Retailers know that once you’re inside, you’ll probably spend more than the amount on the gift card. In fact, 58 percent will spend more than that amount, according to a study earlier this year by WSL Strategic Retail in New York.

So retailers are ready with sales and promotions to make sure shoppers with extra time on their hands — packing newly activated cards and feeling the holiday spirit — find deals they just can’t resist. And because retailers can’t count the cards as sales until customers spend the gifted amount, they want you to move fast.

“The classic strategy is multiple sales. You buy one at a certain price and get another at an additional amount off and it makes that second one so tempting that you buy it even though it’s a bit more than the gift card,” says Candace Corlett, WSL president.

These weeks are also important for shoppers who, if they don’t strike now, may lose track of the card or the desire to use it. Despite good intentions, up to 19 percent of gift cards will never be redeemed, Consumer Reports says.

“There are people for whom this money is burning a hole in their pocket and they are looking forward to getting so much for so little, because the post-holiday sales are so good,” Corlett says.

They’re the No. 1 gift request
For the fifth straight year, gift cards were the top choice on holiday wish lists, according to the National Retail Federation. And this season shoppers were expected to spend $27.8 billion on them.

Eight in 10 shoppers said they were likely to buy gift cards of all types and said they were likely to spend on average $155, which is the highest amount since 2007. That figure is up 6.7 percent from last year, according to the NRF’s 2011 Holiday Consumer Intentions and Actions survey.

New rules by the Federal Reserve last year and provisions of the Credit CARD Act of 2009 have added protections for gift cards and extended the time before they expire and also the time you have until fees can kick in for inactivity.

“When you get a gift card—say for $100—that balance will remain $100 for at least five years without any fees or expiration dates,” says Erin Rodriguez, a spokesperson for the Better Business Bureau. “But the plastic card itself can expire. Make sure you know that if the card says it expires a year from now, all that means to you is that you need to get issued a new card, but the balance will remain.”

Also, companies cannot charge fees until you don’t use the card for a year. That’s when it pays to read the fine print because after that year, “there’s no limit on the fee they can charge,” she says.

The new rules apply only to cards issued by banks or merchants. So if you have a reloadable card or any card not classified as a gift card, read the terms carefully. All fees must be clearly disclosed on the gift card or its packaging whether the card was purchased online, by phone or in person.

Senator warns of scams
It’s the packaging of some cards that concerns a U.S. senator who warns consumers to check gift cards for any signs of tampering.

In a press release this month, U.S. Sen. Charles Schumer (D-NY) warns of scammers who copy activation numbers off the backs of some cards you see hanging in store displays. Thieves keep checking to see if the card they skimmed in the store has been activated and then use that information to make online purchases.

If the access code is compromised, the value of the card can be drained before the person even gets the gift, he says.

Schumer is calling on the National Retail Federation and the Retail Gift Card Association to urge their members to better conceal codes on cards in stores by creating packaging that obscures the codes or placing the cards behind counters and out of reach. He says he’d also like to see retailers refund the value of cards that have been stolen by scammers.

But Carman Wenkoff, chairman of the board for the Retail Gift Card Association, says fears about gift card safety are largely unfounded.

“We don’t see this as a problem,” he says. “There are a lot of assumptions that people have made about gift cards from when they first came out about them being vulnerable to fraud, and almost all of those assumptions have been dealt with since gift cards became mainstream in the last 10 years.”

He adds: “The most common way retailers deal with fraud has been to put PINs on the card where you can have a scratch-off area with a PIN. That way, you’d need to physically damage the card and it would be obvious that it had been used. Retailers are ultimately responsible for the fraud on the cards so they take whatever measures they can to make sure that they’re safe. Most retailers also have pretty sophisticated fraud algorithms behind the scenes to make sure the cards are safe to use.”

He said the greater concern is usually losing the card. He recommends registering the card with the retailer if that service is offered. That way, if you lose the card, you can have the balance transferred onto a new card.

Consumer Reports says when you give a card, add a copy of the terms and policies and the receipt, which is often needed if the card is lost or stolen.

If your issue with gift cards is not deciding when to spend them or wondering whether they are safe, but just that you’re not happy with the ones you’ve got, you can trade them for another retailer’s card or get most of the value back in cash at sites such as PlasticJungle, GiftCardBin, GiftCardRescue and CardPool.com. It pays to comparison shop here, since the amount you’ll get differs by site.

You can also donate your card to charity. Some possibilities for that are DonatemyCard.com, DonorsChoose.org (for supporting public schools) and GiftCardGiver.com.

The American Customer Satisfaction Index (ACSI) found that customers are more satisfied than ever before with credit unions. The industry’s score improved 8.7 percent to 87 (on a scale of 0 to 100). It was the highest score ever reached by any of ACSI’s 47 industries. The ACSI is a national economic indicator based on 70,000 customer evaluations of products and services available in the United States.

Lower scores for banks follow a year of foreclosures, increased regulations and wildly unpopular fees. Among the four big banks, Wells Fargo again topped the list, but a 6 percent improvement for Citigroup tied it for first at 73. JPMorgan Chase, improved 4 percent to 70 and beat Bank of America at 68.

