The Ethics of Credit Card Rewards and Bonuses

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The NY Times has a regular column called “The Ethicist”, and it recently talked about credit card rewards. A reader writes in and asks:

When shopping at big retailers, take up the offer for a new credit card to take advantage of the, say, 10 percent discount. Then when the bill comes, pay it and cancel the account (and risk a slight but temporary dent in your credit rating). I think this isn’t ethical.

The Ethicist disagreed:

That 10 percent discount is a sale by another name. It’s designed to get you in the door and shopping. As long as you buy something, you’re helping to make the store’s promotion a success. These credit-card offers never ask you to promise that you’ll keep the account open. They just ask you to sign up. After that, it’s up to the store to make you feel as if additional purchases are in your interest.

Whenever you are dealing with a big business, I always prefer to look at these things from a practical point of view. Retailers and financial companies are not offering these promos out of the kindness of their hearts. Their promotions are carefully planned to make them money overall, often in ways most people don’t even know about. Does a sale on milk mean that you have to buy all your other groceries at the store? No, but since you’re there you probably will buy something else. Are you obligated to? I don’t see how.

The real reason why credit cards have to offer things like $500 to sign-up for a new credit card is that people are really lazy. Most people have the same bank account they opened when they were 18 years old, and the same auto insurance company as their parents because by default that was their first insurance company. Most people that qualify for promotions have good to excellent credit scores and don’t even carry balances. It’s just that change is hard, and new customer acquisition costs are notoriously high in the financial industry.

You’ll notice that many sign-up bonuses now require a minimum spending requirement. Again, this is to make you put the card in your wallet or purse and use it several times, hopefully building up that habit. Also notice how credit card rewards focus on “everyday” categories like groceries. Another small psychological nudge.

I always look at new credit cards as trials. I will try them out, and see how I like it. I give them a chance – that’s all that I owe them. If I do, then I keep it. I’ve paid annual fees on the Starwood American Express card for years because I ended up discovering the benefits are worth it to me. If I don’t like it, then I cancel. That seems like the ethical thing to do.

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  1. And then how do you handle credit score hiccups as a result of canceling credit card? The reason I am still sticking to a secured credit card after 2 years is, I am seriously interested in building my credit history as I plan to buy a house and a (new) car in a very near future, so I don’t want any credit card denials and any other negative remarks on my credit report or score. Hence I am not even applying for a credit card, otherwise Chase and CapitalOne have been sending me offers almost daily !!
    I would like to have Amex Costco card though (So I finally joined Costco this year).

  2. Please refer to this post for the details:

    How Opening and Closing Credit Card Accounts Affects Your Credit Score

    I am not sure what your credit score is, if it is indeed marginal with few accounts, you may want to hold off on applications.

  3. There are so many types in life where there is a need to be ethical. That’s what I love about these credit card bonuses. No worries. The only ethical concern is deep down I know that while I”m making money off of them, it’s because some other sucker is losing money at the same time. But there isn’t anything I can do about it.

    Where the ethics come into play is with the smaller businesses that you can take advantage of. A local store got burned on an ill conceived groupon. I ignore bonus offers from my small local bank since I don’t want to hurt them. But with the major credit card companies…take what they are willing to give you free of guilt!

  4. I think “The Ethicist” should more appropriately be called “The Rationalist”. Though taking advantage of each other has become a legitimate part of our dystopia, except for the occasional enticements I see on My Money Blog, I chose not to participate. No Macys, Walmart, Nordstoms, Sunoco, Gap, Williams Sonoma, JC Penny or Panda Express Visa cards for me.

  5. The real payers of these bonuses are not companies, they are consumers themselves. Companies must mark up products to compensate for credit card transactions.

    When I swipe my 2% cash back credit card, I’m under no illusion that I’m really saving 2% off of the fair value of the product. I realize that I’m giving most of the credit card processing fee to me instead of the bank. For those not savvy enough to utilize good credit cards, they end up passing through those fees to the bank.

    The poor suckers paying with cash and debit subsidize those that swipe credit cards. If everyone paid with cash, prices would have to rise because there would be nobody to subsidize the credit card users.

    The same logic applies to credit card bonuses. We consumers end up paying for those, in the form of higher transaction costs (and thus higher product prices), or higher interest rates (for those unfortunate enough to not understand math).

  6. credit card consumer says

    I would like your opinion on this:

    I took advantage of a credit card sign up bonus ($250, no purchase required). I pocketed the money and dumped the card, at a cost to my credit score.

    When I called to cancel, the “retention specialist” (some flunky) had a righteous attitude and asked me (in very unprofessional-like tone and terms) about what I was doing. (I think he went off their script. As if being accusational would ever change someone’s mind and convince them NOT to cancel the card. Duh)

    Isn’t this already factored in as a cost of their doing business? As in “X percent of people” will sign up and cancel, but they still net “$Y dollars” in the end.

    So, I am still pissed off at the “retention specialist” — I was tempted to give him a verbal thrashing but I refrained cause he has access to my credit information.

