Credit Card Debt Management

Gas station owners profited $3.4 billion in 2007. Sounds like a lot, until compared to the $7.6 billion in fees they paid to the credit card companies for processing card transactions. This data, provided by Virginia-based National Association of Convenience Stores, highlights a serious problem in the U.S. economy. According to an article in the Fort Worth Star-Telegram:

“We are really talking about a situation where the cart is leading the horse,” said Peter Guidi, vice president of sales for National Payment Card, a new company that is offering gas stations cheaper fees with its own payment-processing system. “You could argue that the credit-card company now owns the customer and the convenience store has become a stakeholder in their business. This is really backwards.”

The interchange fees that credit card companies demand of merchants can range anywhere from 1.75% to 2.5% of the total transaction amount. It’s significantly cutting into convenience store owners’ profits, and Congress has been trying to get something done about it with the Credit Card Fair Fee Act, which would make the fees negotiable.

Of course, credit card companies are claiming that a lessening of the fees would significantly hurt their business and force them to cut back on card rewards. Apparently, money isn’t too tight in the plastic headquarters because MasterCard alone spent $720,000 on legislative lobbying in the first quarter of 2008. That is almost a quarter-mill per month. This interchange fees business is at the forefront of industry lobbyists’ radar, but other congressional issues are causing them some concern.

According to CNNMoney.com, MasterCard lobbied on a bill that would “limit the interest and penalties credit card issuers could charge customers.” What? Regulation and oversight? Wouldn’t that just be a terrible thing?

Bank of America, with its Visa partnership, was one of the pioneers. Discover and MasterCard debuted theirs in 2002 and 2003, though those products appear to be defunct now. It’s the keyring credit card, a miniaturized version that consumers have the option to receive in addition to their regular credit card. A Boston Globe article tells the tale of one suburban mom who loves the keyring card for its convenience, allowing her to leave her purse and wallet in the car.

The article also tells the tale of Bank of America’s estimates on the profit increases linked to keyring credit card use. Of course, consumer studies have shown that shoppers tend to spend more when swiping plastic instead of using cash. Amazingly, according to the Globe article, further studies have shown that consumers with the miniature plastic will spend 2 to 3 percent more than regular credit card users.

But, customer convenience and increased corporate profits aside, is this really a good idea? Hello, identity theft? Anyone? Call me crazy, but am I the only one thinking this could be a problem? The miniature credit card has apparently given way to the Speedpass, a miniature keyring device that works with the radio frequency-enabled system allowing consumers to pay with a mere swipe of their card in front of a card reader.

A lot of people already considered the RFID-enabled credit card unsafe. Despite the card’s very low frequency, some feared the emissions could be picked up any nearby identity thief with an RFID card reading device. Nevertheless, many credit card companies are making their new or replacement cards RFID-enabled, whether the cardholder knows it or not. And now that little RFID device can be on your keyring, too. According to MSNBC columnist Gary Krakow, Mobil and Exxon gas stations are on this miniature Speedpass bandwagon, and McDonald’s will also soon join in.

Remember those needlepoint keychains that said “Jesus” in a sort of puzzle form that looked like Oriental writing at first glance? They were everywhere in the 1980’s — at least in the Bible Belt, where I was raised. I’m going to go make one of those for my keychain, only it’s going to feature my social security number and birthdate in neon green. It will be safe and undecipherable because it’s a puzzle, an illusion, trickery of the eye. Probably nobody will figure it out. After all, these identity thieves aren’t too smart, you know.

Farnoosh Torabi, one of the foremost financial minds of Generation Y, has posted an interesting article on TheStreet.com about why, exactly, credit limits might be shrinking. Like Torabi, my credit limit was also recently increased, much to my surprise. I have, however, been shopping home loan offers, so this will probably change shortly. Torabi and I, with our credit limit increases, appear to be in the minority if the media reports are true. Credit limits are being slashed, but why? When it happens to you, “It’s the economy, stupid,” isn’t really an adequate answer. So what are the real, nitty-gritty reasons behind the shrinking credit limits? Torabi shares her insight, and here are some of the highlights:

What are you buying? If you are putting minimal, everyday purchases like your Starbucks coffee on your credit card (i.e., things you should be able to cover with cash), that can be a giant red flag to your creditor. Torabi also points out that frequent alcohol purchases could indicate the risk of a health problem that could have financial repercussions.

Are your bills caught up? Thanks to the infamous universal default policy, your creditors are able to keep track of — and punish or reward you for — your bill-paying habits. Late on the cable bill, utilities bill, the car payment or the credit card bill? It could cost you in terms of a lower limit or at least a higher interest rate.

Where are you living? Areas of the country with tanking real estate markets, like Florida, Detroit, and Nevada, can cause problems for local residents in more ways than one. That’s right, these area residents can see their limits lowered simply because the terrible local housing market might lead creditors to believe these customers are at a higher risk of financial distress.

Where are you working Are you a realtor? General contractor? Good luck. Are you an airlines pilot? Your credit limit could see decreasing altitude in the near future. Even if you’re successful, these are currently seen as high-risk occupations and your creditors could lower your limit as a result.

Like Big Brother in George Orwell’s famous novel, these credit card companies are keeping an eye on way more than you could have ever imagined. And for good reason — they themselves are at risk of financial distress due to bad loans. So cross your T’s, dot your I’s, and remember to whip out your debit card — not your credit card — next time you’re in the Starbucks line.