ACSI Founder Claes Fornell said in a press release: “While it is too early to quantify just how much business the big banks have lost to smaller competitors, the new ACSI data suggest credit unions and smaller banks now have become an even more attractive alternative for consumers.”

Debit fee debacle helped credit unions
This fall saw a flurry of change in the bank/credit union relationship. Bank of America set off a firestorm with its plan to charge customers $5 a month to use their debit cards. Several other big banks tested the waters. The outrage took on a life of its own and by November banks were dropping the debit card fees. Fed-up consumers staged a Bank Transfer Day for Nov. 5 urging people to put their faith in credit unions and smaller banks instead.

Some people started to entertain other options. Amy Stanton, assistant vice president of marketing for Connex Credit Union in North Haven, Conn., says in the last two to three months since the increased media attention they have opened about 100 new checking accounts over the monthly average for the past few years, which represents an increase of about 60 percent for the credit union.

But still, many people are unfamiliar with what credit unions are and how they work. As their popularity surges, it’s time to demystify the concept for those considering switching. Here are eight frequently asked questions about credit unions:

1. What are they?
Credit unions are nonprofit cooperative financial institutions owned by their members and operated for the benefit of their members.

2. How do they work?
They provide many of the same services as banks — checking, savings, mortgages, auto loans, etc. The biggest difference is they’re nonprofit. They can often offer fewer fees and better rates than banks. They generally are exempt from the taxes banks pay and board members are volunteers elected by the membership.

“Instead of paying a board of directors or shareholders, our profits get turned back into the rates we offer which are traditionally better than banks’,” Stanton says.

3. Who can join?
You have to be a member of the group represented. This could be a geographic community, the place where you work, a religion or other group. Connex is a geographically based credit union with seven locations, but the lines blur a bit for membership. For instance, you can be eligible if you don’t live in the three-county surrounding area but work there, or attend school or church there for instance, Stanton says. Credit unions go through the same process as banks of checking your credit to see whether your payment history qualifies you for opening accounts.

4. What’s the difference in approaches?
Credit unions often are able to take a more personal approach, industry experts say. “We will sit down with you and look at your credit report and look at the accounts you have elsewhere and find where we can best help you,” Stanton says.

5. What’s the downside?
Credit unions may not have as many ATMs in your area so it may be harder to get your hands on instant cash. Check this out before you join, says Lauren Saunders, managing attorney for the National Consumer Law Center (NCLC).

Also ask if they are part of a network that allows you to use any ATM in the network without surcharges, Stanton says.

6. Do they charge the same fees as banks?
One thing to watch is overdraft fees, which can be costly just as they are with banks, says Saunders. “A lot of credit unions are dependent on overdraft fee revenues,” she says and there are ways to avoid those fees. The best forms are transfers from your savings account or a traditional interest-based line of credit — the kind you’re not charged a fee for, you just pay an annual percentage rate (APR) and pay it off over time.

“A link to a credit card is better than overdraft fees,” Saunders says.

She says that while most credit unions offer better rates than banks, there are some that offer the equivalent of payday loans — short-term loans with exorbitant interest rates that are meant for people who can’t pay their bills between paychecks but are often described as predatory lending.

The NCLC reported in September that “at least 25 credit unions across the nation are still involved in payday lending, including 14 federal credit unions that are profiting from loans at annual rates ranging from 146 percent to 876 percent, flouting the credit unions’ 18 percent legal interest rate cap.”

7. Are they insured?
Most are, but some are not. Check to make sure they are insured by the National Credit Union Share Insurance Fund, which is similar to the Federal Deposit Insurance Corporation, which covers banks and means your deposits are backed by the full faith and credit of the U.S. government.

8. How should you compare them?
Take advantage of that personal service, Stanton says, and ask them if they can beat the rates on loans you already have. “Say here’s what I’m looking for and what do you have that meets my needs?” she says. “Have them do the heavy lifting.”

As of this month, lenders have an even wider window into your successes and failures in managing your finances.

A company called CoreLogic has developed a new credit file that contains loads of data that some of the traditional credit bureaus don’t record on more than 100 million people in the U.S.

That information can include whether you pay your rent or child support on time, whether you’ve applied for a payday loan or been evicted or even whether you’re behind on your homeowners’ association fees. Now, if you owe more on your house than it’s worth, it could show up on your report.

The report captures information beyond the radar of traditional reports — such as details on homes paid for with cash, or homes gifted to someone or mortgages made by lenders who don’t report to the traditional credit bureaus. The company says it can also report data up to two months faster than those bureaus — usually within 23 days of filings.

“Until now, consumers who have used non-traditional credit or never purchased a home may have had a difficult time qualifying for loans and credit cards. The CoreScore credit report will allow these individuals to be recognized for how they have managed their finances,” Tim Grace, senior vice president of product management for CoreLogic said in a statement.

Clearer picture or invasion of privacy?
This extra information can work two ways. If you have a great track record in some areas that aren’t part of the credit data followed by the traditional big three bureaus, Experian, TransUnion and Equifax, this additional information may help your case. Say, for example, you’ve never missed a child support payment, but you didn’t pay your credit card bill for a few months. This added information may help you.

