Credit Cards


Do you remember the 80’s?   I was a kid back then but what I remember about it was the sudden proliferation of credit cards.  It was extremely difficult to get credit cards before 1980 or at least for most of the people I knew back then.    There is an interesting history of the credit cards here.  The reason I bring all of this up is because lately I’ve been spending quite a bit of time outside the United States in Europe and South America.

Much to my surprise, I find it increasingly difficult to use American style credit cards overseas because overseas they all use a “chip & pin” type credit card instead of just a magnetic swipe and signature.    If you don’t understand chip & pin, it’s fairly simple.  When you dine out at a restaurant, the waiter will bring out a little wireless machine and sticks the chipped credit card into it.    The machine is then handed to the consumer and he/she puts in a pin code to authenticate the transaction.   In theory, it is safer because the chip in the credit card is not easily cloneable and the pin authenticates the transaction so even if someone manages to glimpse at your code, the card will be safe.

While most restaurants or other merchants will eventually figure out a way to take the American style card, it is fairly frustrating to have to wait for someone to figure out how to take the American dinosaur card.     Worse yet however are the unmanned kiosks that require a chip and pin to buy tickets to trains or subways because there isn’t anyone there to take the alternative method of signature so you end up being stranded!

I phoned several banks and credit unions and asked if they offer any “chip & pin” credit cards and most did not even know what I was talking about!  What the hell kind of bubble do American banking people live in that they don’t understand what’s used all over the world?

With the world becoming more globalized and families more heterogeneous (it’s increasingly rare for me to encounter couples from the same nationality/ethnicity) it’s hard to understand why the banking system is dragging its feet.

In case you’re having the same issue, after much googling I came across this list of EMV cards however most are still “chip and signature” and not true chip & pin cards so be weary.

 

If the banking crisis, Bank of America’s role in that crisis, and the subsequent tax payer bailout haven’t been enough for you to dump the big banks and Bank of America, perhaps the new gall to charge $5 month for debit card usage will give you the courage to go check out a local credit union.    With the exception of one lone credit card, I have now officially dumped every big bank and encouraged many friends and family to do so as well and switched to credit unions.

I actually currently have FOUR different credit union accounts and plan to stay there forever.   The credit unions are typically non-profit and serve their members with rates highly competitive and often lower than most banks.    To find a credit union near you, click here.

 

 

I’ve been reading the fascinating tale of “James” over at Red Tape Chronicles and I have the simple and ultimate solution to his woes: Cash Reserves.   Do people simply not understand that credit cards are essentially a loan and not “free” money?  I have a fairly simple rule I follow:  If I don’t have the cash reserves to pay off credit cards completely in full at the end of the month then the transaction doesn’t happen.

With banks now raising fees, raising minimum payments, raising interest rates, and raising balance transfer fees the “golden credit card age” is effectively over and I have huge doubts that it will ever come back.    I do foresee a new golden age of alternative “money” and let me give you a simple example.   My son (too young for credit) has figured out how to barter with gift cards.    He swapped a Best Buy gift card for cash, at a discount, and bought I tunes gift card with cash.   He is bypassing the need for credit cards by simply utilizing the gift cards themselves as bartering tools and cash swap instruments!   He doesn’t see the need for credit cards, he sees transactions as paying cash for “store specific credit vouchers” to buy goods and services.   Since he buys music and TV shows off of iTunes, he buys iTunes gift cards and never hassles us for credit card numbers.

I think there is going to be a new golden age of alternative “money” circulating the world in the form of gift cards on occasion sold at a discount.   Ever notice how you can get more bang for your iTunes buck at Costco?

According to Bloomberg, Chase will up their balance transfer fee to 5% and with Advanta shutting down their credit card division and banks continuing to cut credit lines, it looks like credit card arbitrage is effectively dead and I suspected as much back in October 2008 but was hoping for a turn around.

The math simply doesn’t work at 5% for any type of arbitrage.   I generally borrow in 25k blocks and generally did about 50k at a time and at 5% balance transfer fee we’re talking about $1,250 in balance transfer fees per 25k!    The math could potentially work if the terms were for 12 months or longer  at zero percent and it were possible to find an investment with 7% or higher return but that’s asking a lot during these turbulent times and most balance transfer offers are for 1.99% with 5% balance transfer for SIX months!

I’m guessing other banks will soon follow suit and up their balance transfer fees.  I think Bank of America recently raised theirs from 3% to 4% for all balance transfers.

I feel sorry for small businesses that use this tactic to float their payables while they wait for payments from customers and I can only surmise that it’s going to kill a good percentage of small business owners.   This is one of those “unintended consequences” of re-regulating the banking sector but I don’t think there was much of a choice.

I’m feeling a bit nostalgic.  For almost a decade I borrowed hundreds of thousands of dollars and arbitraged my way into some quick cash over the years and that’s all gone now.

By now, you might have read that some credit card banks are scrutinizing the spending patterns of their customers and lowering credit limits based on where and how a customer is shopping.

In one scenario, I can imagine a bank looking at a person charging a few hundred dollars at a divorce attorney’s office and assume that the customer’s marriage is in trouble and the credit lines need to be pulled.

In another scenario, I can imagine a bank looking at a person charging a few bucks for resume or placement services and assume that the person is unemployed and pull credit lines.

The real damage however is consumer over-reaction to these policies that force credit card users to simply stop using their cards for fear of lowered credit lines which result in lower credit scores which in turn sets another cycle of lowered credit limits or increase in APR’s in a vicious downward spiral.

The net result is more damage to an already fragile economy as consumers stop spending for fear of having their credit scores decimated.

