Politicians have been going after credit cards as if they were public enemy number one. Barely a week goes by without news of some proposal to limit the amount of money credit card companies can charge.
The fact that many of these proposals have bipartisan support suggests that politicians on both sides of the aisle believe going after credit card companies will win them votes. But are people really so up in arms about their credit cards?
Not according to a CardRatings.com survey. It turns out that an overwhelming majority of credit card customers are happy with their cards. In fact, the survey showed credit cards have approval ratings that would be the envy of just about any politician.
Politicians campaign against credit cards
The following is an overview of some of the proposals that have been made in recent years to limit credit card revenues.
Swipe fees
Swipe fees are charges that merchants pay to have credit card companies process their transactions. These fees are formally known as interchange fees, though they’re more commonly called swipe fees.
When you use your credit card at a store or a restaurant, that establishment pays a fee. The size of that fee varies based on several factors, but most are between 1.5% and 3% of the size of the transaction.
In return, the merchant is able to avoid handling cash for every transaction, and consumers get the convenience of not carrying cash. Swipe fees also help fund the rewards customers earn when they use some credit cards.
These fees are negotiated in the marketplace. Credit card companies have a lot of power in that negotiation because they control the processing networks. On the other hand, retailers also have their share of power, ranging from the leverage of giant retailers like Amazon and Walmart to multiple industry lobbying groups.
Proposals to lower swipe fees would take this negotiation out of the marketplace and put it in the hands of the government. The argument for this is that it would save consumers money, since merchants pass the cost of swipe fees along to their customers.
This argument assumes that consumers would benefit because merchants would cut prices if their swipe fees were lowered. However, a study by the Federal Reserve Bank of Richmond found that it’s far from certain that merchants would pass those savings along to their customers.
In 2011, a similar measure cut the interchange fees debit cards could charge. The Richmond Fed looked at the impact of this a few years later. They found that three-quarters of merchants reported no change in customer prices as a result of the swipe fee cut. Just 2% cut them, while 23% actually increased prices.
Based on that experience, it seems a cut to swipe fees would benefit merchants much more than consumers.
➤ LEARN MORE:How the credit card swipe fee settlement could cost you
Interest rates
Another proposal that has grabbed a lot of media attention is the idea of capping credit card interest rates at 10%.
Certainly, credit card interest rates are much higher than those on other forms of consumer credit. For example, they are about twice as high as personal loan rates.
However, averages don’t always tell the story. Both credit card and personal loan rates vary a great deal from one lender to another. In either case, the rate you get depends on how diligently you shop around.
These rates also depend a great deal on how good your credit is. Rates for people with poor credit are much higher than those for people with excellent credit. So, people with poor credit pull the average rate up.
There’s ample justification for this. Overall, the percentage of credit card accounts that are 90 days or more overdue is 2.64%. In contrast, for subprime customers, it’s 22.29%. Naturally, credit card companies need to charge significantly higher rates to make up for those riskier customers.
One argument against an absolute cap on credit card rates is that it would make it difficult for card companies to issue credit for all but the most reliable customers. This would cut people with lower credit scores off from access to credit and the opportunity to improve their credit records.
➤ LEARN MORE:The credit paradox: Why lowering interest rate caps could make borrowing more expensive
Late fees
At one point, the Consumer Financial Protection Bureau (CFPB) announced plans to cap fees for late payments on credit cards at $8. This was challenged in court and ultimately abandoned by the CFPB.
The CardRatings.com survey found that just 6.43% of respondents had missed a credit card payment within the past year. So, while politicians and regulators have painted late fees as a critical consumer issue, those fees actually affect only a small minority of credit card customers.
➤ LEARN MORE:Tips to avoid credit card late fees
Data shows consumers are happier with credit cards than politicians
With all the credit card proposals politicians have put forward, you might get the impression that consumers have serious issues with their cards. In contrast, though, the CardRatings survey found that most are satisfied with their cards.
- 85% of survey respondents described themselves as “satisfied” or “very satisfied” with their credit cards
- 5.11% described themselves as “unsatisfied” or “very unsatisfied”
- 10% reported neutral feelings towards their cards
Those numbers suggest that credit card fees and interest rates aren’t nearly as urgent an issue with consumers as some legislators and regulators have suggested.
Credit card customers use the marketplace to address issues
Perhaps one reason why credit card customers haven’t been clamoring for credit card reform is that it’s a competitive market. If consumers don’t like something about a credit card, there are always alternatives they can consider.
In fact, the CFPB’s most recent Terms of Credit Card Plans survey found data on over 500 cards available in the U.S.
The CardRatings survey found that consumers are not hesitant to avail themselves of these choices, with 40.5% of respondents saying they felt there was a better card available to them, and another 40.2% saying there might be.
With those other choices out there, more than half of survey respondents said they plan to apply for a new credit card within the next year. This suggests that most credit card customers are actively watching the marketplace for cards. That’s an excellent way for consumers to keep the credit card companies on their toes.
How to get the best value out of your cards
There are many things credit card customers can do to get the best value out of their cards.
Shop around for the best rates
Credit card rates vary greatly, and there are a lot of choices. Also, rates are changing all the time. Make it a habit to compare rates regularly to make sure you’re getting the best deal. The higher the balances you tend to carry on your cards, the more important this rate shopping is.
Pay your bills on time
Avoiding late fees is as simple as paying your bills on time. Get to know the billing cycle for your credit cards so you can plan for those payments.
Besides getting the timing right, paying your bills on time is also a matter of budgeting to make sure you have the money available when the time comes. Credit card minimum payments are generally relatively small. If you start coming up short of having the money to meet those payments, it’s a sure sign that you need to rein in credit card spending.
Pay your balance in full
As for credit card interest rates, the best way to minimize those is to pay your full balance every month. Credit cards should not be used for long-term borrowing.
Regularly carrying a balance can be very expensive, and is a sign you need to rethink your finances. The answer may be some combination of spending less and choosing more cost-effective forms of borrowing for big-ticket items that you need to pay off over time.
Work on your credit score
Credit card interest rates are much higher for people with poor credit. Often, the difference can be 10% or more. Even if you don’t raise your credit score from poor to excellent, you can shave a little off your interest rate by making incremental improvements.
The number one factor in determining credit scores is payment history, so getting in the habit of making payments on time should help. Keeping low balances owed can also help your credit scores. Those practices will help you avoid late fees and interest charges directly, plus could earn you a lower interest rate through credit score improvement.
Use rewards thoughtfully
While you may not be charged directly for swipe fees, a growing number of merchants are charging their customers surcharges to make up for those fees. If you have to pay a surcharge, one way you can make up for it is by making sure you use a card that offers generous enough rewards to offset that expense.
Credit card fees and interest rates may not be as much of a sore point as politicians seem to think. Still, that’s no reason you should pay any more than you have to. There are things you can do to reduce credit card costs without any help from the government.