But others say it’s just one more erosion of consumer privacy. Alexis Moore, privacy expert and credit collections consultant in El Dorado Hills, Calif., says it could also lead to more identity theft.

“I am gravely concerned that this particular addition to the data furnishing industry is only going to make another obstacle for those seeking to safeguard their private information from predators and make it very difficult for those that are high-risk to protect their privacy,” she says.

“The data furnishing industry is not well-regulated and tends to do more harm to consumers than good. This particular data furnisher addition will only make it more difficult on consumers to protect their privacy information from predators and worse, it will create another database for identity thieves and online predators to hack to steal consumer private information and records.”

Businessman Jon Weisblatt says as someone who needs to make decisions about potential clients, he’s interested in what CoreLogic offers. Weisblatt is founder and CEO of an online business called UpgradeUSA, based in Austin, Texas, which leases laptops and tablet computers to consumers across the U.S. who may have trouble getting the equipment otherwise. Customers make monthly payments and the company helps them build a solid credit history.

While sometimes additional credit information serves to decline people, he says, his company uses it to see whom they can include in their services, he says. If a potential client is doing well in another area and the new information can prove it, the company might be more willing to take a risk, he says.

“Because we own the asset, there’s a risk associated with sending laptops and tablet computers all over the country. We have to make sure we’ve got really good decision tools to see if customers meet our minimum criteria.”

Information contained in the CoreScore credit report is designed to supplement the data included in traditional credit reports. It helps tell more of a person’s story than a Fair Isaac Corporation (FICO) score or report from a single credit bureau.

“(Traditional bureaus) don’t offer payday loan databases … or rent-to-own information. There are a lot of things missing from a credit bureau’s report,” Weisblatt says.

“People targeted here are definitely not the wealthy”
Andrew Schrage, editor of the personal finance blog Money Crashers, says he sees how the CoreScore could benefit the consumer in theory, but he’s skeptical it will work that way.

By looking at such things as whether people have applied for or made good on a payday loan, for instance, lenders are targeting low-income people or people who are already seeking last-resort money options. The people who will benefit are a very small subset — people, for instance, who have accessed resources such as payday loans for a very short time and have paid them back right away, he says.

“ I do feel the big picture is that this will hurt the consumer over the long term,” Schrage says. “The people targeted here are definitely not the wealthy. The top 1 percent won’t be affected at all by this. It’s the people who are already struggling, who are already in debt who are missing payments and it will ultimately affect the rates they will have to pay if you give lenders more ammunition.”

Schrage notes that even if lenders know more positive information about a consumer, there’s nothing forcing them to give a consumer a better deal because of it.

“They can do what they want with the information,” he says. “A lot of these credit reporting agencies and a lot of the lenders already have relationships with CoreLogic. They already have the system in place, they already have the trust in place so they just have to pay whatever fee CoreLogic charges them, which is probably going to be pretty small when compared to the ability to increase people’s rates 1, 2 or 3 percent a year.”

CoreLogic has teamed up with FICO to produce an actual score that will be available to lenders in March to use for mortgages and home equity lenders. The company plans to expand the report in the near future with data such as utility and telecommunications payments, spokeswoman Alyson Austin says.

That level of scrutiny worries Schrage.

“I already think with things like car payments, rent payments, child support payments that it’s beginning to cross over that fine line between me getting the necessary information as a lender and starting to invade privacy,” he says. “You get into utility bills and things that are part of your everyday life and it’s a little scary that they can get all this information. Hopefully there will be some legal roadblocks put into place that will prevent this from going too far.”

CoreLogic will now be covered by the Fair Credit Reporting Act, which governs consumer reporting agencies, so consumers can dispute any information they feel is inaccurate. But if the information is correct, there’s now more information that can stain your credit report for a long time—seven years or 10 years for bankruptcy.

Consumers can also write an explanation to be included in the report if there are good reasons payments have been skipped or are late — such as rent not paid because a landlord hasn’t fixed the plumbing.

The report is available now to all lenders and consumers can get one free report annually by calling 877-532-8778. That call initiates an online process at credco.com to get a report. Eventually it will be available through AnnualCreditReport.com, Austin says.

The Consumer Financial Protection Bureau (CFPB) wants the public to weigh in on the prototype that, if approved, would be optional for issuers. (Instructions on how to comment are at the link above.)

Instead of an average 5,000 words in disclosures, this form averages 1,000 and the information is broken down into costs, changes and additional information. Fees and interest rates are displayed prominently, upfront and in bigger type. A separate set of definitions would be available online or in print form.

The announcement of the agreement follows the CFPB’s release of its interim report outlining its progress after three months in action. One of the conclusions drawn from that report was that consumers are confused by credit card terms and contracts, Raj Date, special adviser to the Treasury Secretary for the CFPB, said in a statement.

More than 5,000 credit card complaints were filed with the CFPB following its launch in July and the agency reported resolving more than 3,100 of those complaints. Consumers disputed responses in 400 cases, or about 13 percent of the time.

In his report, Date says only half the calls the consumer response team handled turned into actual complaints. The other half were general feedback calls or inquiries that were answered over the phone or directed to the appropriate resource.

