Wise Money Decisions

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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The IRS has a page describing the benefits of paying your taxes by credit card.  They tout the:

• Convenience,
• Security,
• Proof of payment, and
• Ability to earn cash, miles, or other rewards if you have a rewards card.

Paying your federal taxes by credit card comes with a price  -  2.49% to be exact.  It’s called a “convenience fee” although I don’t find the fee to be convenient.  The card issuer charges the fee because by law the issuer is not allowed to charge the IRS a fee.  

I usually jump at the chance when I learn of an opportunity to pay one of my regular bills by credit card because my card pays 1.5% cash back.  However, when there is a convenience fee you need to consider the numbers.

If You’re Getting a Refund, You’re Also Getting an Assignment

Before we look at credit cards, first I want to talk to those of you that don’t owe taxes.  If you are employed and you don’t owe taxes on your 2007 tax return, your employer is over-withholding from your paycheck.  If you are self-employed and you don’t owe taxes, you are over-paying your estimated taxes.

If your refund is big, say more than $1,000, I’m giving you the assignment to learn about withholding and adjust the amount withheld from your paycheck (if you’re employed) or the amount of your estimated taxes (if you’re self-employed) so that you won’t receive a refund next year.  No matter how hard I rack my brain I just can’t think of a good reason to give Uncle Sam an interest-free loan. 

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Yesterday I discussed the financial benefits of using credit cards.  Today I’ll cover the non-financial benefits.  I’ll discuss why some people don’t use credit cards despite all the benefits when used properly.  Finally I’ll discuss the possibility that credit cards raise consumer prices.   

Non-Financial Benefits

Let’s see, credit cards give you cash savings of over $1,000 per year, plus much bigger savings from lower interest rates on mortgages and car loans.  Do you need any other benefits? 

How about convenience!

Years ago I carried a blank check in my wallet just in case a place didn’t take credit cards.  After I used it I would forget to replace it.  It was a hassle to try to remember to replenish it each time. 

I never carry checks anymore.  It’s too much of a hassle.  Besides, anyplace I can afford takes credit cards anyway.

I never have to carry cash.  I don’t have to scramble looking through dresser drawers and cabinets to find cash before I leave the house. 

If my wallet is stolen, I’d much rather lose credit cards than cash or check.  I can cancel my credit cards quickly to minimize any losses.  But if I lose cash, it’s gone.  If I lose a check, my bank account number is vulnerable.  It is hard to recover money from a compromised bank account.

Think of all the convenience products you buy.  Dishwashers, washing machines, and GPS make life more convenient.  They also cost money. 

Credit cards, on the other hand, make life more convenient and they don’t cost a thing if used properly.  They save you money.  It’s not often you get a convenience product that saves you money.

Read the rest of this entry »

Every so often I see someone give the advice that you should shred your credit cards and use cash or debit cards instead.  This may be good advice for people who have a dysfunctional relationship with consumer debt.  It is not good advice for most people.

There are four big advantages of using credit cards.  The first three advantages put more money in your pocket.  The fourth advantage is one of convenience.  Today I’ll cover the first three from smallest to largest.  Tomorrow I’ll cover the fourth advantage and address a few miscellaneous points.

Defer Payments

First, credit cards allow you to defer payments. 

When you buy groceries at the supermarket with a debit card or cash, you spend the money immediately. 

On the other hand, when you use a credit card you typically keep control of the money for about 30 days before you finally spend it.  Here’s how I calculate 30 days:

It takes a day or two for the purchase to post to your account.

On average it takes a couple weeks to receive the bill from your credit card company.  Half your purchases occur during the first half of your statement period, while the other half of your purchases occur during the second half of your statement period.  If you average out the timing of all the purchases, the “average” purchase occurs right in the middle of your statement period.  In other words, you don’t get the statement until 15 days after the “average” purchase.

After you receive your bill, you have a few weeks of grace period before you finally make the payment.  You don’t want to wait until the last minute to pay your bill if you send in a paper check or use your bank’s online billpay.  But if you pay on the credit card website you can wait to the last minute if you want.

Add it all up and you have about 30 days of deferral.

Why is it nice to keep your money an extra 30 days?  Time value of money of course.  If you invest the money for 30 days before you pay your bill, you get to keep the earnings.  If you pay with cash or debit card, the bank keeps the earnings.

You might be thinking, “Big deal!  It’s just 30 days of interest.  It can’t be that much.”  Whether it’s “much or not much” depends on your perspective.  It’s not a big deal for a single month.  But it gets to be a bigger deal when added up month after month after month.

Let’s do the numbers:

Suppose you spend $2,500 per month on credit cards.  You float the $2,500 in a 5% money market account for 30 days until you pay the bill.  You make an extra $10.42 per month.  Over the course of a year, that’s an extra $125.  Granted, it’s not a huge amount.  But you didn’t have to do anything for it.  No reason to leave money on the table.

If you invest the float money at a higher rate, you make even more of course!

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