Wise Money Decisions

“Why the Credit Bureaus Can’t Get It Right” from smartmoney.com

Regularly I get emails from other websites inviting me to promote their site.  I rarely take them up on the offer. 

When I do, it is my policy to make full disclosure to my readers how I came across the site.

Today GoCollege.com asked me to mention their “Student’s Guide to Personal Finance.”  I scanned through the guide and found some interesting thoughts and statistics. 

Here is one:

Today’s plastic-based society means that both credit and debit cards are easy to come by and easy to use. The reason that these cards are so easy to use is that a large number of people want the opportunity to claim some of your future earnings.

The rationale is quite simple. As long as you owe them money, they in essence, own a piece of you and your future.

It is interesting to think of my debt as someone’s claim on my future income.  That’s exactly what it is, but I don’t often think of it in those terms.

Another interesting statistic:

“As of 2004, undergraduates had an average credit card debt balance exceeding $2,100.”

Note that this is credit card debt only.  Many students have other loans as well.

I consider myself very fortunate to have graduated with zero debt, credit card or otherwise.  In fact, through scholarships I was able to come out several thousand dollars ahead. 

I was even more fortunate to finish a master’s degree with zero debt.  I was the beneficiary of fellowships that paid me while I studied.  I have been grateful every day of my life for my good fortune.

By the time I finished graduate school, I had a new sedan and some $15,000 in the bank. 

Then I went to Stanford Law School.  All the money was gone when I paid first semester’s tuition.  I’ve had student loan debt ever since.

Finally, let me mention one other quote from the site that is consistent with my own experience:

When it comes to financial aid, we turn to the words of Kalman A. Chany:

“The theory is that money goes to the people who need it,” Chany tells Newsday.com. “The reality is that money goes to the people who best understand the process.”

I had many hard-working, needy, deserving friends in college.  Some of them had scholarships, but most did not.  Few of them took the time to understand the process.  My own experience says that taking the time to understand the process is well worth the effort.

Today I introduce a new feature called “PFAIRQWOBRAR.”  

As you might have guessed, PFAIRQWOBRAR stands for “personal-finance and investing related quotes worthy of being repeated and remembered.” 

Some are funny.  Some are insightful.  A few are both.

PFAIRQWOBRAR Quote #1:

“Credit cards are like buzz saws. They are useful tools but dangerous if in the hands of someone who doesn’t use them properly.”

– courtesy of Consumerism Commentary

One of the credit reporting agencies, Trans Union, recently settled a class action lawsuit.  They are accused of misusing consumer information for marketing purposes. 

Included in the class is anyone that “had a credit card, loan or credit account” anytime in the last 21 years.   So, everybody.

Here’s where it gets to be like a game show, as Wallet Pop points out.  You can choose one of four remedies:

• Six months of their credit monitoring service and possible cash payment;
• Nine months of their credit monitoring service (no cash payment);
• Possible cash payment;
• Do nothing and preserve your right to sue individually.

You guessed it, no one knows what the cash payment will be.  Don’t you love these things?

I’m signing up for the 9 months.  The credit monitoring service includes your credit score, not just your credit report.  From what I understand, you can check your credit score every day if you want. 

I want to see how my credit score fluctuates from day to day and month to month as I incur debt, pay bills, sign up for new credit, etc.   Having a first hand look at how the credit score works is worth way more than the 35 cents I may or may not get from the cash payment option.

You must sign up here or by phone (1-866-416-3470) by September 24, 2008 if you want to be included in the class.

I’ve long been aware of one chain of gas stations that openly charges cash customers less per gallon than credit card customers. 

Apparently it’s not alone.  According to a local paper, the Contra Costa Times:

You’re getting charged for using a credit card - up to 3 percent per gallon - and may not have known it.  …

Typically, those who pay with credit or debit cards are charged a fee that’s included in the advertised gas prices, and those who pay cash aren’t charged that fee - between 1.5 percent and 3 percent per gallon.

Who knew?

Yet another reason to use a gas rewards card that pays 3% to 5% for gas purchases.  Otherwise you’re subsidizing everybody else that does, not to mention paying too much for gas.

There have been reports of gas stations refusing to accept credit cards.  Here’s why:

Let’s say the credit card company charges the gas station a 2% fee.  A Honda Accord pulls up and buys 15 gallons.  When gas was $2/gallon, the Accord paid $30 for his gas.  The credit card company charged the gas station 60 cents for the transaction, or about 4 cents/gallon.  The station was left with a few cents of profit per gallon.

Now that gas is $4.50/gallon, the credit card company charges $1.35 for the same transaction, or 9 cents/gallon.  The higher fee pushes the station’s profit into negative territory.  The more the station sells, the more it loses. 

There’s an old Silicon Valley joke about the start-up that told its investors, “We lose money on each sale, but we make it up on volume.”  

To be fair, it’s not an old joke at all.  Before 2001 it wasn’t a joke so much as a business plan.  About that time people remembered their fifth grade math.  Multiply your sales revenue by a negative number, and you get a negative number. 

I hope you’re thinking, “But wait, even though the fee is higher, the station is making more per gallon and should be able to absorb the fee.” 

But alas, the station doesn’t make more per gallon.  The extra revenue is eaten up by oil producers, oil refiners, gasoline transporters, and government taxing authorities that are higher on the proverbial totem pole than the station. 

So what are the stations doing?  Some have stopped accepting credit cards.  Others are joining an effort to persuade the credit card companies to charge lower fees.