  7. Ken In Georgia says

    I’m currently participating in the 5% cash back bonus program from Discover for gasoline purchases during the first quarter. Since I pay my balances in full every month and the interchange income from the merchants is probably only 2% or so, I figure Discover is actually losing money on me — as I make no other purchases on the card other than for gas. So they have to be making it up somewhere, and most naturally that means from those card holders who revolve balances. Although I benefit from this, the arm chair economist in me says we — consumers in aggregate — are all paying higher prices to support these reward programs — whether it be the interest rates revolvers pay on their balances or the interchange fees that merchants ultimately pass on in terms of higher prices on merchandise.

  8. Spot on

  9. I’m not following this.. What is unethical about the whole deal? Both want something. The buyer wants the goods sold, and the business gets money for the transaction.

    The seller lists the terms of the deal. If it’s not fair for the business, they will quickly figure it out. There are also what’s called loss leaders in retail.

    Same applies to the buyer. If they deal isn’t a good deal most people will figure it out.

    Also in physiology there the law of reciprocation. Hence why many spend more when getting a 10% discount. You feel you have the need to give back in return.

  10. Also don’t forget by opening a store credit card they can get more demographic data on you and find more about their shoppers.

  11. Ha!

    The problem I see with these ethical discussions is they usually seem to say “businesses have no ethical responsibility, but people do.” The whole point of these deals is to sucker people into credit card debt. & there are many extremely unethical processes on the credit card side that are perfectly legal. That I personally think are ethically appalling.

    I think it’s a joke to think that the few of us are even on the radar of these companies – they make *big bucks* from these deals – we are just a very small cost of their very big bucks.

    For reference, I had my identity stolen several years ago, and since I do have great credit, someone opened and maxed out about 6 department credit cards in one day, in my name. The damage? About $30,000? The credit card and department stores’ response? I found out about it the day that it happened!! “Yeah – we were trying to get a hold of you because this looked fraudulent. We know it wasn’t you.” Absolutely no interest to find and prosecute the criminals. I found it very maddening. But technically they were the victims. I was absolved of all responsibility, easily and quickly because it was so obvious. What does that say to you? A loss of $5,000 per store, for one fraudulent credit application? Just a cost of doing business. The cost of making credit excessively available – because it will always pay off in spades.

    Do you really think they give a flip about these $250 rewards – if you just take them? I did about 10 deals last year and most of them asked me what they could do to keep my business. I told all of them, “Give me ongoing rewards, and I will stay. I only signed up for the one-time reward.” None of them wanted to keep me. *shrugs* Actually, but they all have sent me advertisements to re-apply for the same card. They don’t care if that is your intent – they just hope some day you will change your mind, that some day they can hook you in. They will try again and again and again.

  12. I’m with you. I have a CitiBank card that offers American Airline miles, I used it in a quest to break the million mile mark. First year was free, but then $85/yr for less value than my 2% cash back card. I missed canceling before the first $85 fee hit, but now it’s time to cancel.
    This is nowhere near the line of unethical. That said, I’d like to do business with that reader, I know I’ll be treated fairly as s/he has pretty high standards.

  13. JoeTaxpayer – why didn’t you just call and request a cancellation once you saw the $85 fee? I’ve never been turned down before – just call and say you want to cancel the card because you don’t want to pay the annual fee. They’ll issue you a credit. Of course, I’ve always done this immediately after I’ve seen the fee – probably doesn’t work if you wait too long…

  14. alex – because I am an idiot some days. really. And I hope that my bad example (and your response) help others.
    I will move the recurring charges (netflix and a couple others) off this card and cancel today. Not going to wait again.

  15. Say there is someone, and he takes money from vulnerable people and gives it to more financially savvy people, while taking a large chunk for himself. Would you find it ethical to be one of the financially savvy people who directly benefited at the expense of vulnerable people? This is exactly what happens when you take advantage of credit card rewards.

    If you’re a cold-hearted, amoral, selfish or Ayn Rand-loving person, you probably see no problem with this. If you have a decently functioning moral compass, however, this should trouble you. If you are one of the millions of American who claims to be Christian (or almost any faith), I would imagine any coherent interpretation of the bible (or other religious text) should make this exploitation problematic for you.

  16. Wow, Jonathan! Excellent article! It is articles like this and the Costco membership one from a while back that really stick with me and has me still thinking about them weeks or months later. Great job!

  17. The Ethics behind Credit Card Rewards is not should you take advantage of them, but should they even be legal?

    I take advantage of them and I am more ok with Signup bonuses since like you say they are there to encourage you to sign up where the percentage bonuses are just wrong.

    The idea is this, nearly everyone uses credit cards. It is becoming harder and harder to use cash. The credit cards companies charge a percentage of every transaction then they offer some of that back to the consumer, in my case 2% on everything and sometimes more.

    I pay my bills on time and never pay any fees. So the credit cards are rewarding me to use their cards, but who is paying for these rewards?

