Crunch time for credit cards – how do you choose your card?

Yes, in most of Europe credit cards don’t really exist, and hefty annual fees are charged not only for credit cards but even for debit cards. In many countries, a “credit card” means a deferred debit card, whereby all debits are charged from your bank account at the end of the month. It is mostly other English-speaking countries like the US where a “credit card” is similar to what we know them as.

NFH,

Do you know what a “charge card” is please? I hear it mainly used in US tv, like The Simpsons, is that just another name for a credit card?

Come to think of it – it might be what we call pre-paid cards? as a Visa / Mastercard that you need to “charge” up? But that’s just me thinking out loud.

I used to have a Marks & Sparks Chargecard until they moved into the 20th century and started accepting credit cards.

Yes, a charge card is a card that operates like a credit card except that you have to pay off the balance in full every month. It seems that most of us above (including me) use credit cards like a charge card. Most credit cards have no annual fee (at least in the UK) because they are subsidised by those who don’t pay off their balance in full and pay interest. Charge cards nearly always have an annual fee because this subsidy doesn’t exist. That’s why, for example, American Express charges an annual fee on its charge cards, but doesn’t charge an annual fee on the equivalent credit card. The best thing to do is get a credit card and use it like a charge card.

The Marks & Spencer Chargecard had no annual fee, but I have no knowledge of any others.

Unlike using an American Express card, with the M&S Chargecard the retail and payment transactions were in a closed loop involving no other company; Customer loyalty, convenience, and a monthly one-hit payment facility for a broad range of merchandise presumably generated higher sales levels to support the cost of operating the chargecard.

I used to have an M&S Chargecard in the 1990s, but I stopped using it when M&S started accepting credit cards. It was the same story with John Lewis. Although it was called an “M&S Chargecard”, I believe it was more like a credit card with an interest rate and no obligation to pay in full every month.

You say that one of your credit cards is linked to your bank account. I’ve never come across such an arrangement in the UK. Or do you mean that your credit card balance is paid off by direct debit from your bank account once a month?

John, I disagree. The latter (credit card) is not necessarily “pay later plus interest”. If you pay later in full, then there is no interest. This approach has two advantages:

1. Interest-free period while you continue to earn interest on the money in your bank account or save interest on an offset mortgage.
2. Rewards, e.g. airmiles, points or cashback

Yes; Thanks NFH – I over-simplified it. The point I was trying to make is that, ‘credit ‘ is a more appealing word than ‘debt’ and might give a false impression. Astute people who manage their money wisely [like you and me of course], and use it to their own controlled advantage during the repayment period, are not the target of the banking industry’s machinations – we are a lost cause and probably a nuisance – but there are many people seduced by the temptations thrown in front of them to spend more money than they can afford to repay on demand.

Very true. Consumer debt culture is prevalent in the UK, whereas it doesn’t exist in many other European countries. British consumers buy goods that they cannot truly afford because credit/debt is so easy to obtain.

“we are a lost cause and probably a nuisance”, not sure I quite agree with that, we must generate a nice steady supply of dosh for card providers in the 1-3% they levy to the retailers on each purchase. And if you don’t have a card then oh look you get to pay the price including levy too. How generous are the card providers and retailers in making sure the none card holders don’t feel left out.

“we must generate a nice steady supply of dosh for card providers in the 1-3% they levy to the retailers on each purchase” – Where did you get this figure from? On page 42 of Which December 2014, it says about interchange fees “Currently, credit card fees are typically around 0.8%, but there are plans to impose a cap of 0.3%, which may be in force by mid-2015”.

That’s roughly what it was 15-20 years ago, I guess its changed.

On a this money webpage article from last year is

What the CMS says a retailer typically pays on a £100 sale:
Cash: Zero. The shop gets £100
Debit card: 8p per transaction. The shop gets £99.92
Credit card: 0.8 per cent. The shop gets £99.20
Premium/rewards card: up to 1.6 per cent. The shop gets £98.40

Malcolm, it was never made illegal. Until the 1980s, discounts were often given for paying by cash. The banks and card networks didn’t like this, so they imposed contractual restrictions on retailers, forcing them to charge the same for credit card transactions as for cash or cheque. The government thought these restrictions were anti-competitive so the Credit Cards (Price Discrimination) Order 1990 prohibited such contractual restrictions, so that retailers could go back to operating dual pricing, i.e. a discount for cash or a surcharge for credit cards. Therefore since 28th February 1991, retailers have been at liberty to give discounts for cash or add surcharges for credit cards. Since 5th April 2013, the Consumer Rights (Payment Surcharges) Regulations 2012 have limited the price differential to the difference in cost to the retailer. Therefore travel agents can no longer surcharge 2% for credit card payments when in fact it costs them only 0.8%.

NFH – thanks for putting me right! Whenever I have tried to get a cash discount if I didn’t pay by card I’ve been told they can’t do it. If the difference is only likely to be 0.8% it’s hardly worth the effort!

Yes, you also have to factor in the cost of accepting cash payments. Cash is expensive for businesses to handle, both in transport costs and bank charges. This is why some retailers give cashback on payments by debit card. Given that it costs a fixed price (e.g. 8p) to accept debit cards which is nearly always cheaper than accepting cash, it makes sense for retailers to offload as much cash as possible on to willing customers and instead receive the amount of the cash electronically as part of a debit card transaction.

No wonder that the UK has over seventy percent of the whole EU’s credit card debt – That’s not what the article says above; it says that “70% of all credit cards in Europe are held by British consumers“. I suspect that the UK’s percentage of the EU’s credit card debt could in fact be much higher than 70% because British consumers tend to spend more recklessly on their credit cards than consumers in other European countries. In much of Europe, a “credit card” means a deferred debit card whereby all debits are simply deferred until the end of the month when they are settled in full. I suspect that only the US has a worse consumer debt culture than the UK.