credit cards

Does Checking Take from the Poor and Give to the Rich?

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A recent study found that credit cards transfer wealth from the poor to the rich. J.D. of Get Rich Slowly stated that it would not change the way he uses credit cards. Adam at ManvsDebt used the study to support the reasons he does not use credit cards.

The obvious alternative to credit cards is to use a debit card tied to a checking account. These checking accounts represent a transfer of wealth from the poor to the rich as well.

The Federal Reserve Bank of Boston includes this quote on their download page. “Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general.” Banks cover the cost of providing a checking account mainly from overdraft fees and debit card interchange fees. A 2006 FDIC study found a correlation between household income and overdraft fees, those who live in lower income areas were much more likely to have incurred overdraft charges. Following the reasoning in the credit card study the conclusion is that checking represents a transfer wealth from low-income to high-income households.

Adam concludes that “consumers who use cash or other forms of payment pay marked up prices to account for the transaction fees generated by those which use credit cards.” Since debit cards also charge interchange fees it is fair to conclude that they account for some percentage of the marked up prices. Debit card users benefit because the fees cover the cost of providing them with a checking account and sometimes debit cards provide rewards as well. It is only the cash customer paying the marked up prices who doesn’t receive any benefit. Who is most likely to be paying cash?

Adam has chosen to opt out of the credit card industry because he doesn’t agree with credit card industry practices. Debit cards are a lesser evil but they do share many of the practices of the credit card industry.

Is the answer to just use cash with no checking account? Those who don’t have checking accounts often have to buy money orders and pay a hefty fee to cash their paychecks. I haven’t done the research but it is easy to see how that would also represent a transfer of wealth from the poor to the rich. Just using cash doesn’t seem to be a viable alternative.

I am going to just continue using my credit cards, debit cards, and checking accounts as usual. Although I don’t agree with some of the practices of these companies by being financially responsible one can avoid much of the cost.

What would be your solution?

My Bankruptcy Experience

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In 1996 I declared bankruptcy.  That was the culmination of a series of bad financial moves.  I was only about $20,000 in debt which doesn’t seem like that much to me now but at the time seemed like an insurmountable amount.  My credit card companies kept hitting me with late fees,over the limit fees and punitive interest rates so even though I was making monthly payments my debt just kept getting larger.  I don’t blame the credit card companies for my getting into debt but they did help push me into bankruptcy.  I tried to work with them but they wouldn’t cut me any slack.  With the credit card companies offering no flexibility on the repayment terms the situation seemed hopeless. I gave up and declared bankruptcy.

The bankruptcy law has changed since I declared bankruptcy so someone filing today would probably have a different experience.  The lawyer fees and court fees together were about $500.  I’m sure it would cost more now but it was a lot to me at the time and it was a struggle to come up with the amount.  The bankruptcy hearing itself was pretty simple.  None of my creditors showed up.  The judge asked me if I had any assets. I replied that I did not and that was pretty much the extent of it.

The aftermath wasn’t too bad either.  I’m sure my credit was very poor after that but I wasn’t applying for any loans so it didn’t really matter.  I was able to rent an apartment while the bankruptcy was pending.  The apartment management didn’t really care about the bankruptcy.  I was told as long as my rental history was ok then there wouldn’t be a problem.  My rental history was fine because I always considered my rent payments more important than credit card payments.

My credit today is great.  My credit score is 731 and has been in the high 600s/low 700s for several years.  I receive credit offers all the time but right now I have all the credit cards I need. Even before the bankruptcy came off my credit record my credit was better than average.  I didn’t do anything specifically to try to improve my credit but just paying my bills on time seemed to do the trick.

After the bankruptcy I got a secured credit card which I was eventually able to convert to an unsecured card.  I received a lot of offers for secured credit cards after I went bankrupt and most of them offered terrible terms.  If you’re going to get a secured credit card make sure you look carefully at all of the potential fees.  I’m not sure if having the secured card helped rebuild my credit sooner or not.  Not having a credit card at all is also a reasonable strategy to consider if you’ve just declared bankruptcy.

All in all my bankruptcy experience wasn’t that bad. I wouldn’t do it again in the same circumstances though. Hopefully I’ve learned enough since then I won’t be faced with that situation ever again.

Alternative Income- Cash Back

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This isn’t really an alternative income source since you have to spend money to get it. If you only purchase things you would spend money on anyway though this provides a little extra money. There are two main ways that I get cash back.

The first way is through online cash back shopping portals. The ones I most commonly use include Ebates ($10 signup bonus), Big Crumbs, and My Points. There are many more out there but these are the ones I’ve used and know.

I’ve mainly used Ebates for online shopping.  Their cash back is good but they only let you cash out four times a year and you have to earn a minimum of $5.01 not counting referral bonuses to cash out. This is a problem for me since don’t shop online(or offline) that much.

I’ve just started using Big Crumbs but I think it is going to be my main cash back site now. They pay on a monthly schedule. One of their big draws is that they allow you earn cash back on Ebay purchases. The other thing I most like about them is they allow you to earn money on your referral’s shopping activity. If you have a lot of referral this could be a decent amount of passive income.

MyPoints I don’t actually do any shopping through. I just get paid to read their emails and occasionally do a survey. I joined them earlier this year and it looks like I’ll make about $20 a year in gift cards from them. If I were more active I could increase that amount.

The other big way to get cash back is through the use of cash back credit cards. My personal favorite is the Chase Freedom(SM) Credit Card. I earn 3% back on my top three categories and 1% on the rest. If you wait until you have $200 cash back accumulated you will get a bonus $50 which effectively turns your cash back rate to 3.75%. I should have $200 accumulated by early next year and I’m waiting to cash out until then.

The other cash back card I use is the Discover® More(SM) Card. The trick to getting the most out of this card is to focus your purchases on their bonus 5% cash back categories. They switch these four times a year giving you a variety of categories to save money on. They currently have 5% cash back on gas which I’ve already earned my maximum amount of $20 on. I’ll now set the card aside until I can use it for the next 5% cash back promotion.

You can view some more cash back cards here.

Remember if you buy something you don’t need just to get the cash back you’re not saving any money.