
8.22.2009 1:30am
Mike& (mail) (www):
So people like me (who pay off our balances each month) won't be subsidized by the poor and ignorant? People like me will actually be required to pay our own freight? Sounds OK to me. More than OK - sounds downright moral.
8.22.2009 1:46am
einhverfr (mail) (www):
Pat;

I completely sympathize with your points. One reform I think that needs to go through is that processors should only be able to charge merchants a single fee schedule on the network. I.e. one discount rate plus one transaction rate.

Another thing I have seen small merchants do is request (but not require) customers to pay for small purchases with cash. "Would you be willing to pay for that with cash today?" This isn't a minimum purchase requirement and I don't think it goes against the merchant agreement.

It's been a while since I read a merchant agreement but I expect there are probably a number of other ways to encourage folks to pay with cash.
8.22.2009 2:10am
GatoRat:
Lib is correct. In many (most?) states, merchants can have different prices for cash and credit, but must advertise both, the higher of the two or, in my state, make the cash price glaringly obvious. A local gas station got in big trouble for that (at night the tiny word "cash" couldn't be seen; their new sign displays both "CREDIT" and "CASH" prices with the labels in gargantuan letters.)
8.22.2009 2:20am
PatHMV (mail) (www):
neurodoc... Yes, you're milking the system, at my expense. I could care less if you profit at the card-issuer's expense; I use a debit card exclusively, so I wouldn't be terribly affected by that. But you're not getting the bank's money back in your reward programs, you're getting money ultimately from the merchant, who gets it from me.

And yes, you're exploiting them, because Visa/MC is exploiting the merchants. If the merchant wants to take credit cards at all, they have to agree to pay whatever interchange rate is assessed by the card issuer (though I presume there's at least some kind of max limit). The card issuers can functionally negotiate collectively through the Visa network itself, which sets the terms that merchants must abide by in order to accept the cards. But anti-trust law prohibits the ability of merchants to collectively bargain, en masse, with Visa/MC. If the playing field were level, and the merchants could form some sort of merchant's association (or several; perhaps restaurants collectively might want to negotiate together) to bargain with Visa/MC for the terms applicable to all of their participating member merchants, then I'd say fine, go right ahead. But the law currently rigs the game in favor of Visa/MC and the card issuers. I don't particularly care for the fix Congress has passed, but the system was in need of some kind of fix because of the government favoritism currently shown to Visa/MC and its de facto monopoly power.
8.22.2009 2:27am
Guest12345:
Heh. Sorry, but nobody who uses a card is subsidizing anyone else. Do you honestly think that any card transaction ever costs the banks or the card systems money? The only difference is that people who carry a balance are more profitable.
8.22.2009 3:27am
lonetown (mail):
Geez, some people are just hard to please. First they excoriate the credit card companies for making credit to easy to get. Called them every name in the books. Vilified them and their families for, you know, lending money to essentially deadbeats.

Now, we're going to call then every name in the books for tightening up on credit. No one this industry needs huge bonuses.
8.22.2009 6:42am
Soronel Haetir (mail):
Pat,

The rates are set at the time the contract is entered, you as a merchant know exactly how much you are going to be charged for any particular card. The rates are subject to change with little notice however, but if they do the merchant is then free to take their business elsewhere, the contract only holds them to the processor so long as the rates don't change.

I don't know if it is enforceable, but the merchant agreement here forbids differential pricing or minimum purchase amounts. Maximum purchases are however not forbidden (not that any purchase has been rejected at my liquor store for that reason).

I'm certain that plenty of merchants simply ignore the agreement and hope it doesn't get enforced.
8.22.2009 7:56am
smitty1e:
Great post, but uniquely pernicious?.
It's a business. As long as the rules are laid down a priori, why the objection?
8.22.2009 8:56am
fishbane (mail):
But what it really does is transfer wealth from people who pay off their credit card bills at the end of every month, [...] to people with bad credit who have run up big balances.

Unlike before, when wealth was transfered from people who carried a balance to people who didn't.