Date has been managing the bureau while the Senate debates confirmation of Richard Cordray, President Obama’s nominee for director.

Bankers say complaints small fraction of total
Nessa Feddis, vice president and senior counsel for the American Bankers Association, says the complaints represent a very small number of credit card holders nationwide and complaints in general have dwindled since the implementation of the Credit CARD Act of 2009.

“There are no big surprises here, she says. “The number of complaints has dropped off dramatically since 2009 … The point is there are 383 million credit card accounts in the U.S. and less than one-tenth of 1 percent have submitted a complaint. You have to look at the numbers relatively speaking.”

Date also mentioned two other general observations in addition to the apparent confusion over terms — that complaints have led to discovery of fraudulent charges which has helped pinpoint recurring scams and that often the issuer and consumer have conflicting factual accounts. In many such cases, however, issuers have been willing to resolve the complaint, Date says.

Feddis says the numbers, at least the ones in the interim report, don’t indicate that consumers are not understanding the terms. “They didn’t explain how they drew that conclusion. They may have other information, they just didn’t say what it was.”

The biggest categories for complaints, in order were: billing disputes (13.4 percent); APR (annual percentage rate) or interest rate (11 percent); and identity theft (10.8 percent).

About 84 percent of the complaints have been sent to credit card issuers for review and response. Five percent were classified incomplete either because the consumer provided insufficient identifying information (such as a blank entry in the name data field) or because the consumer requested that the complaint not be sent to the issuer. The remaining complaints were still pending on Nov. 15. These include complaints sent back to consumers for additional information (3.4 percent of complaints) and complaints under review at CFPB (7.8 percent).

Agency now handling mortgage complaints as well
The agency started with only credit card complaints because credit card problems have been historically high-priority for consumers, but this month it began to accept complaints filed about mortgages and home equity lines of credit as well. You can log onto the CFPB website and click on the appropriate box to get you started.

Date said in a statement that the bureau intends to handle complaints for all financial products and services by the end of next year. The CFPB’s toll-free phone number provides services in 191 languages, and the bureau provides services for the hearing- and speech-impaired.

The CFPB was created when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. A critical part of the CFPB’s work is listening and responding to consumers about financial products and services.

Kathleen Day with the Center for Responsible Lending said the bureau is sparing consumers from having to bounce around to different agencies to get answers.

“It used to be when people were frustrated with their credit card company, they would go to the regulator, who would then bring the complaint back to the company and it would go around and around. It was ridiculous,” Day says.

“One of the things the CFPB hopes to do is to police the markets for bad practices and stamp them out before they become widespread. It’s not a very efficient way to do things to wait till everybody in the world hates their credit card company and then pass legislation. It’s much more elegant and efficient to listen to people in real time.”

The bureau is also seeking comments on its proposal to provide a searchable public database that contains various data fields for each complaint, but without personal information attached. Information could be used by organizations such as consumer advocacy groups to analyze trends.

The deadline for comments is Jan. 30 and you may submit them electronically at http://www.regulations.gov (follow the instructions for submitting comments); or by mail:
Monica Jackson, Consumer Financial Protection Bureau
1500 Pennsylvania Avenue, N.W. (Attn: 1801 L Street)
Washington, D.C. 20220.

You can reach the bureau toll-free at 1-855-411 CFPB; by TTY/TDD phone: 1-855-729-CFPB; by fax: 1-855-367-2372; or by mail:
Consumer Financial Protection Bureau
P.O. Box 4503
Iowa City, IA 52244.

Two economists from the University of Nebraska-Lincoln, Sam Allgood and William Walstad, surveyed more than 27,500 people to measure Americans’ financial knowledge in two ways — how much they actually know and also how much they believe they know — and studied how that affected their ability to manage their credit cards.

At the top, of course, were the people who had high knowledge of finance and knew it. But the researchers hadn’t expected to find that a person’s confidence in their financial knowledge mattered as much, or more, in some cases as a factor in how they handled their cards.

For example, the study found, Americans who are actually smart about finance and know it are 15.5 percent more likely to pay their credit card bills in full compared with people with the same level of financial knowledge, but who perceive themselves as not having solid financial knowledge.

Overconfidence not necessarily a bad thing
“Part of the motivation in looking at this was to see whether high perception of knowledge, when you actually did not have that knowledge, resulted in more mistakes – kind of an overconfidence. That’s not what we find,” Allgood says. “We find even those who don’t have high financial knowledge but have high confidence are still making better decisions.”

Survey respondents fell into four groups: Forty-one percent had both low actual and perceived financial knowledge. Twenty-five percent had low actual financial knowledge but thought their knowledge was high; 16 percent had high actual knowledge but perceived their knowledge as low and 18 percent had high actual knowledge and perceived themselves the same way.

The study measured five behaviors: paying credit card bills in full; carrying a card balance; paying just the minimum amount due; paying late fees and going over the card’s limit. In all cases, respondents who believed their financial knowledge was high had better credit card behavior than those who saw their knowledge as low — even if their actual knowledge was low.