    The people paying fees, usually the poor and credit ruined. They can’t get reward credit cards and often use prepaid cards that charge them to use it not the other way around. Making everything they buy essentially more expensive, since I can by the same exact thing for 2% less. It is essentially a Tax on those who don’t have the best reward credit cards.

    Rewards steal from the poor and make the rich richer. This should be regulated and standardized The US should have its own form of Credit Card or even Debit Card without fees, it should be free to use money.

  18. Jacob said: “Rewards steal from the poor and make the rich richer.”

    Please, it does nothing of the sort. Complete false logic and assumptions. See my post.

    Why must you assume rich people only use credit cards? Why can’t they pay in cash? After all, they have the money right?

    If you were to say it rewards the responsible and punishes the irresponsible would be a more accurate statement. And what is wrong with that? No one is forcing them to keep a balance every month. What happened to be responsible for your own actions?

    “The US should have its own form of Credit Card or even Debit Card without fees, it should be free to use money.”

    The US government??

    Ok then who is going to pay for such service? After all it does take money to build a network, transaction system, send out the cards, etc..

    Better yet with your logic, let’s outlaw credit altogether since it’s only helping the rich.

  19. Kelly Martin says

    Most of these offers have conditions that ultimately benefit the Issuer. Some of them lock you in some plans that will worsen your plight if you opt out. I believe that if you really want something free, try free samples or coupons. I say so because the 10% discount, like your case shows, will be recouped through another means as you accept the offer.

    In my humble opinion, it is unethical for a company to conceal any portion of a contract that plays to the disadvantage of the consumer.

  20. I usually don’t use the retailers credit offers unless I am getting a big ticket item where the 10% or better offer really pays off.

  21. Investor Junkie: The tax payers should pay for it, just as they do for highways,parks, ect.. and other things that benift the public.

    Yes rich people could pay in cash, but why would they when they could get a discount? The key is they have the option.

    The problem with rewarding the responsible and punishes the irresponsible, is that this isnt quite true. If you are poor sometime you simply cant get credit cards even if you have a good credit ratting. Same if you are unemployeed ect..

    It shouldnt be up to someone credit ratting to determain who gets a discount on nearly everything they purchace.

  22. @InvestorJunkie “Irresponsible” people are still vulnerable, and you benefit from their exploitation by using credit card rewards. It’s wrong for the same reason why there are many laws against predatory lending. I would argue it’s more irresponsible to be an affluent person, educated person and take advantage of vulnerable people.

    And the U.S. government could absolutely get involved. In addition to doing more to stop predatory lending, you can look at the success of the state-owned bank in North Dakota. Or look at how difficult it is to transfer money here as compared to Europe.

  23. @Jacob: and @Zach: What happens is we then all collectively pay more for services. The ones who are responsible get penalized then. How is that “fair”? Just like the housing crisis, I’m paying for others who didn’t understand or read terms of a mortgage.

    “If you are poor sometime you simply cant get credit cards even if you have a good credit ratting. Same if you are unemployeed ect..”

    If you are poor there are many cards available to that audience. If you are unemployed why should you get a card? Terms good? No but you can get one. But that’s the whole point why should someone who is a bad credit risk get the same terms as someone who is good?

    ““Irresponsible” people are still vulnerable” But who’s fault is that? How do you legislate responsibility? By legislating the credit card companies you hurt the one’s who are responsible. Again how is that fair?

    History has shown you can’t legislate away lack of responsibility and being stupid. Rich do get richer, even if you do try to make things more “fair”. Poor stay poor because lack of education of money and responsibility.

    In my own case I certainly didn’t learn about money from my family and wasn’t born with a silver spoon. It certainly isn’t taught in school. So how does anyone get of the cycle of poverty? Take responsibility and education.

    “predatory lending” is a myth. As long as the terms are clear, no one forces an individual to sign up for that retailer’s card do they? This goes back to the purpose of this post, the retailers are ethical as long as the terms of the card is clear.

  24. I don’t see how credit needs to be painted as rich vs. poor. Credit is paying bills on time, not based on income. I had credit cards with $18k annual income. People with good credit get lower mortgage rates, is that also unfair?

    As a merchant, I happily pay 3% to accept credit and debit cards because I know that convenience gets me more sales. American Express has historically charged higher merchant fees because their customers buy more stuff, they wouldn’t get away with that otherwise. That’s why small merchants like convenience stores sometimes don’t take AmEx but those with bigger average purchases like jewelry stores always do.

    Would you rather go back to personal checks and dealing with bounced checks and all that? Credit cards are a service that I pay for, just like web hosting or POS software or electricity. They deal with fraud, money collection, identity verification, all so I don’t have to. Would I like it to be cheaper? Sure.

  25. Love the credit card game. We don’t play it nearly as often as we used to. Mostly we just take advantage of 0% offers (like Discover) or ones that net us 500-600 with almost no effort (Southwest).

    You build good credit and as a perk of that great credit score you get free stuff from companies. You don’t have to be wealthy to enjoy the perks.

