The Cash or Credit Conundrum
Consumers rejoice. Floyd Norris has just penned a piece for the New York Times titled: “Rich and Poor Should Pay Same Price.”
Mr. Norris said, it seems “absurd to have a system that requires people who do not use credit to subsidize those who do. You know there is something wrong when a middle-class person can get a part of his purchases refunded by the bank, or can collect miles good for free airline tickets, while paying the same price as a poor person who can get none of those benefits.”
Mr. Norris is on to something important. He reminded me of an article I wrote in December 1985. I asked readers of my weekly column to consider some of the pitfalls of credit card purchasing. I noted that the big banks relentlessly promote credit card usage without adequately presenting the downside of credit card debt. I asked readers to imagine seeing a television presentation by an organization known as the “Cash Payment Fans of America.” The made-for-television production sponsored by this imaginary organization would ask viewers to consider some counter-marketing advice with the following declaration: “Credit Cards: Maybe You DO Want to Leave Home Without Them.”
Law Professor Adam J. Levitin, in a 2008 article in the Harvard Journal on Legislation reports: “On average, credit card transactions cost merchants six times as much as cash transactions and twice as much as checks or PIN-based debit card transactions.” Professor Levitin also notes that in 2006 “U.S. merchants paid nearly $57 billion to accept payment card transactions, which makes this component of the payments industry larger than the entire biotech industry, the music industry, the microprocessor industry, the electronic game industry, Hollywood box office sales, and worldwide venture capital investments.” These are stunning observations.
Alas, our collective imagination may not yet have evolved to the point where we can consider a day without VISA and MasterCard. The buy now, pay later credit card cabal knows few bounds. The credit card vendors want you to forget that using a credit card means you are borrowing money and that you must repay what you borrowed with interest. And, the interest rates can be staggering. Until recently credit card companies could charge annual percentage (APR) rates of up to 36 percent. And, the fine print in your credit card agreement might allow the “merchants of credit” to charge membership fees — described as “participation fees,” “maintenance fees,” or “activation fees” — on top of the interest fees. And don’t forget the “transaction fees,” for getting cash with your card, the fees for exceeding your credit limit or for making a late payment.
Ed Mierzwinski of USPIRG, a consumer watchdog organization, monitors the credit card racket and the slippery practices of banks that gouge consumers with a variety of fees. USPIRG notes that credit card issuers have tricked consumers by:
1. suddenly advancing long-standing regular due dates by five days or more to trick consumers into paying late;
2. arranging for due dates to fall on weekends and then claiming that bills received after 12 noon or 1 pm were late;
3. imposing late fees not only when bills were 30 days late, but as little as one minute or one day late; and,
4. raising the interest rate if your credit score declines.
Fortunately, some of the most egregious credit card abuses will be eliminated by legislation signed into law on May 22, 2009. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, while not perfect, will generally require 45-days advance notice of any rate increase or any other significant changes in account terms, up from 15 days, and card issuers will have to inform consumers of their right to cancel their card before rate increases or account changes take effect. Credit card statements must also be mailed out 21 days before they are due. The new law also limits some interest rate hikes for late payments.
Unfortunately, the problems associated with getting on the credit card treadmill are still overwhelming. Despite some modest legislative reforms, too many credit card issuers are still predators waiting to pounce. Representative Peter Welch (Vt.) and thirteen House co-sponsors have introduced the “Credit Card Interchange Fees Act of 2009.” This piece of legislation is designed to limit some of the fees credit card companies charge retailers and shed some light on the costs of credit card transactions to consumers and merchants.
Consumers can make some additional waves themselves by pretending they have joined “Cash Payment Fans of America” and for one week paying with cash for goods and services. The results could be illuminating.