MBNA raises rate, no reason

[singinjeannie]

Jesse:

What a great observation you've made! Why I say to go after the CC companies is because of their underhanded business procedures. They rope you in with the ads and the "low rates", which only last as long as THEY want them to, and then raise the rates for rediculous reasons.

How about when they raise your credit limit to 15,400 and then penalize you if you actually get close to that $15,400 limit??? Why have the high limit if they don't actually want you to use it?

Just a few more thoughts.

[jmjj215]

I totally agree.

What are your thoughts on using the CCs for their rewards? Are they still profiting from your business because of the charges they exact from merchants?

[singinjeannie]

I believe the studies that have been done that say you will definitely spend more money when you use a credit card. Personally, I can't afford to spend more money!

When you are using a piece of plastic to purchase things, it's like you have a million dollars in your pocket. You can get whatever you want and find it easier to justify it. Once you buy $100 on that CC, it still feels like there is an infinite amount of money in your pocket and can go on spending.

If you use cash and you spend $100, you have 100 less dollars in your pocket. You have to watch everything you put in your basket because, god forbid you get to the checkout and don't have enough money. Really embarassing.

I have decreased unnecessary spending tremendously by using cash. I've saved far more than the 1% or 2% I'd get back from Discover by using their CC.

If one feels they have the self-control to really stay on budget while using a CC, go for it. I know from experience cash works better for me if I'm trying to make budget.

Certainly, the CC companies are also profiting from your business when you use a CC, even if you don't carry a balance, as the merchant has to take a percentage of the money you spend and send it to the CC company, instead of using it to further their own business.

I'm done with Credit Cards for good.

[34saving]

I've only been able to "get them" with one credit card and that was CITI/ATT Universal. They paid me a $50 Home Depot Gift Card to sign up and then $120 (I think . . .it was spread out over 7 payments) to have "credit protector" on the card.) So, they paid me $170 to have a card that I NEVER (not once, had a big "NO" written on it) used, so no merchants paid either.

[jmjj215]

Singin,
That was another issue I dealt with quite a bit before starting to use my CC (which I've only been doing for about 6 months). Before that my wife and I used our debit card for everything. We tried using just cash for groceries but we'd keep forgetting the envelope, would have to go back, it was such a pain. I'm sure if we would've stuck with it we would've started to remember...

Anyway, I was worried about what you mentioned above - not really feeling like there was a real "limit" to my spending. I've found it isn't true in my situation. Here's why:

Each month my wife and I sit down and allocate where every dollar we earned from last month (we spend last month's income during the current month) is going. We record every single purchase we make. Sometimes we use the record on the CC to help us remember, other times we use the receipts. Either way - we record everything. That makes a very real connection happen between our spending and our wallet. Also, we've been doing this since we first married and I've looked at our spending since we started using the CC and it hasn't changed at all by any statistically significant amount. I honestly can tell you that I don't spend any more with a CC than I would with cash. The trick is that you have to be on a strict written budget to pull it off.

The only thing I still think about is that the CCs are making a profit off of the merchant because of me...hmm. Of course, they make a profit off the debit card I would use too - though the % is slightly lower.

[singinjeannie]

Speaking of "getting them."

I do use my Kohl's card, come to think of it. I use it to get my "15 - 30% off" when they offer it. I use it only when I NEED clothes or a gift. Usually back to school time. I buy the items I need, get the % off, then immediately go to the back of the store and pay my CC bill. This way they earn NO interest on me and I still get the discount.

[CRFSaver]

The credit card companies still benefit even if you pay off your balances at the end of the month. The interchange that gets charged is where they make it. In fact the CC industry is moving towards transacters versus revolvers in the long run. And Visa and Mastercard are even raising the interchange rate charged to merchants for their "Signature" cards. Some (not all) of the CC companies are starting to make changes to the way they do business by limiting fees and maintaining fixed rates longer. There are still many that do sleezy business though which is unfortunate.