  26. @Jonathon You learned responsible financial habits without having a large income, that’s great! I’m in the same position. But there are people who are preyed on by the financial services industry, who haven’t learned responsible financial habits, and they should be protected.

    Those swipe fees you are happy to pay are so high because the AMEX and VISA are pursuing monopolistic behavior which come at the expense of consumers and business owners. The credit card companies are desperately fighting against legislation that prevent their collusion/outrageous profits. Unless your VISA/AMEX stock holdings outweigh your interests as a consumer or business owner, I don’t see why you are supportive of the credit card companies here.

  27. Well, we always end up in the same argument about balancing personal responsibility vs. government intervention. We can take away alcohol, guns, and lower the speed limit to 55 mph again as well. Politics, blah. I think terms should be clear and true predatory lending be abandoned, but consumer credit and debit cards are not evil in my book.

    Do you think that store prices have gone down as a result of the Durbin amendment? I wouldn’t lower my prices if I got a 1% fee instead of a 3% fee. I’d just get 2% more profit, which like I said I would like to have as a merchant if it happens. Right now I just see lawyers salivating over a huge class action lawsuit settlement.

  28. Unethical my a**. Look at the credit card companies routine practices. The majority of the things THEY do are unethical.

  29. It’s not unethical at all taking advantage of a credit card promos and cancelling. They do these promos precisely because they ultimately gain so much more- from more purchases.

  30. @Jonathon no one’s talking about taking away credit, we’re talking about regulating credit. And yes, it is a good idea to regulate alcohol and guns, it saves lives and makes our society better. Stopping credit cards from preying on vulnerable people would make our society better, even though you won’t get all the rewards you’ve been accustomed to.

    I think store prices would go down because most businesses, unlike AMEX/VISA, are subject to real competition. If you keep prices the same, another company could lower prices to steal business from you. And I’m still surprised your initial post said you were happy to pay the high swipe fees- maybe business is so great under Obama that a 2% increase in the cost of doing business is nothing compared the profits rolling in lately?

  31. I’ve read how these rewards are a transfer of wealth from poor to rich, and always found the arguments to be nonsense. If I use cash, or a non-reward card, I give up the 2% I now get back. The store pays the same merchant fee to the card issuer, but the issuer makes more profit on my transactions. No offense, but does anyone believe these big bank card issuers will sit down and say “our customers are choosing the non-reward cards, let’s reduce merchant fees and tell the merchants to all lower their prices 2%” ? Never happen.

    When I was a kid (I am near 50 now) I recall the adults would say to finish all the food on our plates “because they are starving in Biafra.” (this country was only around a few years, it’s part of Nigeria now) My response was “we should eat less, and send money to the Red Cross to help feed them, my getting fat won’t help.” The logic made no sense then, nor does the credit card reward logic make sense now.

  32. @JoeTaxpayer so why not use a credit union? Then that debit intercharge fee you are always paying with a card would likely go to an organization that doesn’t rip off vulnerable people. Credit cards do this, and by using them you (and everyone else involved) are making that exploitation possible.

    I think the answer for most people is, they’d rather gain a few bucks or have a little more convenience while blaming the exploited for their irresponsibility, rather than think they’ve been involved in anything that’s unethical.

    I agree with the Biafra logic, and I would absolutely suggest you only buy enough food that you’re going to eat (and don’t let it go to waste- as 33% of food in America does), and send the money you save to effective groups fighting famine.

  33. @Investor Junkie/Jonathan:

    Investor says ” “predatory lending” is a myth. **As long as the terms are clear, no one forces an individual to sign up for that retailer’s card do they?**

    Ah, if only that were true.

    I agree with Investor and Jonathan re the importance of personal responsibility. And it’s not the government’s role to play parent and instill this in its citizens. But I do think it’s the government’s role through legislation/regulation to “level the playing field” at the outset (i.e. opportunity, not outcome) by making sure those terms are clear, by insisting on robust disclosure, e.g. by requiring that people have access to their credit reports and score so we’re aware of the information we’re evaluated on, so we understand the most basic terms – rate, period, fees, and their triggers – of the loan or contract we’re signing, etc, etc.

    That’s why I believe the “plain language” requirements of Dodd–Frank, I think it was, are so valuable. E.g. the new disclosures on credit card statements that show the consequences of paying the minimum balance will result in paying more overall. You give people the facts and let them decide if it’s better to spend their money elsewhere or pay down their (high interest) debt – you let them decide what’s best for themselves.

    But many (if not illegal, then unethical, in my opinion) businesses wouldn’t do that if left to their own will. They intentionally obfuscate the terms and conditions of the contract. If most of it’s on the advice of lawyers to avoid liability, fine, but highlight the most important terms, upfront in normal English. But they know people won’t read the fine print. We should, but we don’t. If you have the savvy, temperament, time or patience to do so then more power to you – you deserve every penny you can milk from credit card rewards! But the vast majority are consumed with their daily lives and struggles to do so. That’s what makes it predatory. The lack of information *coupled* with the power differential between the individual and corporation (and its legalese).

