Tuesday, May 19, 2009

Do Credit Card “Deadbeats” Get a Free Ride?

In credit card industry parlance, a "deadbeat" is a customer who pays his bill in full each month, incurring no finance charges. Since most cards have no annual fee, deadbeats pay nothing for use of the cards. In recent days, there's been much speculation that the "free ride" is over. Congress' credit card reform bill is due to be on Obama's desk by Memorial Day. The purpose of the bill is to limit the fees and penalties imposed on those who don't pay their monthly minimums (the folks the rest of us might actually call "deadbeats"). Understandably, banks aren't crazy about the bill. They've been hinting that they'll take it out on the other deadbeats. This might involve discontinuing rebate programs or grace periods and introducing annual fees.
I'm a hard-core deadbeat. I don't pay fees or interest, and I get free credit between the time I make a purchase and pay for it. That adds up. Assuming a 6 percent cost of funds, one month's free interest amounts to a 0.5 percent "rebate" on everything I buy. That's not all. My main card (get this: a "Platinum Rewards Visa Card" issued by State Farm Bank) gives me an additional 1 percent rebate on purchases, good for paying my home insurance premiums. Since I'm going to pay my insurance anyway, that's as good as cash.
Am I getting a free ride? Not really. I am paying for that 1.5 percent total "rebate," just not in ways easy to see. Merchants pay credit card companies a service fee for all credit card purchases. The fee usually ranges from 2 to 4 percent. When gas stations first starting taking credit cards, they offered a "cash discount" rather than a "credit surcharge." The credit card companies knew enough behavioral economics to demand that. Increasingly, transactions are electronic, and that means there's always a third party getting a cut. Today, to do business with Amazon, iTunes, or car rental places, you basically have to pay by credit card. Ergo, these businesses build the 2 to 4 percent fee into their prices. That means I pay 2 to 4 percent more than I would otherwise, in order to give the credit card issuer its cut. The issuer than refunds 1.5 percent to me. It's still made a profit of 0.5-2.5 percent (less its expenses) on the transaction. As long as the expenses are less than 0.5-2.5 percent, the issuer is making money off deadbeats.
Banks may well use the new credit card regulations as an pretext to test how price-sensitive their customers are. Would you really give up your credit card if you had to pay a $35 annual fee? (My answer: no, not for the one card I really use. I would cancel a bunch of rarely-used cards in my wallet.) Issuers are unlikely to do anything that causes too many customers to cut up their cards. The business—even the deadbeat business—is too profitable.


  1. You are helping others to grow their knowledge by sharing such a valuable information you have. This post is amazing & I'm glad for it. Compare life insurance prices

  2. Credit cards provide us the convenience of not having to appear at a merchant’s store to pay and get our items. With it, we can do the transaction at home and wait for the items to be delivered right at our doorsteps. With such services, credit cards charge their customers a sufficient amount to pay off the services that they do to keep the transaction going. So, if you don’t want to pay an excessive amount, it would be best that you pay your credit card dues on time.

    Rafael Conner

  3. Really great news!!! this information is well worth looking everyone. Good tips. I will be sharing this with all of my friends! Thank you for sharing valuable information.
    Wireless credit card machine

  4. Link exchange is nothing else but it is simply placing the other person’s website link on your page at suitable place and other person will also do similar in support of you.
    Credit card machine

  5. Our high risk merchant process service is contingent upon our dedication and commitment to the merchants. Excellence high risk merchant processing is our main vision as we try to be the most effective within the business, which we guarantee to supply you with top-notch client service at easiest method with lowest worth.
    High Risk Merchant Processing

  6. However it is generally measured worth paying such price as they can actually get better one's credit score. credit cards

  7. A very awesome blog post. We are really grateful for your blog post. You will find a lot of approaches after visiting your post.
    Credit Card Application
    Credit Card Payment
    walmart credit card application
    Apply for Sears Credit Card
    Chase Credit Card Payment


  8. Sears Credit Card Account Login! Again, for I know. Ready to share new things that are useful. You and your friends.

    sears credit card customer service

  9. Hello all
    am looking few years that some guys comes into the market
    they called themselves hacker, carder or spammer they rip the
    peoples with different ways and it’s a badly impact to real hacker
    now situation is that peoples doesn’t believe that real hackers and carder scammer exists.
    Anyone want to make deal with me any type am available but first
    I‘ll show the proof that am real then make a deal like

    Available Services

    ..Wire Bank Transfer all over the world

    ..Western Union Transfer all over the world

    ..Credit Cards (USA, UK, AUS, CAN, NZ)

    ..School Grade upgrade / remove Records

    ..Spamming Tool

    ..keyloggers / rats

    ..Social Media recovery

    .. Teaching Hacking / spamming / carding (1/2 hours course)

    discount for re-seller

    Contact: 24/7