Friday, August 29, 2014

Credit Card Discipline

As you should know by now, my parents try their best to optimize their regular spending by using reward credit cards without spending any more than they would normally.

Let me repeat that last part of the sentence again for dramatic effect.

"without spending any more than they would normally."

Statistics show that the average American will indeed spend 12-15% more if they use credit cards over cash. After all, there's something about reaching into your pocket and not having money that keeps people from buying impulse things like another Starbucks coffee or an extra appetizer.

Additionally, having a piece of plastic often makes us feel psychologically richer than we actually are. Your financial situation is, after all, a dirty little secret between you and your credit card company. Haven't saved up the cash for the new iPhone6 coming out next month? Well, you do have your Visa/Mastercard that will let you "buy now, pay later." But if you didn't have the cash this month, why do you assume you will next month?

Remember, getting charged 15-30% interest on your outstanding balances will destroy both the value of any frequent flyer miles you earn, as well as eat away at your checking account and your future financial well-being.

We bring this topic up, because my daycare just implemented a policy where they will charge us a higher price (additional 3%) if we decide to pay with a credit card.

Legally, there's a few things to consider if you run into a similar situation. Whenever you swipe your credit card, the merchant (store, restaurant, service provider) loses about 2-3% of the charge to pay for the credit card processing (banks and transaction processor). While this 2-3% may not seem like a lot to you, you have to remember that oftentimes some merchants like grocery stores ONLY make 3-5% profit after paying for all their expenses. So the processing fee is about half of their income!

Up until 2013, the massive credit card companies (Visa, Mastercard, etc) didn't allow their merchant partners to charge additional fees when customers would use their credit card. After all, the credit card companies wanted to encourage usage of their products, not discourage it.

But in January 2013, a US District (federal) court ruled that merchants were now allowed to pass along these processing fees to customers by charging them up to an additional 4% on their purchases if they transact using plastic.

However, 10 states imposed Consumer Protection Laws which continue to prohibit these surcharges. These wonderful 10 states include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. The New York version of the law subjects retailers to a potential one-year prison sentence and $500 fine for imposing surcharges (i.e., charging $102 for a $100 purchase using a credit card).

Then in October 2013, a Manhattan Federal Judge issued a temporary injunction that blocked enforcement of the New York state law that banned merchants from imposing credit card surcharges. He claimed it violated the merchant's First Amendment right to inform the customer of the true costs of credit card usage. Apparently, the First Amendment's a pretty big deal...after all, it's the first one.

So the injunction allows merchants to add surcharges for now until the final decision is reached.

All if this is somewhat moot, however, because (a) merchants could always just price all their products/services higher by 2-3% assuming everyone will pay using a credit card and (b) offer customers a 2-3% discount if they use cash. This is a legal way to get around the "No Surcharge" prohibition, because a "cash discount" is apparently legally different than a "credit card surcharge."

I know all this stuff, because our friend's painting business Five Star Painting IL signed up with a processor to accept credit cards from clients. And you know he did his research before signing up.

This Week
So on Tuesday, my Manhattan daycare that I've been going to for the past year sent around a tuition increase memo asking parents to sign an agreement to a 4% increase. However, they also separated the pricing so that there was a price if you were paying in cash/check and a 3% higher price if you were paying with a credit card. So for us, that'd be about a 7% increase if we wanted to keep paying with a card.

Prior to this memo, we had been paying the same weekly price ($340 for 3 days/week - ugh, don't ask) regardless of our method of payment. So my parents had been racking up some frequent flyer miles and hotel points for something they were going to pay for anyway. This was the ideal situation. Earning points "without spending any more than they would normally."

Now, we have to face a choice. Pay 3% more to earn points/miles or use cash to avoid the $11/week surcharge. Some of you may wonder why 3% is such an issue.

"Baby Songer, that's not a big deal either way." Trust me, when you do the math (I'm half-Asian after all), it adds up to over $500 annually. Now I'm not sure about your situation, but personally, I'd rather have an extra $500 every year to spend on ice cream instead of extra fees.

"Baby Songer, won't you come out ahead, because you get more value out of the miles/points?" While many of our award mile/point redemptions come in at around 2-4% or higher, paying a surcharge essentially puts us in a hole to dig out of.  For example, for a $100 charge, we'd pay $103 using our credit card to earn 103 miles. After all, if we paid $100 in cash, we'd get 0 miles. So we're basically buying 103 miles for $3. Buying the miles upfront for ~3 cents/mile and then hoping we can redeem them for more in the future isn't how we like to play this game.

So if you're not good at following our train of logic, we're going to pay cash (by check) to avoid the 3% fee and stay disciplined to our rule earning points "without spending any more than they would normally."

UPDATE: After successful negotations, we were able to remove the 3% surcharge. So now we're paying the same amount as the "cash" price but able to use our credit cards.

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