    I grant there’s a liberal value judgment in that. But everyone can agree that society has an interest in people making better, more informed decisions for themselves. And (financial) education and knowledge are the best ways to foster this and it’s the government’s role to encourage it to that end. Everyone can agree that markets function better with less information asymmetry and it’s the government’s role to encourage more efficient markets.

    Nothing’s a silver bullet but you want to be moving in the right direction.

    PS: and if I we’re a benevolent dictator and got my way, and it caused banks to make less money (not to be read as “lose”) so they cancelled credit card rewards and bonuses, then so be it! Perhaps there are more efficient uses for that money than padding my savvy, sensibly tempered, leisurely and patient self! haha But I have a feeling banks would *still* have to find ways to induce me with enticements. That’s the part of capitalism I like.

  34. Jeff Crews says

    I have never cancelled a credit card. I love seeing interesting credit card rewards and then deciding if I should take them or not.

  35. @zach – because I don’t view the Credit union as a charity, and if I did this, instead of transferring the wealth from the institutions I admittedly despise to my own wallet, I’d be treating the CU users to that money. I prefer to keep these transactions and my charity separate.

    The few bucks have recently passed $12,800. The card I use gives 2% back to a Fidelity 529 account. My daughter is 13 and it should be enough to pay for a semester in college by the time she goes. As I said, since I don’t view the rewards as a “robbing from poor” exercise, I don’t feel compelled to change my habits.

    I agree with Cody above “you deserve every penny you can milk from credit card rewards!” and my pursuit of this takes no extra time, in fact it saves time, and also comes with both extra warranty and fraud protection.

  36. @Cody

    I agree with a lot of what you wrote except that government role isn’t to play parent and instill personal responsibility in its citizens. If by playing parent, you mean anything like enforcing rules to shape behavior, government absolutely should do this. The criminal justice system is an obvious example, or making individuals abide by enforceable contracts they make. It’d be great if everyone played by the rules and no authority figure was needed, but that’s not the case.

    I’m sure you didn’t mean to say we shouldn’t have police officers, but I think the popular phrase you used about government not playing the role of parent just buys into the ridiculous concept so many people have which rejects virtually all governance, instead of simply advocating for smart, transparent and effective governance.

    Financial companies make language complex to unethically make money off people (since they aren’t up front about their fees, charges, penalties, etc), and this obviously hurts the least educated and most vulnerable in society. So would you agree that it’s more ethical to leave this system (by finding a more ethical system- local credit unions) than to stay and benefit from that exploitation? I agree in the long run, hopefully with Dodd-Frank, reforming is a better solution, but I think until meaningful reforms happen (if they ever do), the best thing you can do is to join a credit union and put your money there.

  37. @JoeTaxpayer I guess I’d just rather not support institutions I despise if I can help it, especially ones that prey on vulnerable citizens. I’d rather support institutions that are ethical, fair, and improve my community rather than exploit it.

  38. @Zach, yeah I meant government has no role in that “nanny state” capacity in trying to enforce manners or impose lifestyle choices – not that there isn’t a need for the police. Laws need to be enforced and government’s doing this is preferable to vigilantism. One hopes Americans on all sides of the political spectrum realize this.

    Yes the “nanny state” is red herring that people conflate with “government regulation” in *general,* crowding out transparent and effective governance in particular. One’s lifestyle choices are one’s own and past putting out information (e.g trans fat on fast food menus, anti-smoking campaigns, etc) government shouldn’t do much more. People have to make good decisions themselves. There are exceptions when the behavior affects another directly – i.e. civil/criminal matters – and behavior (smoking) with larger social costs (healthcare) for which there are subtle ways for the government to influence behavior, but for the most part I agree with conservatives that the gov should stay out of overt lifestyle choices – even those in the bedroom.

    I don’t think banks or the people that work in them are inherently unethical. They (bank/bank stakeholders) are greedy and their business practices flow from this greed, not some inherent evil. So as I see the root of the problem as poor policy that allows these practices to occur. Just because you can advise me to invest in something you know will perform poorly so you can bet against it should be legal so long as you disclose the other position. That you can make risky bets with taxpayer money should be allowed only if private money has skin in the game along with the treasury, and the treasury has the opportunity to prosper along with the bank.

    These are simplistic examples but I agree the point is that policy and reform are key. But I don’t believe it’s up to individuals to influence this change through individual decisions such as banking at a credit union rather than a megabank. Just like it’s not my responsibility to invest my money along socially responsible lines. My responsibility with investing is to provide for myself and my family. As others wrote above, donating to charity is a much better way to accomplish such social aims. Call me greedy or individualistic (who isn’t a little) but if I like BoA or Chase’s products then I bank at a megabank. If I think a credit union is for me – for myself I’m using offering competitive banking products as criteria – then I opt for the credit union.