Part of the reason CC companies change rates is that they are not like a traditional fixed rate loan (Mortgage or Auto) which has a defined maturity date and amortization schedule. As funding costs change (remember banks are levered vehicles), rates on the cards need to go up to reflect it. I am not a fan of the Universal Default that many companies use but that is slowly going away. If anyone has an installment loan watch out as some companies are changing the rates on those also.

Kohl's private label card is owned and run by Kohls so no credit card company is benefitting from it. Kohl's benefits because you now have made a conscious decision to shop at their store versus a Mervyns or other competitors.

[jmjj215]

As funding costs change (remember banks are levered vehicles), rates on the cards need to go up to reflect it.

I wouldn't say they need to go up to 18% or higher though. Visa and MC rent their money for much cheaper than that for sure!

CRF, what do you mean by transacters vs. revolvers? I'm curious about this.

[CRFSaver]

Actually, Visa and MasterCard dont lend the money out but just provide a network for those transactions to settle. Each individual bank is required to fund those credit card balances through capital they allocate it, either through retained equity, deposits, CD's, unsecured funding or through the securitization market.

There is a reason rates are set at 18 or 19 percent. So an average funding cost of 3-4%, net charges offs of between 4-7% means the credit card companies cost is between 7% and 11%. (People forget that the CC take losses on those loans of between 4.5 to 8.5%.) So if they charge 18%, they are making between 7-11% on those balances. That doesnt include the capital a bank has to hold off to the side that the OCC or Fed require.

Credit cards as an asset class are quite a bit riskier then a mortgage as there is no collateral backing the loan being made. Because it is riskier they are going to charge more. Just like a sub prime borrower pays more then a prime or super prime borrower. Dont get me wrong, they still make great money. But it is not like they are making 15% on those 18% rates.

A revolver is someone who maintains a balance, or what is refered to as a revolving balance. A transactor is someone who uses the card to make purchases, and then pays the balances off. CC companies still make money off of transactors due to the interchange and discount that merchants pay.

In fact to pay for some of these reward programs for consumers, Visa and MasterCard are classifying many of the rewards credit cards as "Signature Cards", with a higher interchange. That is why so many places dont take American Express due to the much higher interchange.

You look at a company like Wells Fargo that has dirt cheap funding (they are rated AAA)definately has an advantage over an MBNA or Capital One (both BBB) or even a Metris (BB), when it comes to funding costs.

Hope this helps explain some of these things.

[BAGAGT1]

Originally Posted by jmjj215

Anyway, I was worried about what you mentioned above - not really feeling like there was a real "limit" to my spending. I've found it isn't true in my situation. Here's why:

I agree, here is how I handle it. I use my credit card to buy groceries, gasoline, and other monthly expenses. When I use my credit card, I subtract the amount of my charges from my checking account register in Microsoft Money. When I get the CC statement, I will download the statement into MS Money CC account, then delete the CC charges from my checking account. I then write the check from my checking account to my CC and boom no credit balance, but still get the rewards.

It takes a little discipline to remember to move the funds in MS Money, but it could be worth it in saving in the long run.

[jmjj215]

CRF, thanks for that great explanation. That makes a lot of sense. I've decided I'm not going to feel bad about being a transacter and having the merchant foot some of the cost. It's probably already built into the price.

[Miz Pat]

I used to have six cards, but I got rid of them all except two. One is a chase card (it used to be a shell card) that gives me 1% off on purchases (3-5%on gasoline purchases - they keep changing it). The other is my MBNA card, which had a lower interest than the other.

The 1% on purchases is a good money manager (as long as I always pay off the balance). I paid $7000 to get the new roof with the credit card and then immediately paid the balance. I got $70 back on the next bill - that's a lot of groceries or gasoline.

I'd like to think I'm making the system work for me and not me for the system, but it takes discipline. I never leave a balance on the card (which has two tiered interest rates anyway), I never pay membership, I save on writing checks, and over the years I think I've gotten about $1,800 back in tax free money. Every little bit helps.

