My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).

I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.

Perspective of Constant Updates

Why do we hear about political polls almost daily for 6 months or more before the election?  Here is just one sample from a few weeks ago on CBS News: “Where Clinton and Trump stand with 90 days left.”  I just saw the headline and didn’t read the article, because it makes absolutely no difference where they stand 90 days before or even one day before the election.  It only makes a difference where they stand the day after the election.  This is not news.  It’s more like laziness, something they can sit in the office and collect off a feed from somewhere else.

This has been the trend in news for the last few decades.  They breathlessly report results of a poll, sometimes a poll they themselves have taken, about who is slipping or who is gaining.  That information may be useful to the candidates' campaigns, but not to voters who still have, in this case, 90 days to make up their minds.  It is generally a waste of our time; but if they can make it seem like news, they can draw in the viewers and advertisers to help pay their anchors millions of dollars (to read poll results and later in the broadcast complain about overpaid CEOs).

These same organizations will try to keep us up on election night watching them kill time by checking off states, showing partial returns and reviewing voter turnout, until they can make a final determination.  It’s unbelievable how many people fall for this, people who know deep down inside that the results will be the same in the morning and nothing is gained by staying up to hear those results six hours earlier.  The world is not going to changing in those 6 hours.  The new president will not take office for another two months, two months in which the media will be filled with stories about what might happen or who might be appointed to the cabinet, and gobs more speculation by insiders,  experts and even their fellow news reporters.

But we never learn.  The media has us trained to sit on the edge of our seats, soaking in these meaningless polling data and speculations.  We can’t wait to see what happens and need some expert to provide guesses to relieve the suspense.  Likewise, they compete for our attention with breaking news, of some disaster or incident from across the ocean or the other side of the country that can’t wait until a scheduled program – because it will affect our lives how? 

See how we are conditioned.  Ring the news bell and we salivate for the latest!

On a related note, why do I need a mobile app to check my bank balance on my phone from anywhere?  If I go out shopping, I will use my credit card that needs to be paid only once a month.  I will have plenty of time to come home and check my bank balance on my computer if I really need to.  Shopping with a list also reduces the chance of coming up embarrassingly short.  Yet the bank thinks they are doing me a big favor giving me the ability to check my balance on the fly.  Perhaps they think I will be going to lunch from the office unable to decide between joining my rich friends at the Ritz or my cheap friends at McDonalds.  I have to check my balance first.  Perhaps they are just trying to encourage me to live closer to the edge financially, knowing I can get away with it because I have my bank balance at my finger tips.

I don’t know.  I suspect they are just trying to compete for my business with all the other banks that will let me check my bank balance on my phone at any time from anywhere for some unfathomable reason.  Meanwhile they are paying a bunch of programmers to come up with nifty apps instead of using that money to pay me a just little more interest on the money I do have in the bank.  That would be an excellent way to compete.

This is about having perspective.  Slow down and get a grip on reality.  Don’t be lured in by the hype and simulated excitement.

Admit it.  Ninety-nine percent of breaking news is not that urgent or important.  A tornado warning in your county is breaking news; a plane crash in Egypt is not.  The only other time it might be important enough to interrupt my day is if my bank suddenly went out of business.  Then I could pull out my phone and find out immediately if I had any money left at all!

The Shrinking Middle Class

A study released this week by Pew Research Center bemoans the state of the middle class.  We have less money, we are forced to spend less, and our expectations for our future and that of our children are less optimistic.  Many find it more difficult to maintain a middle class standard of living.  While 32% believe they are better off and 23% report no change, 42% say “their household's financial situation is worse now than before the recession began.”

The most disappointing finding appears near the end of this article where they asked, who deserves a lot of the blame.  The answers were:  Congress – 62%, banks – 54%, big business – 47%, the Bush administration – 44%, foreign competition – 39%, the Obama administration – 34%, and finally, the middle class itself – 8%.  Once again we portray ourselves as victims of big government or big business.  Only 8% are willing to take any responsibility for the situation!  This is disappointing, because by giving away responsibility, how can we fix it?  We become dependent on others.

