The challenges to managing credit this year has been the impact of increased interest rates on all types of borrowing, and the trend, especially for smaller retailers, to either charge a fee for using a credit card to cover the “swipe fees” the merchant pays, or offer a discount for cash. We will discuss the details behind this and the proposed legislation to deal with this situation.

Interest Rates

In July, the FOMC raised its benchmark interest rate to 5-5.25%. What do higher interest rates mean for all of your credit vehicles?

• Credit cards now charge an average of 20.44% on balances, up from 16% in March of 2022. Those carrying balances should be working hard at paying them down.
• New Car loans now average 7.2%, and used car loans are at 11%. Between those rates and the prices of used cars, many are priced out of the used car market, and qualifying for loans has become more difficult as well.
• Fixed rate 30-year mortgage rates bounced between 7 and 6%, and are now just under 7%, compared to 5% a year ago. The supply of homes is down, which keeps prices high, and people with a 3 or 4% mortgage currently are loathe to sell in spite of the prices unless they absolutely have to (or don’t need a mortgage for anther home) since they will face the high mortgage rates on their next home.
• Interest rates on new student loans are up (ed.gov) to between 5.5% and 8%. Three years ago they were at 3%.
• The positive aspect to this environment is that savers can get between 4 and 5% on savings vehicles such as CDs, high-yield savings accounts, and money market funds—rates that haven’t been seen in over ten years.

(NYT)

In related news, 51% of banks say they are using tougher standards for potential borrowers at the end of the second quarter, up from 46% at the end of the first quarter. (Axios) This had been mentioned in articles on consumer borrowing and rates as well.

Managing Credit

In VantageScore’s June 2023 CreditGuage anaylsis, the average credit score only moved one point, and debt levels and credit utilization remained flat, indicating consumers are using restraint. Even with consumption remaining strong, this might mean if consumers don’t have cash to pay for things, they aren’t resorting to credit. (PRNewswire)

How many credit cards should you have? More than one, according to this CNN article. They provide a list of six reasons, but the best reason to have more than one is to have something to use in case one of your cards gets compromised. You can also set up payment due dates so that if you are paid twice a month, you only have to pay one credit card bill per paycheck. This can be a good way to budget and track spending, if you use one card for say, essentials like food and fuel, and the other for things that might fall into the “want” category.

CNN also provides the obligatory “best cards for 2023” list.

Credit Cards-Swipe Fees and the Credit Card Competition Act

Swipe fees are making headlines. The National Retail Federation estimates that swipe fees cost the average consumer $1000 per year. At issue is the fact that Visa and MasterCard control 80% of the credit card market, setting these fees (between 2 and 4%, averaging 2.4%), and not allowing vendors to use competing markets for processing.

Are you paying to use your credit card at local businesses? As small businesses struggled to stay afloat during the pandemic with supply chain and labor issues, swipe fees were yet another cost they could not control, and so many decided to pass along the fee to the consumer. Some retailers, particularly gas stations, offer a cash discount instead.

You may wonder if this is legal. It appears to be in all but two states, Connecticut and Massachusetts. Lawpay.com has collected the rules regarding surcharges for all fifty states, if you care to check the rules in your own state.

Washington's response to the situation has been to introduce legislation addressing the swipe fees and control in the credit card market. 

A bipartisan push in Washington to clamp down on credit card fees is pitting retailers against network payment processors — and both sides are working hard to gain the attention of consumers.

The Credit Card Competition Act was reintroduced last month in both the House and the Senate, after not being brought up for a vote in either chamber during the previous Congress.

The measure aims to bolster competition for credit card processing networks by requiring big banks to allow at least one network that isn’t Visa or Mastercard to be used for their cards. This would give merchants who pay interchange fees a choice they otherwise rarely get. (CNBC)

Retailers are lobbying in favor of legislation. American consumers paid $160.7 billion in fees, directly or indirectly, in 2022. The credit card companies are of course lobbying against this legislation, claiming the rewards programs that consumers like will disappear if the legislation is passed. According to The Points Guy, consumers garnered $60 billion of rewards last year. The fees do fund these programs. (CBS) (If we compare these two numbers for 2022, it looks like the credit card companies still have $100 billion to account for.)

The legislation does not attempt to cap fees. The theory is that by requiring the addition of a second competitive processor into the equation, competition will bring the prices down. (The Hill)

Special credit cards

Have you heard about credit cards for medical expenses? Yes, they exist. Should you get one? There are many considerations. If you are facing or anticipating a costly bill, you have a few options. You should make sure that you have tapped all potential resources (regular savings, health savings account, flexible spending account, etc.) If you don’t have enough, you can try to negotiate a break in the fee and/or a payment plan with the provider, or you might consider one of these cards.

These medical credit cards work a bit differently than your regular credit card, and can only be used for certain medical expenses. You usually get them through the medical provider. Your credit limit will be the amount you owe, and the provider gets paid upfront. The creditor then collects the money from you. Often the interest is deferred for a short period of time, which might allow you to pay it off before accruing interest. But once that period ends, you will be accruing interest and your credit score may be impacted, so you must be very careful. (Motley Fool)

The CFPB has is concerned about these cards and if they are being pushed on patients, forcing them to incur more cost. They have initiated an inquiry into the practice.

Resources

The following list of article might be good ones to assign to students, as they are all relevant for young adults who are about to encounter the world of credit cards.

• For credit card beginners: “What College-Bound Students Should Know About Credit Cards. (Yahoo Finance/MyFico)
• For an explanation of the different types of credit cards out available: “Types of Credit Cards Explained.” (Yahoo Finance)
• At what age should you try to get your first credit card? (CNBC)
• Your first credit card may very well be a “secured” credit card. How long should you hang on to that card? (Yahoo Finance)

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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