[jmjj215]

MizPat, people refute the 1% you're getting back by saying that you spend more w/ a credit card (or debit card) than with cash b/c cash "hurts" when you spend it. My wife and I are implementing cash only groceries for the next six months to test this theory.

We do 1% also, autopay the balance in full each month directly from our checking account. The 1% is the equivalent of a month's worth of groceries over a year. Like you said, that's a lot of groceries

[CRFSaver]

I would be willing to bet that it costs many of these large retail places less money to accept a credit card then it does to accept cash and checks. When you take into affect the cost of, processing the checks, lost float, processing cash and coin, and delivery charges (read: Armored Car to transport those checks and cash) its probably cheaper for the merchant to take the credit card.

[Miz Pat]

That is a good thought on the credit card, but I should have explained that I use the credit card for items budgeted that I would normally pay cash for:
Groceries, gasoline, automotive and house repair items, vitamins, doctor visits and perscription drugs. Since these are budgeted items for the most part (I don't put on things that I don't have a balance to pay for in my checking - I make a hold in checking for every transaction), I'm using the card as a means of paying bills efficiently. I admit to small sins - bookstores, starbucks frappachinos, but even those I mark in the check book, so when the credit card comes in, I have corresponding holds for the lion's share of the card.

My other card, the one with lower interest from MBNA, is the one I would put wild thoughtless stupid purchases on, i.e. ones that I don't have money for right now and didn't save for.

So as long as I exercise discipline in how I use the card, it can be a valuable and profitable tool. Once I screw up on that discipline - I'm doomed.

Pat

[jmjj215]

CRF, another great point. Perhaps those costs outweigh the transaction fees levied by the cc companies.

MizPat - good discipline. Have you been monitoring your MBNA card to make sure its balance is consistently heading south instead of north? That would be my only worry to "thoughtless stupid purchases" !

[Miz Pat]

Yes - I just paid off the last $90 on the MBNA card so I guess I'm doing good in that respect.

I still spend money foolishly though. When the weather is hot (I'm in the desert and its been average 105 degrees a day) I tend to gravitate to air conditioned restaurants and fast food - I have that budgeted too, but my husband can look pathetic and whammo - I've spent 20 bucks in a restaurant.

However, I have no outstanding debt. The car is paid for and the money from the car payment is going into a direct deposit for the next car or car repairs. I pay about $70 a month more on the mortgage (30 year fixed 6.5%) and hope to pay it off sooner rather than later.

This list has been really beneficial to me in keeping up the discipline.

Miz Pat

[jmjj215]

Yes - I just paid off the last $90 on the MBNA card so I guess I'm doing good in that respect.

Sweet.

In no way do I hope to come across as harping or anything...just another thought

I don't know how consistenly you "spend money foolishly" but if you're going over your budget on a regular basis that probably means your budget isn't realistic. For example, my wife and I have blow categories. When I have a foolish purchase, I just go for it and it goes in the blow category.

So even the foolish stuff is budgeted for!

Oh, by the way, it is totally awesome that you're debt free except the home. Congratulations on belonging to a very select, small minority of Americans.

[CRFSaver]

Originally Posted by jmjj215

I totally agree.

What are your thoughts on using the CCs for their rewards? Are they still profiting from your business because of the charges they exact from merchants?

So I was doing some research yesterday for work and thought I would post this little tidbit. Interchange is what the CC companies get from the merchants. Not everyone posts it but MBNA does.

In 2004 they made $442,104,000 from interchange. In 2003, they made 391,827,000 from interchange. Mind you this is just non-interest income but as you can see they still make a nice chunk of change off transactions. All of these numbers came from their 10K.

[jmjj215]

In 2004 they made $442,104,000 from interchange. In 2003, they made 391,827,000 from interchange. Mind you this is just non-interest income but as you can see they still make a nice chunk of change off transactions. All of these numbers came from their 10K.

Now that's pretty interesting. Does the 10k give any info on how they charge the interchange, what percentage they use of what base, etc.? It's almost enough to make me want to not even get the rewards - b/c I think CC companies are crooked the vast majority of the time.