The researchers didn’t explore why people perceived their knowledge differently. “The data set was collected by FINRA—the Financial Industry Regulatory Authority — so we didn’t get to craft the survey to help us get at that specific question,” Allgood says. He says the next step is to see why there’s a difference in how people perceive their financial knowledge and whether further study would show that it varies across racial, ethnic and gender lines. “My expectation is that it will,” he says.

Behaviors may extend beyond credit cards
Credit cards were chosen for focus because credit card abuse has been such a hot topic, particularly on college campuses, Allgood says. But Allgood and Walstad are currently researching other areas where confidence levels might be affected.

“We have looked at other areas – investment behavior, savings, holding stocks, decisions involving mortgages. One of the interesting things in the survey is people were asked whether they have sought counseling in a variety of ways – whether it’s about tax planning, general personal financial counseling and what we’re finding is that perception is also related to that—people who have a higher perceived knowledge are more likely to seek assistance from a professional.”

Allgood likened it to students asking questions in class – if you have more confidence, you may be more likely to ask more questions.

That information could be useful in the way personal finance is taught, he says. “We don’t want in any way to downplay the role of actual knowledge,” Allgood says. But if changes were made in teaching, people might gain more confidence, he says.

One possibility is in leading people through the process of making decisions in their own lives, rather than learning how decisions are made in theory. Talking to people about making decisions such as how to change the withholding on their paychecks and who can help them with that at their workplace might help build confidence more than giving them a list of things to check.

“It could be part of the curriculum for personal finance where people could do a case study on themselves where they take a personal financial decision that they’re grappling with and you could help the person work through that,” Allgood says.

Mike Sullivan, education director for Take Charge America in Phoenix, said this study emphasizes that it’s not what you know, “it’s more the capabilities you have that determine how successful you are. It’s almost more of an attitude.”

He says teaching confidence is an important part of financial literacy and “that calls for simulations and activities where students make decisions about money and they see the ramifications of those decisions. After they do that a few times, they’ll get confident about making those decisions … We should teach attitudes and we should teach it via experiences.”

Allgood says the need for more financial education is highlighted by the financial collapse of 2008. Amid the finger-pointing at large institutions and government, people also realized that a part of what was going on was that individuals were the ones taking on mortgages and getting the adjustable rate mortgages, he says.

“Whether that was because they were given bad advice or didn’t know better, the bottom line was that it appeared people did not have the financial knowledge to make good decisions or ask good questions,” Allgood says. “It put a spotlight on how much more complicated finances are today. Forty years ago, it was difficult to get any credit—there just weren’t that many options . What we saw leading up to 2008 was that credit became very available for people. Without knowledge about the good and bad, people made a lot of bad decisions.”

Credit cards are easy to swipe. The purchases often don’t seem as real because you can pay them over time. There’s no “pain” of counting out bills or calculating a balance in a checkbook.

But two authors of a new study in the Journal of Consumer Research have found that credit cards are influencing not just how much we spend, but how we feel about the items we’re buying.

Their study shows that under the spell of credit cards, we are more likely to focus on the positive aspects of the purchase and not on details, such as cost and how we’re really going to use it. Ignoring those aspects can lead to overspending or buying things we don’t need.

Subjects were “primed” to think about credit or cash
In the study by Promothesh Chatterjee, assistant professor of marketing at the University of Kansas, and Randall L. Rose, chair and professor in the Moore School of Business at the University of South Carolina, test subjects were “primed” to think about either credit cards or cash by playing a series of word games.

Then they were given information about things they could buy. Those who were primed to think about credit cards were less likely than those primed for cash to remember details such as cost when they considered objects such as tablet computers, iPhones and cameras.

All too often, it doesn’t take much for us to be distracted by marketing messages, the study found.
“We do a lot of day-to-day things on autopilot and that’s where we get influenced,” Chatterjee says.

Some elements of the Chatterjee-Rose study expand on previous similar research, including studies that have shown people using credit cards or debit cards were more likely to make impulsive purchases at the grocery store, buying cookies, chips, cakes and making other unhealthy choices.

Chatterjee says previous research has also shown that just by seeing a logo for a credit card company such as MasterCard or Visa in a store window or at a register may nudge a consumer to think about items in a different way and be less concerned about cost or other negative attributes of the product.

The research could have implications for other areas, including the way social welfare payments are made, for instance. According to the National Consumer Law Center, 40 states now make unemployment payments with prepaid debit cards.

While debit cards are similar to cash in how they work, they are more similar to credit cards in the way they look. It’s possible making the payments this way could influence spending behavior, Chatterjee says.

“That’s a fruitful area to research,” he says. “It could definitely have policy implications.”
Jill Norvilitis, professor of psychology at Buffalo State College in New York, said we are conditioned early on to think of credit cards as a means to get to where you want to go. “(Credit card companies) give you the impression that that’s the life you want and so they’re teaching you to focus on those benefits,” she says.

And it doesn’t take much to get us thinking about the benefits of credit cards, she says.

“What I really liked about this study is they did four separate studies and each was a relatively simple manipulation. They didn’t do a lot to prime this cash or credit idea. And yet, they got the effects in each of the four studies.”