Why blame Congress?  We all like our Congressman.  He takes care of problems when we call.  He appears at major events and groundbreakings.  He makes sure money sent to Washington gets back to his district.  Sometimes overlooking the big picture and what’s best for America as a whole, he watches out for us, because that’s what gets him reelected.  It can’t be him.  It must be those other 431 incompetent crooks.  Unfortunately, Congress is our fault.  We can’t blame them for acting as they do.  We set up negative consequences for them to act in any other way, and we reelect nearly all the incumbents until they decide to quit.

How about the banks?  Is it their fault that they talked so many people into buying houses they couldn’t afford?  Is it their fault people were lured in by teaser rates and then surprised when the actual costs kicked in?  No, it’s their job to make loans.  It’s our job to be smart enough not to borrow money based on the hope of ever-increasing market values.  We screwed up but don’t want to admit it.

As for the two administrations, the answer is pretty much the same as Congress with added comments from Monday’s posting (Political Campaigns – August 20, 2012) about how we get the candidates we respond to rather than necessarily the most competent or qualified.

The major problem here is that we are once again looking for convenient scapegoats instead of admitting that the problem starts with us and can be solved by us and only us.  Certainly there is plenty of blame to go around.  But anyone who insists on blaming only banks, business, Congress, or past/current administrations must wait for action and take whatever they get.  Those solutions will be more restrictions on our freedom or more regulations on banks and business, making them even less inclined to risk business expansion or increase hiring.  To not take responsibility is asking for trouble, but we continue to do it.

Down with Home Equity Loans

Driving past a local bank recently, I was surprised (perhaps even mildly shocked) to see a sign reading: “Put your home equity to work for you.”  What could they be thinking?  Well, the banks are thinking that they can make a loan and collect fees and interest.  The customers are likely not thinking very clearly.

There are still so many people with zero or even negative home equity, owing more than the value of the house, “upside down” or “under water” from the Great Recession.  They believed the line the banks (and realtors) fed them about putting almost nothing down and counting on the market to push the prices up steadily.  When the bubble burst they were left holding the bag.  Some walked away and some were evicted but many lost their houses.

Now, before the economy has fully recovered, banks are at it again.  The advice you get from bankers, realtors and financial advisors serves their purposes,  not yours.  It produces interest, fees and commissions.  A house is not a good investment.  It’s usually hard to sell, so you can’t get your money out right away for emergencies.  It doesn’t always appreciate.  The tax deduction is less of a benefit than most people understand (see The Myth of Home Equity, March 5, 2012).  The government only helps you pay a portion of your interest and you still pay more than you borrow.  Finally, when you do sell it, you still need some place to live!  That means you have to buy another house that has been going through the same market changes.  Unless you are a speculator, timing the market, or willing to put a lot of time and energy into a fixer-upper, you have to be very lucky to come out ahead.

Those advisors continue to call it an investment, buy a house bigger than you need (paying interest and sales commissions) and count it as retirement savings or keep cashing in your home equity to invest in the stock market (paying more sales fees) where it will grow more quickly or, worst of all, take the money out and reward yourself with a nice vacation – “You owe it to yourself; you’ve worked so hard, etc.”

Well call me old fashioned, but my advice is build up that equity and don’t even think of it as equity or an investment.  Think of it as having a roof over your head that no one can take away from you.  When the market goes up, good.  When it goes down, too bad, but at least you don’t have a bank or collection agency knocking on the door.  You’ll never be able to afford your neighbors' luxuries or exotic vacations, but you won’t have their headaches either.  This behavior is not possible for everyone.  I understand there are exceptions and personal situations.  But when you drive by the sign tempting you to “Tap your home equity,” I think you will be a lot happier in the long run if you just keep driving.

Bank Overdraft Fees

Again, here is a subject we should be taking care of ourselves instead of expecting the government to fix.  This article tells about an inquiry, not an investigation to uncover wrongdoing, by the Consumer Financial Protection Bureau into banking practices regarding overdraft fees. 