    I vote/campaign/donate/support public figures who I think will legislate/regulate/interpret policy I agree with. While you can “vote with your money” I just don’t see it being that effective outside the market. Nor is it my role to affect the reform that’s needed through who I do business with as a *consumer*

    BS or am I being a hypocrite?

  39. All this bickering is why am politically agnostic about these things. I do vote, but other than that I just react to what is available to me. Complaining on the internet gets me nowhere. If I can get 2% cash back on my major credit card spending while getting fraud protection and an extended warranty, then I take it. If it’s not available, then I just move on to the next time or money-saving idea.

    The Durbin amendment was not a case of government regulation for the benefit of consumers, it was a win of big retailer lobbyists over the big bank lobbyists. Do you really think Target and Wal-mart would spend tens of millions lobbying for lower debit card fees if it mean the benefit would flow to the consumer? Please. Like I said, politics, blech.

    It’s true though, most consumers have no real lobbying power, just votes. If only people actually voted more.

  40. @Zach: Who are these “vulnerable citizens” you keep referring to? Please give examples other than somone who is poor Unless they have mental problems and intellectually cannot read or understand simple math how are most people “vulnerable”?

    Is it college students? Since they were until recently targeted heavily when I was in college. And I took advantage of their offers and built up my credit.

    Why can’t you assume most act rationally? If someone is not financially responsible in the end most cases it’s their own fault. I’m more for better education on financial matters. The government certainly cannot make someone financially responsible. They will always find someway to shoot themselves in the foot. Instead the ones that financially responsible get penalized

  41. Eric Jacobson says

    Maximizing profit from dealing with banks and their offerings is not at all unethical. Banks know exactly what they are doing and they will terminate your accounts and bar you from further dealings with them if you sign up for too many cards or otherwise become too much of a risk based on their formulas. By maximizing bonuses you are not hurting a defenseless being, you are dealing with a very powerful partner in a mutually acceptable trade of credit and bonuses for possibility of profit to the bank.

  42. @Cody I agree with you for the most part on the nanny state (I think we need to tax smoking/alcohol/gas much more just to recoup the externalities/costs its imposing on society that taxpayers are burdened with). Although I’d wonder if you’d go as far to disagree with laws against polygamy by your logic.

    I disagree that individuals have no responsibility to invest ethically. If a company exploits/kills/enslaves people to produce cheap diamonds, I don’t think you can buy those diamonds and honestly think you’ve done nothing unethical. Saying the system should be reformed (which it should, and we should work for), does not make your purchase ethical.

    You vote with your dollars, and I think that’s a really important aspect of democratic capitalism that too many Americans ignore for the sake of cheap stuff and convenience. They’d rather not think about the consequences of their actions, and just believe that donating a few dollars to church or charity is all that’s needed to make them ethical people.

    I would say that supporting the main financial institutions undermines your votes, contributions and support for responsible policies/politicians. Companies are always making more money off you then you are off of them, and the industry effectively lobbies politicians in a way far beyond what individual voters are capable of. Shifting money to credit unions gives them a bigger voice in politics, and a smaller one to the unethical companies.

    I understand not everyone is in a position to make a switch to credit unions or sees the logic in it, but I would still highly recommend people become dues-paying members of Public Citizen, Center for Science and the Public Interest, or state and national Public Interest Research Groups (PIRGs), and sign up for their action alerts. This will give consumers a greater voice in politics to help counter the enormous influence of big businesses.

    While I think ideally the government should ensure all investments are somewhat ethical (like they should make sure all products are non-toxic)

  43. @Jonathon I agree people should vote more, but I think people should also vote with their dollars more. People spend hundreds or thousands of dollars on gas every year, but do people think about which companies are horrible for the environment and human rights and which are not so bad? (Unfortunately none have impeccable records, but large variations exist). I think people should reward Sunoco and Hess for their relatively high ethics, and try not to buy gas at ExxonMobil or BP.

    The Durbin amendment would lower the cost of businesses for all merchants, not only the mega-corporations. Obviously the big companies would save the most money, but I still see no evidence that every company would simply pocket and none would be passed on the consumer. In contract, all evidence says if we keep swipe fees high, VISA/AMEX will continue to reap outrageous profits from pursuing monopolistic behavior.

  44. I see what you’re saying, especially in the 4th paragraph. The root of the problem is the corporate money in politics. It’s so pervasive that it makes real reform futile. It causes people to disengage from politics and discourages them from voting, not to mention remaining informed. It’s corrosive and undemocratic. The corporate free speech idea facilitating this is BS in my view. If I buy Acme’s product, I’m giving them money for the costs incurred in producing the product that I’ll enjoy plus a given amount of profit that the market will support. It shouldn’t be carte blanche to pay lobbyists. Jonathan is right in that it co-opts the political process. Unfortunately politicians and even the supreme court justices are on the payroll too so it’ll take a constitutional amendment and the chances of that are less than winning the lottery. This alone makes you want to “stick” it to them by grabbing a sign up bonus and then dumping the card, unless you’d just buying into the same cynical game.