Personally, I would be fine with whatever CC companies wished to charge whomever, if they weren't allowed to force retailers to hide transaction fees from customers, raising the prices on cash users.
8.22.2009 10:34am
trotsky (mail):
Whatever the fine print in a credit-card contract might say, retroactively increasing interest rates at the bank's whim is hardly a reasonable business practice. The new law includes the oppressive demand from jackbooted bank regulators that banks give 45 days notice before changing an interest rate and allow cardholders the option to freeze their account and pay off their balance at the old rate. Shocking, truly shocking.

And of course, these rules were first drafted in 2008 by those economic illiterates at the Federal Reserve. All Congress did was speed up implementation a year or so.
8.22.2009 10:58am
Soronel Haetir (mail):
Of course, I've seen plenty of people saying they get obviously backdated letters informing them of interest rate and limit changes. It doesn't do much good to get an unpostmarked letter dated June 2nd if you don't get it until July 20.
8.22.2009 11:23am
trotsky (mail):
Oh, and from today's NY Times:


Irritated by the changes? Inclined to take your business elsewhere now? This is exactly the right instinct, since plenty of people can still get a better deal from a different card. Fee-free balance transfers still exist. And banks have barely touched the most lucrative rewards programs — and wouldn't dare fiddle too much given the revenue they generate.
8.22.2009 11:24am
markH (mail):

In response to the new law decreases in credit card usage and increases in default rates, some credit card companies are starting to charge annual fees on their credit cards...
8.22.2009 11:34am
n_shapero (mail):

===============================================
Mark N said:
many of them are kickbacks, since the rewards on reimbursable purchases by employees traveling on an expense account, or business purchases by small business owners, generally go to the spender personally, rather than back to the entity that paid the bills. They're somewhat like frequent-flyer miles in that respect.
===============================================

I don't know what companies you've worked for, but every company I've ever worked for where I had company paid travel, the company (not the employee) received the benefit of the frequent flyer miles.
8.22.2009 11:59am
n_shapero (mail):

==========================================
Lib said to PatHMV,
the merchants aren't allowed to charge one price for cash and a different price for credit
At least in California, it appears that merchants can offer a "cash discount" and a couple nearby gas stations do this. Small merchants may be willing to do so as well on a case by case basis. I think though that if only one price is shown, it must not reflect a cash discount.
==========================================

Where in California? The only cases I've seen here in Los Angeles are the gas stations that do NOT accept credit cards (cash only, no checks or debit cards) and SOME of those charge a few cents less per gallon for gasoline. There USED to be a rule (at least in LA) that allowed gas stations to charge different amounts for cash and credit transactions, but that hasn't been the case (in Los Angeles, at least) for several years (I've forgotten when it stopped at all the chain stations, it's been that many years).
8.22.2009 12:09pm
Guestie:
n_shapero: I've never personally known anyone who did not personally bank frequent flyer miles flown on company travel. I believe that the justice department formerly required its employees to use frequent flyer miles gained from government travel on government travel (typically used to upgrade to first class), but it's my understanding that the vast majority of employers don't receive or otherwise benefit from their employees' frequent flyer miles.
8.22.2009 12:20pm
Cheap Energy (mail):
I'm one of those "pay in full every month" folks. I carry two cards. Both are no fee, one has 1% cash-back, one has 2% cash-back. Almost everything goes on the cards. I charge a couple of thousand dollars most months.

Far from being a "free rider", I think I'm a high volume client, and support the very expensive network that provides extremely convenient, nearly ubiquitous, non-cash point-of-sale transaction services. The availability of this network is worth quite a bit - in convenience, and reduced costs - to a very wide cross section of the population.

There are however two services involved here. Credit/debit cards both provide the convenient point-of-sale transaction. In addition, credit cards provide available (perhaps too easily available)longer term credit. The rates are higher than I choose to pay, but others presumable find it the most attractive option available.

I don't see any legitimate role for government here, other than to enforce contracts. (One might make the case that the contracts have to be understandable to be legitimate.) Credit in not a right. "Affordable" interest rates are not a right.

