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Are Banks Trying to Steer Us to Credit Cards?


The latest uproar from the world of big banks is the announcement that Bank of America is rolling out a monthly fee for using debit cards in 2012. Of course, Bank of America claims the right to make as big a profit as it can -- and it is a business with that right. (Naturally, customers who don't want to pay the fees can shop around for another bank. That's their right.) Banks have been piling on the fees over the last couple of years, looking to consumers to provide sources of revenue. Citing regulations on overdrafts, and caps on debit transaction fees, banks are charging fees for everything from checking accounts to statements, and raising ATM fees. Some banks have even made noises about limiting debit transactions. By making checking and debit more expensive, it seems as though big banks might be shooting themselves in the foot. After all, won't they just lose customers in droves? Maybe, maybe not.

Encouraging Credit Card Use

Instead, some of the big banks might find themselves making more money. Sure, many customers may shift away from using their debit cards. But what will they use instead? In a society that has come to rely heavily on the convenience of plastic for fast and easy purchases, it seems the answer is clear: Credit cards. Instead of swiping your debit card, you might be more likely to pull out the credit card -- it it will save you a direct fee. And using your credit card would be more helpful to issuing banks anyway. Transaction fees on credit cards are a percentage of each purchase. Rather than being capped at a flat fee for the transaction, like debit cards are, the larger the purchase you make, the more the credit card issuer makes. This is probably one of the reasons that Chase has been considering a debit card purchase cap of $50 or $100. If there is a 24 cent cap on debit transactions, it doesn't matter how much you spend. The fee for merchants will always be 24 cents. However, if you spend $100 and the fee is 3%, that's a $3 transaction fee. Spend $500, and the fee is $15. You can see why major and regional banks that issue credit cards might be interested in encouraging use. As for Bank of America's fee for debit card use, the institution stands to make much, much more if customers just decide to start swiping BofA credit cards instead of using their debit cards. This can apply to other banks as well; if you move away from the use of your checking account, and rely more on credit cards, they can make much more money in the long run.

Indirect Costs of Credit Card Use

It's important to realize, though, that credit card use comes with its own costs. Some issuers are adding annual fees to their cards, but there are other ways that credit cards might be costing you. These indirect costs mostly have to do with how credit card use raises costs for everyone. Chances are that merchants are raising prices to make up for the transaction fees they are charged when customers use credit cards. Many agreements with credit card companies specify that merchants who accept their cards can't charge lower prices for cash customers, so that means that prices are higher for everyone. Others might point to the general cost of credit cards to society in general. While credit cards have provided a fast and convenient way to pay (not to mention adding a level of security; once cash is stolen, it's gone), they have also created a situation that encourages debt and instant gratification. Plus, the fact that almost anyone can "afford" almost anything using credit cards means that it's easier to raise prices on goods and services, adding to the price inflation we see. These indirect costs are not things we think about very often because they are harder to see. It's much harder to pick out the higher costs merchants charge because of credit card fees than it is to see a debit card fee that you, directly, pay each month.

Rewards Credit Cards

Of course, for some users, there are rewards for credit card use. Rewards programs can be lucrative for some. Cash back, travel perks and free merchandise are all rewards that credit card users can take advantage of. Many credit card users buy everything with cards, and pay off the balance each month, receiving the rewards and enjoying the benefits. (Those who carry a balance, though, will see rewards values eroded by the interest fees they pay.) However, there is a debate over whether not these rewards are truly worth it in the long run, considering the costs that everyone pays as a result of a society steeped in the use of plastic.

Is a Cash Only Lifestyle Feasible?

This debate over debit card fees, and the personal and societal costs of credit cards have some considering cash again. Many believe that "cash is king," and that a cash-only lifestyle is the way to go. However, there are some downsides to carrying cash around. It can be bulky. It doesn't come with any security measures. And, have you actually tried to pay cash for a car? Many dealerships make it easier for you to get a loan to buy a care than to pay for the whole thing in cash. However, even with these challenges, some feel that a cash-only lifestyle is worth it. And, if you use cash, you don't have to worry about those pesky debit card fees, and worry about falling into the debt trap. Because an aversion to debt and credit cards, brought on by the recent recession, and the possibility of debit card use fees, it seems as though cash really could make a comeback. What do you think? Are big banks trying to steer us toward greater credit card use? Do you think a cash only lifestyle is feasible? And what would you do if your bank added more fees?