  45. @Investor That’s a story about an economics reporter who was taken by a subprime mortgage. Financial companies make it difficult for even sophisticated parties to understand all the terms and conditions, much less the 72% of Americans who never received a BA. Here is another intelligent person who had to go to extraordinary lengths to understand a simple bank communication. Reading the fine print of all the transactions you make would take weeks out of your year, and you still might not understand it all. Finance companies know you don’t have that kind of time, so even someone without mental problems, or someone literate, won’t be able to understand what they are signing up for.

    We simply don’t have rational consumers or perfect knowledge of the market- these are the fictional premises often assumed by libertarianism that can make that theory as equally impractical and irrelevant to society as communism.

    Government can’t make people financially responsible, but they could attempt that graduates of public education are financially literate. I know my public education contained virtually no useful information about managing finances in the real world. Most high schools are lucky if they get most graduates to be literate, let alone financially literate. This situation is a boon for the financial services industry, but terrible for most citizens. The government could also simply prohibit predatory practices- like how banks would charge you $35 for overdrafting 10 cents instead of simply denying the transaction, because they make billions on overdraft fees! This is precisely what Obama did when he signed credit card reform in 2009, which has helped lots of people, and we continue passing legislation preventing predatory practices since this industry is always finding new ways to take advantage of people. We won’t always be able to stop people from making bad choices, but we can certainly limit egregiously predatory practices to prevent a lot of unnecessary exploitation by unwitting consumers by highly sophisticated financial interests.

  46. As an employee, as well as an owner of a very small small business, I find the “Credit Card Game” to be bad business for everyone involved. *Note I did this a few years ago so I’m not preaching, I found it to be a tremendous waste of my time and efforts.

    If you have a marketable skill besides your day job, why would you mess around with these Credit Card “deals?”

    I did the math and my time, whether I dedicate it toward future income or toward family, it’s substantially more than messing around with the Credit Card Companies over a low interest rate or a $50 “sign up bonus”

    And at the same time since I wasn’t groveling for a lowly credit card sign up fee, which pulls someone down.

    If you’re worth your salt you can make more money doing what you’re skilled at than banging the dog filling out paperwork for some credit card offer. Are people seriously doing this?

  47. @Zach: To counter your arguments.

    I remember reading abou the NYT guy. Absolutely no sympathy for this guy. You can be book smart, but lack street smarts which this guy certainly lacks. In the statements he made, it should have even obvious to himself he shouldn’t bought a house. When you can’t afford rent, how can you afford a house?

    Again I ask how can you prevent someone from making stupid decisions? No one forced him and his new wife to buy a house did they? How can any of the new laws and regulations prevent this guy’s stupidity? It was his actions and he should be responsible for it. I certainly don’t blame others for my actions and financial mistakes.

    In reference to the article itself it could be said with the artificial low interest rates and government mandates to get everyone to own a house (regardless if they could actually afford it) caused the whole crisis. At least it was a big part of the issue besides Wall St, Bankers and the borrowers themselves. All responsible equally responsible for the mess.

    So in effect the government is saving us, from themselves! It allowed for people who normally (remember the days of needing 20% down) couldn’t get a house. The market was artificially manipulated to have what we got. How was that a free market? The RE market was already heavily influenced by the government at many levels: tax deductions, Fannie and Freddie, fed funds rates, etc…

    In your second point you are suggesting more rules and regulations will simply the legal documents banks will spew out? Really? So more rules and regulations by the government to mandate simpler rules by banks? How has history shown this to work out?

    Mark my words Dodd Frank law will do nothing of the sort. While there are some good things in there, it will not make financial instruments simpler and it certainly will fail in the other mandates of too big to fail and preventing another crisis. If it were a comedy it would be laughable, but it’s not.

    Banks in the end MUST make a profit. You take away the areas they were making profit, and they are forced to do it in other areas. Which then will be looked upon as government must regulate, etc and etc. The cycle never ends.

    “We simply don’t have rational consumers or perfect knowledge of the market- these are the fictional premises often assumed by libertarianism that can make that theory as equally impractical and irrelevant to society as communism.”

    Libertarianism never states the markets are always efficient and correct. What they do state is they work most of the time, and certainly works better than command and control. Nor does it state unfettered capitalism is the way to go. Regardless of the efficient market theory states, markets aren’t always efficient in the short term.

    At least we agree on education, as the power comes from the individual, not the state.

    Life will always be unfair, no amount of government regulation will make it “fair” If they try to, it’s possible to make it unfair for others in the process. In normal economic terms someone who’s responsible should be rewarded, while others who aren’t shouldn’t. Instead we are getting more and more perverse set of rules we as a society my live by.

  48. @Berk – I don’t think most rewards fans are proselytizing in favor of the cards’ rewards, just sharing their experience. To your point “If you’re worth your salt you can make more money doing what you’re skilled at than banging the dog filling out paperwork for some credit card offer. Are people seriously doing this?” as with nearly everything in life, there’s a balance. Just the use of my 2% cash back card takes no effort, one signup 13 years ago, no annual fee, etc. The benefits are beyond just the 2%, they offer the buyer protection, extended warranty, seller fraud, etc.

