By running behind the bus, he saved the bus fare (say, 2). If he had run behind a taxi, he would have saved the taxi fare (say, 20).
Thank you! Such tortured logic…
… is remarkably commonplace in consumers.
Thanks for the book reference. I checked it out of the local library today and it’s very interesting, and not just the part about monetary issues. Speaking of irrational people, I think it’ll help me understand my family and my students much better.
Over the years I have bought several old pick up trucks because they were cheap and then spent several thousand dollars fixing them up. I know better but for some reason I get sucked into it. I think I enjoy seeing old things come to life.
Moderator Note
Making snarky remarks to other posters doesn’t contribute anything of value to the discussion either, so knock it off. No warning issued.
Colibri
General Questions Moderator
My Dad used to say that some people would buy a turd if it was on sale.
The majority of cash-back cards make money or break even for the issuer even if you do pay off the balance every month, because the annual fee equals or exceeds the amount of cash back virtually any consumer will get.
Let’s say the average user spends $15,000 per year on his card. In practice, we know almost nobody will actually do that because people who have one cash back card are likely to have two or three. I spent a couple of years trying to squeeze every transaction possible onto a single cash back card and managed $17,400 in the better of those years.
Now, some of these cards offer up to 3% cash back for certain purchases, 2% on others, and 1% on everything else. In practice, you’ll find that only a tiny fraction of that $15,000.00 goes toward 3% transactions and not much more goes to 2%. We’ll be generous and say the effective cash back rate is 1.5%.
At $15,000 per year, your 1.5% return is $225.00. So if the annual fee is $175.00, the card issue takes a $50 loss even on the worst case customer.
For every one of those people, there are a dozen who they make money on via interest and finance charges. There are probably a dozen more who hardly ever use their cards but want to keep the account open for the credit benefit (average age of account).
The lesson here is that it’s possible to make money using cash back cards, but only if you’re smart about it. First, pay them off every month. Second, pick a card with no annual fee.
It’s better than that. The bank makes money, even if it doesn’t charge an annual fee and even if you don’t run a balance.
Banks charge the vendor an interchange fee on every transaction, and the interchange fee is higher for transactions made with cards that give rewards. The result is that my 2% back is a rake-off given to me by Fidelity for the opportunity to gouge vendors with inflated interchange fees.
So, to recap, 1) most holders of rewards credit cards pay more in interest than they make in rewards, 2) even those who pay off their bills in full each month suffer if they pay an annual fee for the card, and 3) those like me who use no-fee rewards cards get our rewards by letting the card issuers gouge vendors with inflated interchange rates, which probably results in higher prices for everyone, even those who pay cash.
Remember that there used to be debit cards that gave rewards (which is why Mrs. Ispolkom and I once had three separate Chase checking accounts, even though we lived more than 400 miles from the nearest Chase branch). Dodd-Frank required regulation of interchange fees for debit cards, and substantially reduced them. That was the end of those reward accounts. If credit card interchange fees were regulated similarly, I’d expect a similar fate for rewards credit cards.
That’s the classical idea behind coupons; you essentially give a discount to the cheapskates willing to spend that extra effort to clip the coupons, and charge everyone else full price. So you sell X number at full price, and Y more at the coupon discount (which still makes a profit) that you wouldn’t have otherwise sold. Essentially you make MORE money that way than if you had just kept the price the same, or offered a blanket discount.
Someone’s bound to come in and tell me I’m wrong and that this is the antiquated way coupons work and blah, blah, blah. I don’t buy it- I think this is what the primary idea behind coupons is- to get people to buy your product who otherwise might not have, and to make money on the deal.
At least in Canada you can get cash back cards that have no annual fee. I have one through TD Canada Trust. The % I get back isn’t anything to write home about (I think it’s 1%), but it is there.