Damage Caused by C.Card Rewards

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Registered: 03-18-2000
Damage Caused by C.Card Rewards
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Sat, 01-09-2010 - 10:47am

Assessing the Damage Caused by Card Rewards


http://www.nytimes.com/2010/01/09/your-money/credit-and-debit-cards/09money.html?hp


For several years, I’ve wondered whether my aggressive pursuit of credit card rewards made me a selfish consumer.


After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.


Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.


So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.


Andrew Martin’s article in The Times earlier this week noted how quickly the fees that merchants pay to accept certain debit cards had risen, too. That suggests a related question: Wouldn’t we all be better off if those of us who use plastic to earn free travel or cash back laid down our cards en masse?


So this week, I tried to figure out what would happen if we did just pay cash, or if there’s a better course of action for people who spend in a self-interested fashion but still have a conscience.


Quantifying the damage the cards cause merchants and the poor turns out to be quite difficult. Each card in your wallet can bear a wide range of costs, and retailers may pay different amounts to accept the same card. You can get a rough sense of your cards’ costs by punching in the first six numbers at truecostofcredit.com. (Me: This link has good info.)


Here’s one finding: Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies’ laserlike focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.


But cards undoubtedly also benefit retailers. People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.


As for the cost to consumers of all the card use, the National Retail Federation figures that the so-called interchange fees that their members pay to accept Visa and MasterCard alone cost an average of $427 an American household in 2008. Add in other fees the stores pay, plus costs for American Express and Discover, and that number could approach $600.


Bringing that cost down to zero means that everyone would have to quit cards cold turkey. That’s a tall order, given that the campaign wouldn’t work unless all Americans were in on it, especially those who earn well over that $600 each year in rewards.


Besides, cards offer other benefits besides rewards, like ease of budgeting and record keeping, allowing you to avoid checks by paying monthly bills with a card, the ability to dispute charges and the time savings in not having to refill your wallet at an A.T.M. as often (and cost savings in not paying A.T.M. fees).


But let’s pretend that a boycott is feasible. Then what? Some merchants would keep the money they no longer had to pay to the banks instead of lowering prices. Banks, having lost that income, might try to make it up by charging consumers higher fees.


There is no way for consumers to win. No way, that is, unless merchants started giving us all discounts for using cash instead of cards. Then, we could decide whether the card rewards were worth more to us than the discount that any given retailer was offering. Visa, MasterCard, American Express and Discover all say that this is perfectly fine (not to mention the retailers’ right by federal law); they allow cash discounts but prohibit surcharges for card use. (Me: Offered to pay cash at a furniture store if they gave me a discount. Instead they gave me a 10% for obtaining their store card. Which I paid off when I received the bill.)


But most merchants find this problematic for a variety of reasons. What difference is there, really, between a discount and a surcharge except semantics? And what retailer needs the risk of inadvertently breaking one of the rules and having to pay a fine or losing the ability to accept cards altogether?


Other retailers find it offensive on its face that they should have to offer a discount to people who use United States legal tender. How, they ask, did we come to a point where anyone would even be bold enough to suggest something so outrageous? Besides, it makes little sense to hand over money to people who are already paying cash without knowing how many card users will join them, if any.


Then, there are the rules in some states that require retailers to display both the cash and credit price on every single item. That might work for a gas station but be expensive for a big-box retailer. (Me: Gas stations do this where I live.)


John Rydman, co-owner of the Spec’s chain of wine and liquor stores in Texas, offers a 5 percent discount to customers who use cash or punch in their PINs when using their debit cards. He decided to mark every item in the store with two prices, even though the state didn’t require it. “We do it for the ease of the customer, because they can’t do the math generally,” he said.


You’d think his largess would satisfy every customer, but it does not. “Some people don’t get it and don’t like it,” he said. “They’re mad that nobody else does this to them.”


Indeed, this is the problem that gas stations can face, according to Jeff Lenard, a spokesman for NACS, an industry group that represents convenience stores and gas stations. If they introduce a cash discount, many card-using customers will drive on by, assuming that the station owner has in reality simply raised prices for people swiping plastic. If the station owner then capitulates and establishes a single price again, cash customers who were getting a deal before now think prices have gone up again, and they, too, find another place to fuel up.


Life might be simpler and more efficient if retailers could levy a surcharge that covers their costs to accept cards and let consumers figure out whether to pay it. But the card companies don’t allow that, and Congress hasn’t yet forced their hand, though this is now how things work in Australia (where some retailers charge excessive fees, alas).


So what’s an American consumer to do in the meantime? For help answering that, I turned to Dave Hanson. Mr. Hanson, a Spokane, Wash., resident, is one of the savviest card users I know. He also happens to have studied philosophy in graduate school at the University of Chicago and taught applied ethics at Gonzaga University.


He’s not cutting up his cards just yet. “The marginal effect of my individual use of plastic simply won’t impact the larger outcome,” he said. “The assumption that we ought to act in a way that we wish all of us would act ignores the fact that there is no mechanism by which we can ensure that we will all act that way. And we won’t.”


But shouldn’t some us take a stand anyway, if only to prove a point? “You wouldn’t get very far if you suggested that to people,” he said. “The sad fact of contemporary American economic culture is atomistic individualism. Anything else is decried as communism.”


Mr. Hanson suggested some other ideas. He uses cash for certain small purchases and at retailers where he has reason to believe that his card use will cause undue economic harm. He also supports politicians who aim to change banking practices that hurt merchants and the poor.


Indeed, if you’re worried about the social impact of your card use, you could donate some of your card rewards each year to nonprofit groups that help the economically disadvantaged.