Psychology of abstract payments
Art Markman,  Professor of Psychology and Marketing at the University of Texas at Austin, says the study highlights what happens psychologically when payments become more abstract, as they do with credit cards.

“What happens when you think of things abstractly is you tend to focus on the overall benefits of something,” says Markman, author of “Smart Thinking, Three Essential Keys to Solve Problems, Innovate and Get Things Done,” due out in January 2012.

He gave an example of someone recommending a conference six months in advance. “You decide to go because all you’re thinking about is how much fun it would be to do this. And then the week before you go, you ask, ‘how could I have said yes to this? I have all these things to do.’” You’re just as busy when you say yes as you are when you go, but the difference is “you’re not thinking about all those specifics.”

The same thing is happening with credit cards, he says. “You’re thinking just about the benefit of the product and not thinking about the specifics, such as how am I going to pay for this thing and … what am I actually going to use it for?”

Given consumers’ weaknesses in this area, there’s a huge opening for marketers to match their messages to your thinking at the time you’re making a purchasing decision, Markman says.

“For a marketer to make this strong association for you of paying with a credit card and buying luxury goods, what the marketer is doing is making it feel more fluent for you to make these kinds of luxury purchases with credit cards.”

Normally, in order to get that kind of an association, a consumer would have to use their own repeated experiences, but marketers are “giving you all of that experience without you having to do anything,” he says.

Marketers have this connection figured out, Chatterjee says. “Believe me, marketers know how credit cards influence behavior. We have to educate the consumer. As long as they pay an equal amount of attention to costs and benefits, that’s fine. If you are swayed only by benefits, you have to be careful.”

As credit cards continue to replace cash and checks, and mobile wallets emerge with even more ways to distance transactions from cost, consumers are faced with a cognitive burden every time they shop, Markman says, and they are essentially asked to keep track of costs in their head. Not everyone will have a problem with this, but people need to be aware of the challenge.

“It’s not that we can’t possibly manage that, it’s just more difficult to manage that,” he says.

A team of international researchers finds in a new report that, left to your own devices, you’d pay more — as much as 24 percent more.

That was one of three main questions researchers evaluated in studying the effect that minimum required payments and long-term information about those payments had on consumers deciding how much to pay on their credit cards each month.

They also studied whether increasing the minimum payment caused people to pay more in general and whether disclosing how long it would take you to pay down your balance if you paid only the minimum (a disclosure now required on statements) inspired people to pay more.

The U.S. researchers on the team were Boston College’s Carroll School of Management Professor of Marketing Kay Lemon and Assistant Professor Linda Salisbury.

They, along with their British counterparts, found that the very appearance of a minimum payment on a statement made it more likely that the consumer would pay only the minimum. The report appears in the current edition of the Journal of Marketing Research.

The experiment replicated results of previous research by another author in the study, University of Warwick psychology researcher Neil Stewart, who found an “anchoring” effect — seen when consumers fixate on the minimum listed and pay less than they would without the information.

The findings in the current study are based on surveys of more than 500 U.S. consumers and an analysis of anonymous data for more than 100,000 British cardholders from 11 different lenders.

Consumers were presented a scenario: Imagine you have a credit card and received your monthly credit card statement this morning. On the next screen you will see the credit card statement, and you will be asked to make your payment. Please consider how much you can afford to pay, and treat your payment decision as you would in your everyday life.

Some consumers’ screens showed the minimum required amount, along with the balance and APR, and some did not show a minimum requirement. Those who had the minimum payment information paid an average of nearly $120 less ($376 instead of $496) on a balance of nearly $2,000 than those who had no information on minimum payment.

There could be several reasons for that, Salisbury said, though causes were not part of the study. One might be that people see minimum payment as a suggestion.

“People might view it as an expectation or a norm of payment,” Salisbury said. “It’s possible they may see it as a recommendation and that might draw it down. It’s also possible that they’re acting on an unconscious level — sort of an unconscious power of suggestion.”

What if the minimum was higher?
Since it’s unlikely any financial institution would get rid of the minimum payment, the study aimed to find out what interventions might help cancel out the “anchor” effect on minimum payments. So they tested increasing the minimum payment amount.

They found increasing the minimum payment amount did, in fact, cause people to pay more. But this worked best for those who typically pay the minimum amount. For those who don’t typically pay the minimum, raising the minimum did not have a significant effect, she said.

They also tested the effect of giving consumers more information and spelling out the impact of paying the minimum in terms of how much total interest they’d have to pay and how long it would take to pay it off. The assumption was that if consumers know the consequence of paying the minimum every month, that might lead them to increase their payment.

But that’s not what the data showed. The researchers found that the disclosures they tested didn’t inspire people in the study to pay more, a finding that counteracts what designers of the Credit CARD Act of 2009 had intended.

In fact, realizing that paying off your debt will come a long time in the future may be sparking an “I’ll never get out of debt” feeling, Salisbury says. “They may think that no matter how much they pay, it will never get paid off.”

The CARD Act now requires such information in a box on the back of each credit card statement.

But Salisbury isn’t ready to say the entire minimum payment warning box isn’t working.