I'd like to see as much competition as possible - among card issues, and networks. Competition - not regulation - will lead to the best service and the lowest prices. Vendors should be free to make their offers, and people should be free to choose among the services on offer.
8.22.2009 12:48pm
Jmaie (mail):
Number of people forced to sign up for credit cards - 0

Number of people forced to carry balances on those cards - 0

Number of merchants required to accept credit cards - 0
8.22.2009 1:14pm
byomtov (mail):
even if you pay cash, you're still helping to pay for card use; the merchants aren't allowed to charge one price for cash and a different price for credit, even though they have to pay upwards of 2% (or more) on every credit card purchase.

PatHMV,

True. My comment was merely directed at complaints about paying credit card fees.

Curt Fischer,

Sorry I don't always write the comments you would like me to write. I know it's disappointing, but that's the way life is sometimes.
8.22.2009 2:12pm
einhverfr (mail) (www):
Soronel:

Many more merchants skirt around the edges of the agreement.

For example, "We will honor your card if you need us to, but we would appreciate cash payments since this is under $10" doesn't seem at odds with the letter of the agreement.
8.22.2009 2:22pm
Soronel Haetir (mail):
Thankfully as a merchant I'm in a business that people want to be able to come back to the store. I would personally be much more worried if fraud were a major concern. Merchants are pretty much stuck when it comes to fraudulent purchases.

A sign of how much people want to come in, for all of last year I had one unfulfilled bounced check totaling about $50. I've been offered insurance against that, but it simply isn't worth it in my case. I did have one person try a rather crude out of state fraud but it was so rediculous as to not be tempting. Reported it and went on with business.
8.22.2009 2:37pm
neurodoc:
PatHMV, do you fly, whether for business or pleasure, on carriers that give and redeem frequent flyer miles? I do, flying enough on one to be in their top tier elite, which brings me free tickets (e.g., two free in first class from US to Australia), upgrades, waiver of various fees, etc., and almost always at very low costs per miles flown, taking advantage of bonus offers when they come along, e.g., double elite qualifying and/or redeemable miles. So, do you resent me and others like me who are getting a much better return on our travel dollars than you and the majority of people do? Because the airlines must offer me these enticements to get my business, do you think that I am increasing the price to others, who would enjoy cheaper travel if I would only selflessly forego the extras I have come to expect?

It would be far easier for you to imitate my credit card behavior, especially the pay-in-full-each-month-carry-no-balances, than play that frequent flyer game that I play. To the extent that you can/could, though, I recommend both to you, and think you should feel no guilt about doing either of these.
8.22.2009 4:35pm
Dan Simon (mail) (www):
Prof. Zywicki's argument is economically illiterate nonsense. If credit card companies don't charge annual fees today, it's because competitive pressures and customer preferences don't allow them to, not because their profits from other parts of the business somehow allow them to be nicer to their customers that way. And now that this legislation has passed, credit card companies will be under the same competitive pressures, and faced with the same customer preferences, and they will look for revenue elsewhere, as they always have.

But then, this is the same Prof. Zywicki who, during the height of the credit bubble, was responsible for such gems of insight as, "There is no indication that the increased competitiveness of lending to lower-income households has changed the household borrowing budget constraint...the growth in subprime lending is not creating overwhelming debt burdens for low-income households. In fact, by expanding home ownership, subprime lending has made it possible for low-income houesholds to access home equity credit, which has a lower interest rate than other credit alternatives." Also, "it seems to me that we want to encourage individuals to minimize their principal payments on their houses". Given his past analyses, I have no idea why anyone would listen to his opinion on credit markets now.
8.22.2009 6:05pm
jjohnshade (mail):
"once a consumer pays an annual fee he has essentially made a capital investment and is locked into that card for the year."

Why isn't this a classic example of the sunk-cost fallacy?
8.22.2009 6:38pm
Shane:

Why isn't this a classic example of the sunk-cost fallacy?


