Would you change your use of credit cards if you discovered the “rewards” are perceived income and not actual income?  What if credit debt was enslaving your nation?  What if both were true… what would you do?

“There is that maketh himself rich, yet hath nothing: there is that maketh himself poor, yet hath great riches.” –Proverbs 13:7

Two Predominately Popular Views

The debate over the use of credit cards seems to be divided into two polar camps – Camp Rewards and Camp Avoid.  The following is a basic description of both camps and a summary of the view held by each.

• Camp Rewards – These folks use credit cards to take advantage of the rewards programs they offer.  They tend to use their cards for most purchases leaving their own money in the bank to draw interest all month, then pay the cards off each billing cycle thus evading any finance charges.  This group rarely sees credit card use as a moral issue and tends to believe that consumers should use credit cards only if they do not have enough personal responsibility to operate within the guidelines of the rewards rules.
• Camp Avoid – These campers avoid the use of credit cards like the plague.  They may or may not have been raked over the coals themselves and usually have a moral conviction that the business practices of credit card banks are abhorrent and may even view their abstinence as a form of protest.  They traditionally believe that using credit cards encourages over spending by creating a dangerous disconnect between themselves and their money.

Having recently shredded and closed all my credit card accounts I am firmly entrenched in Camp Avoid, have waged war on credit card banks, and would like to challenge the members of Camp Rewards to jump ship by providing them with a different perspective on the subject of credit card rewards.

Regardless of the camp you’re in… if you need someone to convince you that the business practices of credit card companies are immoral, then you may want to quit reading now – I cannot help you.  With that in mind, this article will not work to convince anyone of the immorality of the industry but will assume readers already aware of an obvious truth.

Instead… I will set out to convince those dancing the dance of credit card rewards to cut ties with the industry and come join Camp Avoid!  I am not setting out to discredit or dishonor those who use credit to get rewards… but rather am imploring you to take a step back and consider the bigger picture.  I do not judge anyone… but I do live to persuade others to choose the BEST option!

If anyone has been able to fend off the strategies of the credit card banks, they can consider themselves lucky.  “Convenience users” – a term used to describe card users who pay off their balance in full each month—is at an all-time low, representing only 37.4% of the credit-card using population.”  *source from 2004, I’m sure this number is much lower now.

A Different Perspective…

What if the rewards were only perceived and not actual?

Credit card companies would have us to believe that their credit card rewards are ultimately a way to increase our bottom line.  In fact, they spend billions of dollars annually on clever marketing campaigns intended to make us believe we need their “rewards.”

Should we trust their marketing campaigns?  Good question.  I’ll let you form your own opinions on their level of trustworthiness.

Let’s break down a few numbers, read a few quotes, and consider what all is involved concerning credit charges and how they effect the pricing of goods and services in our current economy.

Rewards 101 – Interchange Fees

Interchange fees are fees that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa and MasterCard for purchases.

Interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.

In recent years, interchange fees have become a controversial issue, the subject of regulatory and antitrust investigations. Only very large merchants such as Wal-Mart might have the leverage to negotiate fee prices, and while many merchants prefer cash or PIN-based debit cards, most cannot realistically refuse to accept the major bankcard association-branded cards. This holds true even when their interchange-driven fees exceed their profit margins.  Some countries have established significantly lower interchange fees. The fees are also the subject of several ongoing lawsuits in the United States.  –Wikipedia

Because merchants have no control over the fees they are charged, and because fees in the U. S. are the highest of any country in the world – high costs must be passed on to the consumer.

Interchange fees affect the market by raising the cost of consumer goods and services by at least enough to cover the 2% they cost merchants.

Those who have been following our Debt Free Adventure no that we also boycott Walmart and choose instead to shop at local businesses whenever possible.

“Credit card companies typically levy more than $2 in fees for every $100 consumers charge at American businesses… but credit card companies rules prohibit merchants telling consumers about these fees at the point of purchase.”  *source

Price increases for all…

Given the information above we see that interchange fees cost users of debit and cash along with the users of credit.

Each year, in addition to interest, late fees, over-the-limit charges and other fees charged by credit card companies and their banks, consumers pay billions of dollars in hidden fees that never appear on their monthly statements. These hidden charges are called credit card “interchange fees” also known as “swipe fees.”

Major organizations like The National Retail Federation (NRF), National Grocers Association, National Restaurant Association, and advocacy groups such as Americans for Financial Reform have come out in favor of reforming credit card interchange fees.

NRF Senior Vice President and General Counsel Mallory Duncan says, “…banks are driving prices of consumer goods higher by charging merchants more and more for credit card usage. The merchants have to pass the cost back to the consumer, so everyone—not just the people who use credit cards but those who pay cash or by check, too—pays more.” *source

It gets worse.

• Merchants are legally disallowed, per the terms of their merchant agreements, to disclose this fee information to consumers.
• Merchants are charged a flat fee and a percentage on every credit purchase you make but cannot legally require a certain amount per transaction for use of credit (though some do so anyway.) In other words, per their agreement with the credit card banks, they cannot require a minimum purchase of say $20 for the use of a credit card to make a purchase.
• Jim of Bargaineering.com recently reported his findings of how credit card rewards points translate into cash.  He discovered how the equation credit card banks use is not: [1 point = 1 unit cash].  Instead, after looking into it a bit further Jim found that a more accurate equation would be: [1 point = 0.65 unit cash].  He also found the equation to be unique to each bank… each using different rates of conversion – some higher, some lower.

Unless you are much smarter than I am, the only conclusion to be made is that by swiping our cards we are essentially supporting the construction the infrastructure and industry that raises our prices.  The same industry that is oppressing the poor and exploiting the vulnerable.