What should you, the mighty consumer, do?  Continue using your gas rewards credit card.  The station will make less from your patronage.  If that makes you feel bad, you can console yourself with the hundreds of reward dollars you’ll save each year. 

If you still feel bad, use your rewards dollars to buy Cheetos from the gas station. 

We had plenty of time to kill at the airport a couple weeks ago. 

My 2-year-old wanted to spend it doing escalators.  We couldn’t find a pair of up and down escalators next to each other.  Instead we found a down escalator next to a flight of stairs.  When I finally dragged her away an hour later I had done enough stairs to increase my actuarial lifespan by a few years. 

I had lots of time to get to know the other people on my flight.  One guy told me he had booked a ticket on ATA a few weeks ago.  Hours after he booked, ATA announced it was ceasing operations and filing for bankruptcy. 

My first thought was, “You book a flight and hours later the airline goes bankrupt.  You’re hexed.  Don’t stand close to me.”

My next thought was, “I hope you read my blog and know you should book airline flights with a credit card.”

He had indeed booked with a credit card.  He called the credit card company to ask how to get his money back.  They told him they had advance knowledge of ATA’s announcement and avoided charging it through.  His got his money back on the spot.

It’s nice to see that something I wrote about actually works in the real world!

A Lot of People Have Worthless Airline Tickets Right Now

There are a lot of people holding worthless tickets right now.  According to the Atlanta Journal-Constitution:

Five U.S. discount carriers have either declared bankruptcy or gone out of business in the last two months: Frontier, Aloha, Skybus, Champion and ATA, a unit of Peachtree City-based Global Aero Logistics.

If they didn’t book with a credit card, they will next time!

Years ago I read that a gasoline station doesn’t make money by selling gasoline.  The gasoline draws people to the station, and some of those people buy tiny $3 bags of Cheetos to go with their gasoline.  The margin on the gasoline is tiny, but the margin on tiny bags of Cheetos is not tiny.

Writing a blog works the same way.  A blogger doesn’t make any money by posting content.  The content draws people in, and a few people click on ads.  At least that’s what I hear.

Back to gasoline.  All these years I’ve marveled at the gasoline business model:

• Sell a popular low-margin product to draw in crowds;
• Make high margin products easily available;
• Hope that some people buy the high margin products.

When I stop at a gas station I fill up my tank and I leave.  Unless I’m traveling a long distance I never go in to buy something.  Even worse for the gas station, I always use my American Express Blue Cash or my Discover Gas Card, both of which pay 5% cash back on gasoline.  The gas station gets charged a higher fee for rewards cards than other credit cards. 

Since I use a rewards card and don’t buy Cheetos, I always figured gas stations might actually lose money when I buy their gas.  That would make me a gas station’s worst nightmare. 

I’m Not Their Worst Nightmare After All

A few days ago I learned that “gasoline accounts for 70 percent of a typical station’s revenues, but only 30 percent of its profits.”

It surprised me for two reasons:

• If gasoline is 70 percent of revenues, then the other 30 percent is Cheetos and other junk food.  Check my math, but if the average price of a fill up is $50, then the average motorist is buying $21 of Cheetos per stop. 
• 30 percent of profits on gasoline is a lot more than I had thought.  For years I thought it was basically zero.  If the gas stations are making 30 percent or their profits on gasoline, then their margin on gasoline is much higher than I thought, which means they’re not losing money when I use my rewards card, which means I’m not their worst nightmare. 

I never felt guilt when I thought gas stations were losing money on me.  But it’s nice to know the gas station can make a small profit even if I don’t buy Cheetos.

There are several good reasons to use credit cards.  They save you money, they build your credit history, and they’re convenient. 

Recently I became aware of one more reason to use credit cards.  ATA Airlines announced last week that they are discontinuing operations.  For customers that purchased tickets using a credit card, their homepage says:

“ATA customers who purchased tickets using a credit card should contact their credit card company or travel agency directly for information about how to obtain a refund for unused tickets.”

If contacting the travel agent or credit card company fails, a customer would also have the option of initiating a credit card chargeback.

Tougher Road to Hoe if You Bought a Ticket with Cash or Check

On the other hand, customers that purchased tickets using cash or check may only seek a refund by become a bankruptcy creditor:

“ATA currently is unable to provide refunds to customers who purchased tickets directly from ATA with cash or a check. These customers may be able to obtain a full or partial refund for their unused tickets by submitting a claim in ATA’s Chapter 11 proceedings.  Information about submitting a claim will be available at the following website: http://www.bmcgroup.com/ataairlines.”

Conclusion

Let me think.  Would I rather call my credit card company?  Or would I rather figure out how to submit a claim to bankrupcty court, become a bankruptcy creditor, wait through the long bankruptcy process, and hope there’s enough money left for me after the senior debt gets paid?  That’s a tough one.

Unless you have a dysfunctional relationship with credit, you ought to use credit cards.

A few days ago I received a mailer from American Express.  They want me to pay my taxes using my Blue Cash card.  Apparently American Express doesn’t read my blog, because just last week I discussed why it’s a bad idea to pay your taxes by credit card.

The mailer focuses on the cash rewards I will receive from using the card.  The mailer helpfully reminds me that I can use the cash to buy certain featured items.  See if you can guess the items from AMEX’s descriptions:

First item: “A getaway to get away”

Second item: “Get a new perspective”

Third item: “A dazzling showstopper”

(Click below on “Read the rest of this entry” for the answers)

Remember, most people should not pay their taxes using a credit card.  Unless you’re on some kind of promotion with your credit card, your cashback bonus plus the time value of money from deferring your payment will not make up for the 2.49% “convenience fee.” 

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