Or, you could give up on cards and try to earn your rewards back by investing in Visa stock. Making money off the card system in that way might not be ethically consistent. But at least you’d still have a stake in what appears to be an inexorable march down the road toward a cashless society.

 


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iVillage Member
Registered: 11-17-2009
Sat, 01-09-2010 - 12:49pm

Seriously? Why must the people at NY Times try so desperately to accuse the rich of being evil (by shopping with their credit cards) and make "victims" out of poor people. This one is a REAL stretch.

What would happen to the economy if these "rich" and "affluent" people just stopped shopping for goods all together? I'll bet a lot of stores would close, people would lose their jobs, unemployment would go up even further, etc, etc., etc.

What a bunch of garbage! After all, don't we WANT the rich to spend their money?

iVillage Member
Registered: 08-30-2002
Sat, 01-09-2010 - 1:50pm

**What would happen to the economy if these "rich" and "affluent" people just stopped shopping for goods all together?**


LOL! Never going to happen. I smell red herring. Like rich people are going to start wearing last years fashions until they fall apart, quit eating out, quit going to entertainment venues, not "need" a new car before the old ones wheels fall off......Thanks for the chuckle on a Saturday morning.


I used to work for a nurseryman that hired Mexican immigrants that he worked like dogs, in 100+ degree heat for minimum wage and would get angry with them if they didn't RUN from one place to another at the nursery. He could care less that they rode bicycles to work, slept 16 to a 2 bedroom house, drank from the faucets and ate ramen from lunch, while he bought himself a new Quad cab



iVillage Member
Registered: 10-10-2008
Sat, 01-09-2010 - 5:43pm
IMAO the opinions sited seem to counter economic reality. The affluent spending allows employment. Learning the lessons of the Dole from Rome to Britain it is inconceivable that this is a serious work rather it seems to be a "what if".
Strict cash only systems have been tried before and failed.
xvra
Hornycomments.com for myspace adult comments
iVillage Member
Registered: 11-17-2009
Sat, 01-09-2010 - 6:44pm

What does any of this have to do with the price of tea in China??

Again, so are you claiming that using your credit card is somehow becoming successful on the backs of others?

The article was on using credit cards....not on how people treat their employees.

iVillage Member
Registered: 08-30-2002
Sat, 01-09-2010 - 7:00pm
Your comments, in general, about the huge favor the rich do for the rest of us peons, and the scraping gratitude we should feel for their


Avatar for ddnlj
iVillage Member
Registered: 03-26-2003
Mon, 01-11-2010 - 9:14am

Is it true now that there are only two classes of people - the rich and the poor?

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iVillage Member
Registered: 11-17-2009
Mon, 01-11-2010 - 9:38am

((If you're in the middle you're taken advantage of by those on either side of you. The middle class are the ones who prop up the rich AND the poor.))

I don't believe I am taken advantage of by either. Please explain your statement further. Also, please explain how the middle class "prop up" the rich AND the poor.

The way I see it, the rich prop up both the middle class and the poor. They are taxed the most heavily. The top 1% of wage earners pay 40% of all the taxes. The rich donate heavily to charities as well as employ many people.

The government, however, LOVES to take advantage of the rich. They will be taxed even more under Obama. They will pay for healthcare, war, and the out-of-control spending spree that the democrats can't seem to stop.

Obama "promised" that the middle class won't see their taxes raised one single dime. However, he has broken almost all of his campaign promises so far....so I don't feel too reassured that he won't raise my taxes.

iVillage Member
Registered: 03-18-2000
Mon, 01-11-2010 - 10:32am

Did you actually bother to read the article?


Where do the cash rewards I earn on my CC come from? Is it within the realm of possibility that those less credit worthy pay the higher interest rates to fund my cash rewards. Would prices in stores be less if they didn't pay CC companies X amount on every purchase?


No where in the article, if you'd read it, does it mention people should stop shopping.


This article is informative it contains facts & hypothesis it's not an attack on the wealthy.



 


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iVillage Member
Registered: 03-18-2000
Mon, 01-11-2010 - 10:44am

"Strict cash only systems have been tried before and failed."

Can you cite examples?

Credit cards haven't been in existence very long.

 


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iVillage Member
Registered: 03-18-2000
Mon, 01-11-2010 - 10:54am

Article & graph at......


http://www.tax.com/taxcom/taxblog.nsf/Permalink/MSUN-7YJ5KA?OpenDocument


http://economix.blogs.nytimes.com/2009/12/09/the-rich-pay-more-taxes-than-the-very-rich/


Over at tax.com, Martin A. Sullivan makes an interesting observation: While generally the United States personal income tax system is (by design) progressive, at the very top of the income ladder, it is actually regressive.


That is, the richest Americans pay a lower share of their incomes in taxes than the nearly richest Americans.


The following numbers, taken from the Internal Revenue Service, show that once a taxpayer earns about $2 million in annual income, the effective tax rate starts to fall.


DESCRIPTION


Americans earning more than $10 million a year, for example, pay an effective income tax rate of 19.7 percent on average, whereas those making $500,000 to $1 million a year pay an effective tax rate of 23.4 percent.


What is the main explanation for this regressivity at the top of the income scale? Three words: capital gains taxes.


Tax rates on capital gains — disproportionately received by the richest Americans — are lower than the top tax rates for ordinary income. (This has led Warren E. Buffett to observe that he pays a lower share of his income in taxes than his secretary does.) Capital-gains taxes are lower primarily in order to encourage long-term investment, and thereby make more capital available for American businesses, at least in theory.


But the resulting low tax rates for the very rich may prove to be problematic in the coming year, as a heavily indebted federal government seeks more revenues — especially from the wealthiest Americans.


Update: Mr. Sullivan further breaks down the composition of income for the rich and the very rich here.

 


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