“Home Depot pays more in interchange fees than for employee health care.”  *source

So we don’t really make money from rewards… using credit cards actually costs us more money then we could ever make back.  If it were not so credit card banks would not entice with offers to use rewards.  They make ridiculous amounts of money and use rewards as a way to trick us into thinking we are making money.

Rewards 201 – Personal Responsibility

A common point among those who encourage using credit cards for “rewards” hold that those who cannot “use the cards properly” lack personal responsibility.

While I outlined my strong support of personal responsibility, I am also a HUGE advocate of mercy for the poor and less fortunate.

I challenge you to consider how…

Credit card banks prey upon the weak and vulnerable paying millions of dollars to universities and alumni associations alike who buckle and sell the personal information of their students, faculty, staff, and alumni to this vulture industry.  *source 1 & 2

Concerning people with less income and a “taste for plastic” – rather than refusing to extend credit, or giving lower interest rates to them – as Liz Weston suggests – credit card banks continue to issue cards to these people like candy, and do so at interest rates near 30%!

And who do you suppose is one of the largest target markets of credit card companies right now?  People who have recently been through bankruptcy!

Rewards 301 – Credit CARD Act of 2009

While this legislation was passed in May of this year, it does not go into effect until February of 2010 giving credit card banks nearly 10 months to figure out how they can work their way around any newly imposed restrictions.  If you would like to help push this through faster, check out CreditCardReform.org

How have credit card banks responded?

Simple… they are changing the terms to existing contracts in order to position themselves to make money at the expense of their customers.  Yep – even the good customers like those who pay off their balances in full each month.

Some of the typical changes we are seeing include:

• increasing interest rates “because of a bad economy”
• instituting annual fees on existing cards that never carried them before, without clearly informing customers
• increasing minimum fees by as much as triple, leaving a lot of their debtors unable to pay.

What About Debit Cards?

Unfortunately debit cards are used as credit more than they are used as debit.

You know the drill.  You go to make a purchase and the check out person asks, “debt or credit?”

So what’s the difference?

If you punch in your personal identification number (PIN), it’s an online transaction – it gets completed electronically and it’s done pretty quickly. If you don’t use your PIN and you sign a charge slip instead, it’s an offline transaction. Offline transactions are processed much like plain-vanilla credit card purchases.

Even though you use a debit card, offline transactions are very much like credit card transactions. Your debit card might have a Visa logo on it, for example, so it runs through the Visa network. It’s not a credit transaction, but it uses the same infrastructure.  *source

So who cares whether it is an online or offline transaction?  Merchants. If you use your card as debit, merchants are charged less fees so you can imagine that banks give you heavy incentive to choose credit!  You should care too because as we read earlier… the merchants pass those glorious fees right on down the line.

If you use your debit card as a debit transaction, you are not negating the fees, but you are in effect lowering them.  This is because the cost for debit transactions is less than the cost of credit transactions.

What About Cash?

Unfortunately, because the extreme use of credit has built price hikes into almost all retail pricing situations, even the use of cash will cost you 2% more!

How does that make you feel about rewards? Honestly.

Many merchants would love to give customers a discount for using cash, and some still do!  However, because of the complexity of the issue they cannot typically maintain a system where they charge one price for cash and another price for credit… it’s too cumbersome and costly to maintain.

So why use cash… why not just forget it and continue using credit?

Because it is the right thing to do. I suppose that is the basis of my entire argument summed up nicely in one clear statement.  I am sure I will catch a good amount of flack for this article… but that is fine.  I wanted to present facts to sway your opinion about the use of credit by  showing how it continues to enslave our nation.

Most importantly… do YOU think it is the right thing to do?  If so, then we must ask ourselves if $200 – $400 per month in “credit card rewards” is worth doing what we now think of as wrong.  Maybe you do not see this industry as repressing and destructive.  If that is the case, then I guess I have failed you today.

Like I said above… I do not judge anyone for their use of credit cards – this post has been weighing heavy on my heart and I simply wanted to convey it as honestly and openly as possible with the hopes that I might sway even one existing “rewards” user!

Remember… the more we use our cards as credit, the more we are supporting the existing credit card fee infrastructure.

Consider This A Challenge & Rethink Rewards!

You Have A Vote

Every time we go to make a purchase we can lessen the devastating effect of credit on our nation by simply choosing to boycott the extreme use of credit.  We can use our debit card as debit, or better yet… use cash.  I know it may be a pain, but life isn’t all about money – nor is it about always taking the easy way out.

Whether this credit crisis was our fault or not – doesn’t it feel good to help those who need help?  To have mercy on those who need mercy.  To take a stand for what is right – even if you have to stand alone.  Who cares if you’re the only one standing?  At least you stood!

Switching to cash and debit only transactions will not be an easy change for the wife and I.  But I suppose we will approach it like we do everything else… one baby step at a time.  It will get easier and easier with each passing day – then before you know it making credit purchases will become little more than a bad dream!

Bible wisdom is better than silver and fine gold…

• “There is a way which seemeth right unto a man, but the end thereof are the ways of death.” –Proverbs 14:12
• “Do they not err that devise evil? but mercy and truth shall be to them that devise good.” –Proverbs 14:22
• “He that oppresseth the poor reproacheth his Maker: but he that honoureth him hath mercy on the poor.” –Proverbs 14:31
• “The eyes of the LORD are in every place, beholding the evil and the good… In the house of the righteous is much treasure: but in the revenues of the wicked is trouble.” –Proverbs 15:3,6
• “He that refuseth instruction despiseth his own soul: but he that heareth reproof getteth understanding.” –Proverbs 15:32
• “Righteousness exalteth a nation: but sin is a reproach to any people.” –Proverbs 14:34

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.