It is. But it doesn't mean that consumers won't behave like this.

On the issue at hand, I'm with PatHMV and a few others who recognize that these "unintended consequences" to the new legislation, while it worsens my terms as a cardholder, is certainly more fair than before. I don't really consider it "redistribution" when we're actually just correcting redistribution that has been there for as long as we can remember. Or at least as long as I can remember - I'm in my mid-20's.

I think of this as a restaurant transitioning from a buffet pricing model to a more traditional per-dish model for menu pricing - there were some people who really benefited under the old system, but there's no reason to believe that they were ENTITLED to it forever.
8.22.2009 7:50pm
Careless:

"There is no indication that the increased competitiveness of lending to lower-income households has changed the household borrowing budget constraint...the growth in subprime lending is not creating overwhelming debt burdens for low-income households. In fact, by expanding home ownership, subprime lending has made it possible for low-income houesholds to access home equity credit, which has a lower interest rate than other credit alternatives." Also, "it seems to me that we want to encourage individuals to minimize their principal payments on their houses"

Ouch.
8.22.2009 10:08pm
Mike& (mail) (www):
Wow! More from Zywicki:
So social engineers may want to be careful about "saving" the poor from the scourge of subprime lending, because by restricting those choices they are likely just pushing them into even less-favorable credit options.

I think Todd should stop posting about economic subjects - especially economics as it relates to helping the poor.

I am quite certain the the millions of poor people with ruined credit who are being foreclosed against would have been better off had people like Zywicki encouraging them to take on subprime loans.
8.22.2009 10:23pm
PlugInMonster:
I'd like wingnuts to explain to me why $20/year is so painful for the privilege of having free 30-day loans.
8.23.2009 2:15am
Unwonted Pseudonym:
PatHMV:

Yes, you're milking the system, at my expense. I could care less if you profit at the card-issuer's expense; I use a debit card exclusively, so I wouldn't be terribly affected by that. But you're not getting the bank's money back in your reward programs, you're getting money ultimately from the merchant, who gets it from me.


It doesn't matter who the rewards program comes from, I'm not "milking the system" unfairly. The merchant pays that transaction fee because if the merchant doesn't, I will take my business elsewhere. He pays the fee--and my reward--because the alternative is for him to lose my business entirely. Even if I grant that the playing field is "stacked" against merchants in their negotiating, credit card users can concede to the economic argument without buying into your moral opprobrium.

PlugInMonster:
I'd like wingnuts to explain to me why $20/year is so painful for the privilege of having free 30-day loans.

Because at the point one is paying $20 a year for them, the loans are not free. (Indeed, if I carry a $100 average daily balance each month, it's a pretty poor interest rate.)

Of course, I'm not a wingnut, just someone with a grasp of basic math. So I'll be charitable, and assume that you were not completely unaware of the obvious, and wanted to know what the "wingnut" response would be for amusement value?
8.23.2009 3:25am
PatHMV (mail) (www):
Neruodoc... I don't need to emulate your practices. I don't use a credit card at all, just a debit card. The amount comes straight from my checking account, right away. I don't see the need to try to game the system at other's expense, just for a few beads and trinkets in "rewards."

Unwonted Pseudonym... Yes, you are. You're milking the system. It's a nice gig, and you're certainly free to take advantage of the system paid for primarily by others. But it's still milking the system. The merchant would LIKE to refuse to pay the higher fee on your "reward" card, while taking other cards, but he can't. Merchants aren't allowed to pick and choose. Your "rewards" card is using HIS money to attract you to their card. That's not right.
8.23.2009 10:16am
Tatil:
Credit card companies have been reducing my rewards and increasing my fees long before this bill.

Are you guys saying that merchants are not charged the same fees by every VISA card? Do they have no idea the level of fees they could be charged when they interact with different cards from the same network? Are you also saying some credit card companies are charging merchants less than the max they could even though this behavior would not bring them any more business from either the merchants or shoppers? Even if the first two questions is answered in the affirmative (and whose fault would that be? I'd say the merchants for signing such agreements), I doubt the answer could be "Yes" for the third one. It seems you guys have bad info.