    With the current state of the economy, I’m not quick to judge others. I someone is “extreme couponing” I just suggest they do the math, and see if their hourly return is sufficient. The same applies to cards only more so. It’s not just the time, but impact to one’s credit score. Ignoring that, and just looking at the effort required, remember, half the US makes less than $50K family income. That $50 is half a day’s pay for many, so the $50 may be worth it. To you or me, maybe not.

  49. The more I researched about Ed Andrews NYT article and his book, the more I determined the guy is a fraud.

    While I haven’t read his book, I read a number of comments on Amazon and read the NYT article again. The guy pretty much blames everyone but himself (would you believe even Bush). When he does blame himself goes off in detail why it’s still not completely his fault.

    Such drivel, and speaks volumes of how judgmental and impartial the author is. The ends justifies the means, yet fails to mention his new wife’s serial bankruptcies. How is that not a critical part of the story? The story reeks of elitism, and entitlement.

    IMHO not a good example of someone we should feel was a “victim” as you portray. The guy was and is still an idiot. I certainly would NOT be looking towards this guy on economic or relationship advice for that matter.

  50. Eric Jacobson says

    @Berk – Check out the bonuses recently and currently available with some of the offers if you have average or above average credit. It takes maybe 1-2 minutes to fill out the Web form and you could have gotten as much as 100K British Airways miles, 150K American Airlines miles, 50K Thank you points (worth $500 in gift cards or just over $600 in travel credits), 50K in highly transferrable Chase Sapphire points, 50K United miles, 50K Southwest miles, and much much more. Over the years I have gotten tens of thousands dollars worth of cashback and flight credits for minimal investment in time and effort. You can just about double the above if you apply for personal & business versions of these cards or if you have your spouse do the same. Do a search for flyertalk special credit card offers, as an example. Some research and obviously discipline with the credit are needed.

  51. @Investor I wasn’t arguing in favor of artificially low interest rates and government mandates for homeownership- but a great strawman! Same for saying government regulation can making everything entirely fair. I’m saying the government take reasonable steps to make the market more fair, to prevent exploitation by financially sophisticated parties against lower and middle class Americans who are more easily exploited by financial products. Case in point, the 2009 credit card reform law- do you think this was entirely uncalled for because the credit industry is perfectly ethical and honest, or perhaps it was helpful piece of consumer protection?

    You say Dodd Frank doesn’t go far enough (hasn’t dealt with too big to fail), and I wonder what political party you might support since the GOP seem to have no desire in regulating wall street in any meaningful way.

    You say banks must make a profit, but do you think that a state-owned bank could be successfully run and give the money back to the state? I think the Bank of North Dakota provides any interesting answer to that.

    I don’t think more rules and regulations are needed, I think simpler (and smaller in number) rules that prevent predatory behavior are needed. And no- I wasn’t suggesting they should strip financial institutions of all profits- only ones that come from taking unfair advantage of consumers.

  52. If you’re not making at least $100 an hour after-tax on these credit card sign-up bonuses, then you’re not doing it right. It’s also a profitable hobby – remember that typing comments on the internet make you zero dollars an hour, but we still do it anyway. 🙂

  53. “Why must you assume rich people only use credit cards? Why can’t they pay in cash? After all, they have the money right?”

    Yes they could, but why would they carry around a ton of money when they can use a credit card with rewards? And even better make interest on their own money until they pay off the bill in a month?

    And poor people don’t have the salary that many rewards cards require. Or the credit history, credit line, etc. to make the most of their card. So a poor person will more likely pay their bills with cash than someone with a high income and a reward card.

    But who actually pays for those rewards? My reward card has a bunch of features, free concierge, cash back, travel insurance, etc. and no annual fee. Visa charges about 3% to a business when I use my card. I then get back like 1.5% in rewards (plus the other benefits). So Visa isn’t paying it, they are still making a profit. It is the merchant who is. And that means they raise their prices 3% on everyone just in case they use a high rewards card. This hurts cash payers who are more often poor. Can a rich person pay in cash? Yes, but they are much less likely than someone who is poor and doesn’t have the salary requirements for the rewards cards.

  54. @guy:

    As a biz owner I certainly would pay the 3% (it’s actually 2.3% in our case) than having to try to collect, which is a waste of time and money. I would even be willing to give a slightly discount to customers who paid via that method.

    The cash is in our checking account within two days. No fuss no muss. In our case (online) it’s certainly much easier than dealing with other payment methods and the dollar amounts we deal with. Many times with customers who pay us via check monthly it’s a big pain to collect on them if they are late. Don’t assume every merchant hates credit cards. I certainly welcome and actually would prefer it over checks. We don’t deal with cash since we are online, and not a retailer.

    Also you assume rich have to carry cash, why not a debit card? Bottom line this isn’t a rich vs. poor debate. This is a cash vs card.

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