I’ve been a critic of Dave Ramsey a few times on my blog and I vowed not to speak of him again BUT I am beginning to come around to his world view on credit cards.   The credit scoring industry simply wields too much convoluted power in the grand scheme of things and at this point, the banks & credit scoring philosophy is damaging consumption and the economy.

Credit card banks and credit scoring agencies are completely powerless when consumers pay with cash.   There is no record or “trace” of where, how, when, and why consumers are shopping and that may be part of what we need to get this economy going again: fearless consumers.

I’m being inundated by e-mails and comments that people’s FICO scores seem to be dropping mysteriously for no reason.   People don’t appear to be late on any payments and not increasing debt or credit lines so what’s happening?

I’m beginning to wonder if the banks are involved in these shenanigains as many credit card banks have been increasing interest rates on consumers credit card because of the financial crisis.   So if FICO artificially drops people’s scores then bank can “justfy” raising rates right?

Unfortunately, the banks are largely supported by tax payer dollars right now so why are consumers paying higher interest rates AND higher taxes to support these banks?   This is the scam of the century if you ask me.   The poor suckers that carry credit card debt are being screwed twice:  higher interest rates and higher taxes.   The banks?   They get rewarded twice:  Huge profits when the gamble pays off, bailout when it doesn’t and now higher interest on credit card loans.

And the people keep bending over and taking it…..I just don’t get it.

I just unloaded all my credit card debt and have ZERO credit card debt other than the routing stuff that floats on my AMEX monthly.   I’m curious to see what my December FICO will show.   My score has been continously dropping for the past three months for no apparent reason.

I’ve been receiving more and more credit card balance transfer offers in the mail recently and I had pretty much written off credit card arbitrage a while ago since banks had removed caps on their fees for balance transfers.

With the existing credit crunch and depositors skittish about keeping more than 100k in any FDIC bank, I’m wondering why and how banks are able to loan out so much money at low interest rates when they supposedly don’t have any money to lend out.

In any event, I’ll likely borrow 25k at 0.99% and try to turn a few grand out of it fairly quickly and boost my existing 40k arbitrage up to 60k+ to churn some quick profits and improve my cash flow this next quarter.   The fee is capped at $99 so I’m looking at paying $200 in interest and fee to hopefully churn out 2k in profits.   Not bad for a couple of months worth of work if all things go well…..

Having dealt with many retailers for a while, I know American Express has traditionally charged higher fees to merchants for processing transactions but I’ve been recently encountering more and more shops dumping American Express.   The biggest chain that I’ve seen doing this is Subway.   I’m guessing it’s the independent franchises that are dumping the card to preserve cash flow and reduce fee exposure as food and labor costs continue to increase.

I’m wondering if this is why American Express had poor results this past quarter vs. simply being a “tapped” out consumer.   I’ve encountered problems with AMEX at discount outlet stores, fast food chains, and independent shops simply not taking Amex anymore.

Food for thought.

I don’t shop too frequently at retail shops since I do most of my shopping either online or at Costco but this past week I visited many retail outlets to buy some x-mas gifts for family and I noted something new when paying.

In the past, the little card swipe device would prompt you to select Credit or Debit after you swiped your card or in some cases BEFORE you swiped your card.  Now, whenever I swiped my card, I was immediately prompted to enter my pin number.   I looked up at the clerk confused wondering why it was prompting me for a pin on a credit card and the clerk advised me to hit “Cancel” and select “Credit” at the next screen.  This happened at various retail outlets (Circuit City, ToysRus, etc) the exact same way.

There has been a battle for years over signature debit vs. pin debit vs. credit card charges and the fees vary greatly for retailers and banks.  If I understand the issue correctly, pin based debit purchases charge retailers as little as $0.12 where a credit or signature debit purchase would cost a retailer as much as 3% of the purchase.

Clearly, retailers have a monetary incentive to push consumers into using pin based debit and perhaps this is the reaction to all those cutesy mastercard and visa commercials portraying non-card users as losers.  Retailers are now defaulting to pin-based transactions on their card swipe terminals as you check out and it’s really annoying for me because hell would need to freeze over before I would ever conduct a pin-based debit transaction at a retailer.

On a side note, the retail experience continues to deteriorate rather badly.  I was in the market for two LCD TVs this year and I visited at least 6 stores trying to find the model I wanted.   After hours of fruitless searches, I settled for a single LCD TV and will wait until after the holidays for the second larger LCD I was looking for this holiday season.   I was also disappointed at not being able to find Nintendo DS at any of the dozen shops I visited either.   Luckily, I was able to purchase two Nintendo DS’s a couple of weeks ago online and those were safely delivered.   Apple iPod Nanos were plentiful but I was also unable to find quite a few other gifts: Stainles Steel Refrigerator with steel handles, a few Wii game titles, a few DS game titles, a few jewelry items, etc.

I’m working on a separate post titled, “Do Retailers Have It All Wrong?” to discuss a few issues I had with this year’s holiday shopping season.

I’ve ranted about the idiocy of FICO scoring system many times and I’ve discovered a solution to my problem. Like many big banks, I’ll simply move all my credit card debt off balance sheet. Once I do this, PRESTO, no more debt on my credit report and my score should rocket back up to 825 or so.

The real trick of course is to create an RSSIV (Rich Slick’s Structured Investment Vehicle) to bundle my debt and sell to unsuspecting overseas investors. Hopefully, with any luck, a judge will rule that those overseas investors don’t have any right to any of my possessions to collect on those debts should I be unable to repay those loans.

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