I doubt
8.23.2009 2:07pm
neurodoc:
PatHMV:...I don't see the need to try to game the system at other's expense, just for a few beads and trinkets in "rewards."
You have said words to this same effect several times now, but you have yet to explain at other's expense.

Using the credit opportunities one has to realize their maximum benefit is the economically rational thing to do, and it involves taking advantage of no one else (at other's expense). You can't, or at least you haven't, explained how I and others of the pay-in-full-each-month persuasion are taking unfair, if indeed any, advantage of third parties. Why should the deals we individually strike with credit card issuers, who have all the bargaining power, is about anything more than a two-party matter, one between us and the credit card issuers, with no referrence to or bearing upon the deals those credit card issuers strike with other parties, that is other credit card users and merchants?

Again, I think the government should regulate so as to protect the unwary from predatory financial practices, and to protect the rest of us from the pernicious side-effects of such practices. Those of us who avoid fees and collect those "beads and trinkets" are not behaving in any other than honorable way through our use of credit cards. If you feel better using a debit card rather than a charge or credit card, then do so, but don't imagine that you are doing something more virtuous than others, and be advised that debit cards are not so good a deal IMO.
8.23.2009 2:54pm
neurodoc:
Tatil, not all VISA (or MC) cards are the same from a merchant's point of view, since some cost them more/less than others. A complicated business that I am not the one to explain.
8.23.2009 3:00pm
David M. Nieporent (www):
I'd like wingnuts to explain to me why $20/year is so painful for the privilege of having free 30-day loans.
I don't think "free" means what you think it means.
8.23.2009 5:54pm
Sammy Finkelman (mail):
It is probably possible, in the case of someone being charged an annual fee, especially with a card that not everybody gets charged a fee, to call up the fdredit card company and simply ask for the fee to be waived. But you may have to do that every year.

I'm surprised Todd Zywicki doesn't know it. Just have your friend call up the credit card company and sask for the fee to be waived. It is probably not even necessary to threaten to cancel the card.

By the way I think even under the old law, credit card companies were requiredto warn you of interest rate increases outside of the current contract terms, and give you an opportunity to decline and pay off the balance at the old rate. One caveat was/is that you must not use that card in any way, even an automatic recurring balance that you neglected to cancel, or the new rate goes into effect.

The same thing actually also applies to an attempt to use an annual fee. You can decline that too, and still keep the card without using it, until maybe the day comes when the credit card company wants your business and offers to remove the fee (well maybe not now - credit card companies are getting rid of completely inactive cards that don't even at least exist as overdraft protection lines of credit)
8.23.2009 8:10pm
Tatil:
OK, let's assume that:

- Some cards charge merchants higher fees and the retailers have no control over it

That means some cards charge merchants less than what they could (in return for no additional business from the merchants and fewer shoppers using their cards due to the lack of reward or loyalty programs. This does not make any business sense, but let's assume for a moment that this is true.)

Combined, these assumptions mean if I use a card without any reward programs, the merchants earn more money. The lower costs result in a bigger profit for them, but they do not share any of that cost savings with the shopper. Why should a consumer donate money to the bottom line of a retailer? I don't see any altruism here. Donate your hard earned money to charity instead.
8.23.2009 8:50pm
Dan Weber (www):
To follow up on my previous post, I called fully intending to cancel my card with an annual fee, and they waived the fee. It wasn't an idle threat since I really would have canceled.

I've negotiated cash-discounts with major vendors when doing large purchases via check instead of credit card. Credit cards may say you cannot charge a premium for using the card, but they can offer discounts to cash (and check) users.

I'm open to the argument that credit cards are pernicious towards the vendor. But I'm not going to unilaterally disarm and give up the rewards I get to fix the system.
8.23.2009 8:52pm
Poor Credit Loans (mail) (www):
getting a loan is your choice.
8.24.2009 4:12am

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