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Shorebreak   |     |   Comment #1
Not at all. The TBTF banks just want to continue their flow of gargantuan profits regardless the roadblocks thrown in their way.

tightwad   |     |   Comment #2
When fees get too high or I no longer feel that the services offered bu banks/CU are worthwhile, I will easily convert back to all cash. Most of my younger years I was strictly a cash only consumer. It really has only been the last ten years, since discovering the internet, that I realized what I was missing with the national available choices in savings, rewards cards etc... Believe it or not, I didn't have a credit card until I turned 40. I just didn't think I needed one. When I discovered "cash back", I realized how ignorant I had been in my youth.

I have never earned a large wage. I never lived "high on the hog", or wanted too. I worked hard and tried to save money...mostly for the security and peace of mind it gave. I could do without things others seemed to need and not have to live paycheck to paycheck like most around me.

Do I think the banks would like to see more credit card use? Sure...The problem I see is that more and more people with underwater morgages and high debt now, will not be able to qualify for credt (and probably shouldn't). I just don't see an expanding customer base for the banks to draw from.

Something is coming and it's not going to be good. If you are one that thinks a change in political partys is going to fix anything, you need to unbury your head...The clowns in charge on both sides haven't got a clue how to fix things (nor do I).
pua   |     |   Comment #3
I have a reward credit card which pays me 2% cash back on all the things I charge on it.  There's no annual fee.  And I never pay interest, because I always pay the entire balance in full each month.  That's such a great deal, I have no idea why anyone would want to use a debit card.  Yes, I know that people (like me) who use credit cards drive up the cost of merchandise for everyone, since merchants must offset the fees they pay to the credit card companies every time a customer uses a credit card.  Too bad!  The answer for someone who wants to pay with actual cash (greenbacks) is to ask the merchant for a discount for using cash.  Most merchants refuse.  So if they refuse to give a discount for cash, then heck with them and pull out your credit card.
grue   |     |   Comment #4
Pua wrote:

> I have a reward credit card which pays me 2% cash back on all the things I charge on it. 

I have one of those too...  through the end of October.

It was originally a Schwab card, but was handed over to Bank of America's FIA Card Services a few years back.  They've continued to pay the 2% cashback and I used it regularly for all purchases I didn't have a better deal on (eg, I used PenFed's Rewards card at gas pumps because they pay 5% back).

I'm not sure what to do when my Schwab (now FIA) card ends its 2% cash-back program.

I have 2% cashback through a Fidelity AmEx, but I hate pulling out an AmEx card because 50% of the time it ends in a "we don't take AmEx" rebuke.  And Discover's programs of accumulating points and "ordering" cash (or certificates) is too time-consuming for me.

I'd love to know of another 2% cash-back VISA card that "just works."
shinoby   |     |   Comment #5
No bank will ever have to "steer" me to CC use.  I've never used a debit card;  I never will.


Just finished up my Chase AARP 5% six month rebate period.  Saved literally thousands of dollars on that deal.  Now am using the gift cards I bought back then for most ongoing purchases including food, gas, prescriptions.  One store where I bought a ton of GCs allows purchase, with its GCs, of other gift cards from other merchants . . e.g., Amazon.  Merry Christmas!

GCs were all bought with no purchase fee whatsoever.  However, I am losing interest on my money.  Still, with interest rates so low, I'll take the 5% and lose the 2% (or whatever) for the next few months.

Afer that it'll be on to the next credit card deal. 
Wil   |     |   Comment #6
grue (#4) wrote: "I'm not sure what to do when my Schwab (now FIA) card ends its 2% cash back program." Use your cash reward credit cards strategically. Use the new Bank of America card on groceries (2% cash back) and gas (3% cash back), except when you can get a better reward from a another card, and for everything else, use your Fidelity AmEx anywhere that it is accepted. At places where your AmEx isn't accepted, you'll at least get 1% cash back with the Bank of America card.
mrvirgo   |     |   Comment #7
No bank was instrumental in steering me to American Express Blue Cash Back card. It was a cash back card I jumped at when I saw it advertised. 6% groceries,  3% department stores & gasoline, 1% everything else plus a $100.00 bonus which pays the $75 dollar fee for the first year and still gives you $25.00 left over. I put eveything on Blue Cash and the dollars have accumlated fast. Of course I pay the entire balance each cycle. When the first year is up, I can drop down to the no fee version which pays less. If I opt for the free version, I still come out ahead no matter what. So far no one has refused American Express.

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