I made the point back in July 2011 and again recently that the bankers are smarter than the government when it comes to business and finance.  They react to new regulations with new policies or fees, forcing the government to come back later with more regulations.  It’s a vicious cycle that adds no value to our lives or to the economy.  In fact it often results only in our receiving another piece of mail with a multipage explanation of how the rules have changed - once again.

The fact is that most of these interventions for consumer protection involve situations that are directly under our control.  If we act responsibly, we don’t need protection.  This case of overdraft fees is a prime example.  The fees become an issue only when someone writes a check or withdraws from an ATM more than is in the account.  It’s addition and subtraction, but it doesn’t affect people because they can’t add or subtract.  It affects them because they don’t keep their records current.

There are many excuses for slipping, but they are only excuses.  When customers make an error, the banks take advantage.  When this happens, there should be one of only two outcomes.  Either the fees are high enough to cause a person to change behavior and keep better track, or they are not.  A good analogy is running out of gas.  You are stuck by the side of the road, costing you both time and money.  It is the result of not paying attention to the fuel gauge. There is no question as to whose fault it is, and it is easily remedied in the future.  This seldom happens to people a second or third time because they have learned from the experience to pay closer attention to the gauge.

Likewise overdraft fees should be no big deal!  Yet the head of the bureau wonders: “how consumers are affected and how well they are able to anticipate and avoid paying late fees.”  What a surprising statement!  They are affected by having to pay fees that should cause them to change behavior, and they know exactly what behavior needs to change.  To assume that people are incapable of solving this problem on their own seems arrogant and insulting.  Citizens displaying responsible behavior, not government inquiries, effectively solves this problem with no more regulations or "protection" required.

Perspective: Penny-wise, Pound-foolish

I have some recent (behavioral) evidence that many corporate executives are skimping on IT resources in the short term, risking eventual loss of business and higher costs over time.  This certainly falls in the category of perspective.

Today I picked up the mail and opened an envelope from my doctor’s office.  It was a bill for zero dollars.  It told me what I already knew, that I didn’t owe them any more money for my recent visit, but costing them for the printing, the postage and the enclosed return envelope that I didn’t need.

Earlier in the day I received 3 identical e-mails from my broker telling me that my profile had changed. (I changed from my current listed bank to the one that sends me two identical e-mails at the same time every month reminding me to balance my checkbook.) The brokerage is very careful in these cases and sends two small test deposits to the new bank. I looked at the bank website and found the two deposits in my checking account. So far, so good. Then I returned to the brokerage site to confirm and was told to come back in a couple days after they made the deposits. Apparently they were not yet aware that the deposits were made. Somebody’s programs are not talking to each other.

The reason for the above change is that I am ending my relationship with the bank that was originally listed with the broker. At this bank every time I come in, they look up my account and say, “I just signed you up for next quarter’s bonus points!” – like they are starting off by doing me a big favor.  Then I tell them that I already signed up and wonder why their PC doesn’t indicate it. If they said, “I see you are already signed up,” at least I would think they are on the ball, however, when I checked later at home, it is very difficult to get that information, so they just sign me up whenever I talk to them. (This, by the way, is the credit card that I was issued two of and just got one cancelled when I received a solicitation for another identical one in the mail – another case of programs not communicating.) But I digress. The reason I went to the bank was to transfer out my IRA and, not wanting any trouble from the IRS, I specifically asked for a check made out to the new bank showing me as FBO (for the benefit of). They told me that their computer wouldn’t do that without a transfer request from the receiving bank, which would take longer than the 10-day grace period. (And they wonder why I’m changing banks!) So I have a rollover instead of a transfer, which means that each bank (or each bank’s computer) must send me an additional tax form.

Finally, in the process of checking on the bonus-points question, I noticed that the department store where I ordered a wedding present on line is about to bill me twice, once on the day I submitted the order and again on the day they shipped it. 

I hope all these companies are saving a bundle from off-shoring, because they are losing a lot of goodwill by this display of incompetence to their customers.