A long time ago, when I was first learning to manage my finances, my dad instructed me to prepay my credit card. This effectively transformed the credit card into a debit card by running a positive balance on the account. It was a great learning mechanism because it still required me to make monthly payments, but provided a cushion in case I missed one or made a mistake. In my father’s mind (and I agree), the few dollars I was losing in interest opportunity costs were more than made up for by a lengthy credit history with no late payments.
These days, I would never ordinarily prepay any of my cards. Just the opposite, in fact – I schedule payments for the last possible day. The economic rationale is simple: positive credit card balances don’t earn any interest, therefore I want to hold on to my cash for as long as I can. Occasionally, however, I send the credit card companies a little extra cash. The most common reason is also (believe it or not) economically rational: consumption smoothing. For example, I prepaid part of my October balance in September, anticipating an abnormally high balance that month (thank you, California trip). The net result after two months was the same, but there was no month in which I had to make a particularly large payment – and that’s easy on the mind.
So imagine my surprise today when I went off to make my first payment on my Discover card and the site informed me of the following (emphasis mine):
A credit has been applied to your Account since your last statement was posted. This credit has reduced your overall Discover Card balance.
Since you may not make an online payment for more than your current balance, we are showing you the Current Balance instead of your Last Statement Balance.
I found that very surprising (enough to write about, anyway!) – you would think, especially in this economic climate, that credit card companies would love to receive cash in advance on which they have no obligation to pay interest. I think that’s especially true because there’s a chance I might not use up my positive balance for some time, effectively giving the company an extended interest-free loan. So why would they ban this practice?
My theory is that their view is exactly the opposite of my father’s – by preventing customers from prepaying, they increase the probability of a customer paying late. That, in turn, allows the company to levy late fees which are far more lucrative than a few bps of short-term interest (at today’s levels).
Any other thoughts on why prepayments would be explicitly prohibited?
In a report that should surprise no one, the NYTimes finds that convenience yields higher revenues for NYC taxis. Indeed, the credit card machines which are now mandatory for every cab have coincided with revenues rising 13% from last year, bucking a national trend of -15%. Tips have risen from 10% of the fare pre-cards to 22% with the new system – and considering that only 28% of rides are paid for with plastic, that means the credit card tips are significantly higher.
Much of that may be attributed to the choices which are presented to riders when the ride ends, starting at $2, $3 and $4 and graduating to 20%, 25% and 30% as the fare increases. For a short trip, the fixed dollar amounts can represent massive percentage tips (an informal NYT survey reported a 38% average, most of which came from people using the presets). Obviously, this beats the old system of rounding to the next dollar, when (in my cynical view) tips were given not to help the driver but so the passenger wouldn’t have to deal with change. (Of course, use of the preset amounts suggests convenience remains a key factor.)
But all is not well: predictably, some taxi driver representatives are playing down the report, saying, for example “I know that’s not true.” And as we all know, anecdotal evidence from people with incentives to be biased is always more useful than TLC data (that’s the all-powerful Taxi and Limousine Commission, for the non-NY’ers among you). But the choice quote – the one which inspired me to dedicate a few hundred words to this analysis of what has become a daily ritual for me – is this gem, which puts a bizzare sense of accounting on display:
“Because of credit cards we get customers, that’s true,” said Muhammed Hamid, 35, of Queens. “But if they give us cash, you can put the gas on that; you don’t have to wait three, four days.”
It’s true that credit card payments take three days to clear. But why does that make a difference? If a taxi driver switched from all cash payments to all credit card payments and did exactly the same amount of business and received exactly the same amount of tips, there would be a period of three days during which he would realize no revenues – the days immediately following the transfer. From then on, there would be no difference; he would get cash every day, it would just be the cash from work done three days previously. Because of this rolling accumulation, there is absolutely no practical difference in revenues. Even if there were some bizarre quirk of the universe in which the credit card payments somehow lumped together and did not pay on a rolling basis, which there is not, the cash that is being received in the meantime can pay for gas.