“Another part of that warning, which we don’t thoroughly test here, is the addition of that last row of the box that says if you pay this larger amount it’ll take you only three years … The preliminary evidence of other research I’m doing suggests that that is probably going to be the piece of the minimum payment warning that is effective.”

Disclosures may need refining
Josh Frank, lead researcher for the Center for Responsible Lending, points out that the study doesn’t say that disclosure is bad for the consumer, rather that it alone just isn’t motivating enough to compensate for other factors that drag down people’s payments.

“It’s always good to refine these disclosures as you learn how consumers interpret them and react to them. I don’t think the lesson is don’t disclose this kind of information because I think it does help, but we should track whether it’s helping and policymakers should refine these disclosures as they discover confusion or unexpected behavior by consumers.”

More studies should be done on better ways to present disclosure information on a statement to get across the importance of paying more than the minimum, Frank says.

One possibility might be changing the way that the statement compares the difference in costs of paying off the debt by paying only the minimum versus paying it off in three years.

He gave this example: “Let’s say you have $1,000 you borrowed. And the disclosure says if you keep paying this minimum payment you’ll end up paying $1,500. And if you pay this amount which will pay it off in three years, you’ll pay $1,200. To a lot of consumers, if you compare the totals, $1,200 vs. $1,500 doesn’t sound like a big difference. But really a more correct comparison is to take out the $1,000 principal and think about how much interest you’re paying. In that case the interest is $200 vs. $500 so when you make that comparison and realize the interest is more than double, it’s much more dramatic and an eye-popping amount for consumers to think about.”

But the banks are still staring down $6 billion in losses and they will have to make that up somewhere, says Edward Sibbald, a former banker and director of the Center for Excellence in Financial Services of Georgia Southern University.

“If you are a customer of a big bank, the chances of you having a free checking account in the near future are slim to nil,” Sibbald says. “They’ll probably also charge a higher fee for wire transfers and overdrafts. My fear is they’ll look at head count as a means of reducing costs. The last thing we need right now is more people unemployed. You’ll also see the end of rewards programs.”

After a month of public rage over Bank of America’s plan to start charging debit card users $5 a month next year, the bank on Tuesday announced it was scrapping the plan.

“We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” David Darnell, co-chief operating officer, said in a prepared statement. “Our customers’ voices are most important to us. As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so.”

Banks miscalculated public’s anger
Banks greatly underestimated the power of social media and the frustration level of the public and overestimated their own importance, Sibbald says.

“Bank of America thought they were big enough and bold enough and convenient enough with all their locations that they could get away with it,” Sibbald says.

Bank of America made reference in the announcement to the competitive marketplace. The move followed similar reversals by four of the nation’s largest banks in the last week.

On Monday, SunTrust said it would end its $5 monthly fee for debit card users and shortly afterward Regions Bank said it would get rid of the $4 fee it started charging last month. Both banks said they would refund fees already paid.

JPMorgan Chase started testing $3 monthly debit card fees in February, but the company reportedly will stop the practice when its current pilot in Wisconsin and Georgia is completed in November. Wells Fargo announced last Friday that it was canceling its test program after two weeks of testing in Georgia, New Mexico, Nevada, Oregon and Washington.

“As we adjust to changes in our business, we will continue to stay attuned to what our customers want,” said Ed Kadletz, head of Wells Fargo’s Debit and Prepaid Cards in a press release.

Why this fee was one too many
Debit card fees seemed to push consumers a little too far – more than other bank fees — as this was a charge for using your own money as opposed to money “loaned” from a credit card or a fee for using a premium card. Customers who were trying to control their debt by using a debit card instead of racking up credit were outraged that they would have to pay for that decision.

Other banks and credit unions have been quick to play to that anger and say they won’t impose debit card fees.

TD Bank announced last week that it wouldn’t charge the fees. According to a recent TD Bank poll, nearly three-quarters of TD customers use debit cards 15 times per month. They cited ease, convenience and no fees as the primary attractions.

“All banks, including TD, are under pressure to respond to the regulatory changes surrounding the banking industry,” Nandita Bakhshi, Executive Vice President of TD Bank said in a press release. “With 70 percent of our customers saying they would discontinue their account if a fee was implemented, we listened to our customers.”

Bank of America’s fee proposal sparked pockets of grassroots opposition. One organizer was Molly Katchpole, 22, of Washington, D.C., who started a petition on Change.org to “Tell Bank of America: No $5 Debit Card Fees.” The petition had more than 300,000 supporters just before the announcement.

She said she started the petition because the fee “was obnoxious. They didn’t give any explanation for it.” She switched her accounts to a community bank and started the petition.

Katchpole said she thought the petition would do pretty well given the escalation of Occupy Wall Street protests going on at the same time, but she was taken aback when protests caught fire and Bank of America was forced to retreat.

“I wasn’t expecting it because the week before they had said they would refine the fee structure so I thought that was it. I thought there wouldn’t be any more news,” she says.

The message to others is “people need to realize if they are unhappy about something like this they have the right to try to change it. Even if they think the odds are completely not in their favor, try it anyway. Start a petition, write a letter. Make a few phone calls. Something.”