I’m frankly at a loss to deconstruct this statement any further. And yet - if drivers get credit cards of their own and use those to pay gas, they can put off their gas payments for up to a month. It’s not necessarily a good solution, but to try and tie this debate back to cashflow timing is very strange, especially in light of all the methods both sides have to adjust those timings and the fact that, as illustrated, it doesn’t matter anyway.
Actually, that’s not entirely true. It’s probably much easier to hide cash payments from the IRS.
I think I’ve seen something like this on late night TV: Congress has a new bill which overhauls credit card regulations… and they’re throwing in relaxed gun control, absolutely free (but only if Obama signs right now)!
Indeed, the latest fiasco out of Washington is a rushed so-called consumer protection plan, which has a second provision allowing loaded firearms to be carried in our national parks. If that’s not pork, I don’t know what is. In fact, it reinstates a last-minute Bush law that was overturned in March.
On the credit card side of things, it seems fairly reasonable to me – a lot of common sense measures aimed at making penalty information more clear and less surprising. There’s some chatter that by making it less profitable to lend, the bill will incentivize credit card companies to hold back credit, exacerbating the liquidity crisis, but that seems overblown to me. Very little in the bill will actually inhibit the ability for credit card companies to profit. The point that comes closest to achieving that would not allow rates to be raised on existing balances, but let’s be realistic: if you have an existing balance, your next statement isn’t exactly going to get paid right away. Not to worry, the “predatory lenders” will still have their chances. A second measure increasing the notification period before raising rates from 15 days to 45 days makes sense, as it guarantees all consumers one chance to pay off their debt before new rates hit. Under the old system, only half of cardholders would have a billing cycle close before rates could be increased. The impact to the bottom line is probably minimal; the effect on consumer’s ability to maneuver their finances is large.
But it’s all a bit redundant, seeing as just a few months ago Bernanke put forth “the most comprehensive and sweeping reforms ever adopted by the [Fed] for credit card accounts.” Yes, it’s nice that now it will be a “law” (a purely semantic difference in this case), and the timetable has been moved up a few months from the Fed’s July 2010 rollout, but I don’t think Congress should quite be patting themselves on the back for solving anything with new thinking. Oh – I forgot, any chance to stick it to some financial firms is one worth taking.
Turning now to the loaded gun side of things… is this for real? Talk about a hijacked bill! Naturally, our self-serving and desperate-to-get-reelected legislators in the House made sure to hold two separate votes, one for credit cards and one for guns, so that in the future no one would be able to accuse them of voting for the gun bill when they were “really” voting for the credit cards. However, since Democratic party leaders already agreed to swallow the gun law as a cost of getting the credit card measure passed, this was largely a political waste of time.
The stated purpose of the bill is “to protect innocent Americans from violent crime in national parks and refuges.” Let’s go to the tape, shall we? The Washington Post provides a break down of crime in National Parks through 2006 (if anyone has more recent data, send it along!):
Crime rates are expressed as incidents/100 thousand people, so this chart implies a total crime rate of 1.65 for our national parks. The violent crime rate (just the first 5 lines) was a tiny 0.14. In 2006, New York City’s violent crime rate was 637 (yes, a difference of 3 orders of magnitude). The violent crime rate for the United States as a whole was 469 in 2005, which means that violent crime is three thousand and twenty-nine times more likely outside the national parks than in them. We need to allow loaded guns to protect citizens in the parks? Hardly.
Yes, the 11 homicides in 2006 were 11 too many. But the parks are hardly a bastion of violent crime – in fact they are among the safest locations in our country! The parks’ violent crime rates are so minuscule that the likelihood of a victim also carrying a gun (presumably, with which to protect themselves) is tiny unless everyone starts carrying a weapon on their park visits.
Chalk this rider up to an “I’ll show you!” attitude which is increasingly pervading our politics and dividing our legislators on party lines. I only wish more of our elected officials had the guts to kill it, and I remain fervently hopefully that Obama’s promise of “no more pork” will one day take hold.