Other activists are hoping customers put their frustrations to work as Saturday’s Bank Transfer Day approaches. The movement is still on, despite the banks’ reversals. Organizers are urging consumers to switch their accounts that day to credit unions or community banks.

Bank Transfer Day is a social media-driven protest and Friday its Facebook page had more than 40,000 likes.

The Credit Union National Association (CUNA) says the movement is rapidly gaining steam. CUNA reported Thursday that based on a survey of 5,000 credit unions nationwide, at least 650,000 consumers have joined credit unions since Bank of America’s announcement. An additional $4.5 billion in new savings accounts also has gone to credit unions during that time, the trade group said. That compares to the 0.2% negative growth the trade group had reported through August.

But consumers should know that changing banks comes with its own set of potential problems. Consumers Union offers tips for those who want to switch banks at DefendYourDollars.org.

Customers also should be aware that just because a bank says it won’t charge a fee for debit cards doesn’t mean it won’t add charges elsewhere as the industry tries to recoup money lost in recent reforms.

Banks are expected to lose more than $6 billion in annual revenue because the Durbin amendment that kicked in Oct. 1 will reduce by roughly half the amount that banks can charge merchants for debit card transactions.

That comes on top of banks’ loss of nearly $5.6 billion, from restrictions that went into effect in July 2010 that limit what banks can charge for overdrafts.

Sibbald says the state of the economy, the relatively recent bank bailout resentment, and the feeling that “once banks got healthy again, they went back to their same old practices, including outsized compensation packages for their executives,” all fed the public’s anger.

Now banks will regroup and lick their wounds, Sibbald says. “You won’t see major changes until at the very earliest next spring. There will be a cooling off period. Bank of America can’t announce one week that it’s getting rid of the debit card fee and then a week later say, ‘Oh, by the way all your checking accounts are $15 a month.’”

(Story updated 11-04-2011. Originally published 11-02-2011.)

Score one for consumers. After a month of public rage over Bank of America’s plan to start charging debit card users $5 a month next year, the bank announced on Tuesday it was scrapping the plan.

“We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” David Darnell, co-chief operating officer, said in a prepared statement. “Our customers’ voices are most important to us. As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so.”

The bank also made reference in the announcement to the competitive marketplace. The move followed similar reversals by four of the nation’s largest banks in the last week.

On Monday, SunTrust said it would end its $5 monthly fee for debit card users and shortly afterward Regions Bank said it would get rid of the $4 fee it started charging last month. Both banks said they would refund fees already paid.

JPMorgan Chase started testing $3 monthly debit card fees in February, but the company reportedly will stop the practice when its current pilot in Wisconsin and Georgia is completed in November. Wells Fargo announced late Friday that it was canceling its test program after two weeks of testing in Georgia, New Mexico, Nevada, Oregon and Washington.

“As we adjust to changes in our business, we will continue to stay attuned to what our customers want,” said Ed Kadletz, head of Wells Fargo’s Debit and Prepaid Cards in a press release.

Debit card fees seemed to push consumers a little too far – more than other bank fees — as this was a charge for using your own money as opposed to money “loaned” from a credit card. Customers who were trying to control their debt by using a debit card instead of racking up credit were outraged that they would have to pay for that decision.

Other banks and credit unions have been quick to play to that anger and say they won’t impose debit card fees.

TD Bank announced Friday that it wouldn’t charge the fees. According to a recent TD Bank poll, nearly three-quarters of TD customers use debit cards 15 times per month. They cited ease, convenience and no fees as the primary attractions.

“All banks, including TD, are under pressure to respond to the regulatory changes surrounding the banking industry,” Nandita Bakhshi, Executive Vice President of TD Bank said in a press release. “With 70 percent of our customers saying they would discontinue their account if a fee was implemented, we listened to our customers.”

Bank of America’s fee proposal sparked pockets of grassroots opposition. One organizer was Molly Katchpole of Washington, D.C., who started a petition on Change.org to “Tell Bank of America: No $5 Debit Card Fees.” The petition had more than 300,000 supporters just before Bank of America’s announcement.

And customers’ voices may get louder as Saturday’s Bank Transfer Day approaches. The movement is still on, despite the banks’ reversals. Activists organizing the campaign are urging consumers to switch their accounts to credit unions or community banks that day.

But consumers should know that changing banks comes with its own set of potential problems. Consumers Union offers tips for those who want to switch banks at DefendYourDollars.org.

Customers also should be aware that just because a bank says it won’t charge a fee for debit cards doesn’t mean it won’t add charges elsewhere as the industry tries to recoup money lost in recent reforms.

Banks are expected to lose more than $6 billion in annual revenue because the Durbin amendment that kicked in Oct. 1 will reduce by roughly half the amount that banks can charge merchants for debit card transactions.

That comes on top of banks’ loss of nearly $5.6 billion, from restrictions that went into effect in July 2010 that limit what banks can charge for overdrafts.

Sen. Dick Durbin (D-Ill.), author of the swipe fee amendment, praised the Bank of America decision in remarks on the Senate floor Tuesday. “What we have at work here is a very fundamental principle of our economy — the free-market economy: Transparency, so people know what they are being charged. So they have a choice.”