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High winter heating bills, meet credit cards

More utilities offer credit card payment options. Should you use it?

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Utility companies across the country are making it easier to pay your monthly electric, heating oil and natural gas bills with credit cards and debit cards -- payment options that were rare just a few years ago in the utility industry.

Why you should care: Credit card payments offer the convenience of paying electronically, but may not be right for everyone, such as people who do not pay their credit card balances off each month.

What to look for: Free credit card acceptance is the best option for consumers. Otherwise, you may be charged a fee of $3 to $6 per transaction to process payments.

As the economy slows downs and utility bills rise with the price of oil, homeowners may look toward credit cards as options to pay utility expenses. Consumer credit advisers, however, say credit card utility payments are not a good idea if you don't pay off your balance each month.

A CreditCards.com survey of utility companies in November 2007 found 92 percent of the major energy providers nationwide offer customers the option of paying with Visa, MasterCard, American Express, Discover or Diners Club credit cards. (See the major utility companies in your state that accept credit card payments.) Utility industry observers say there has been a growing trend over the last few years toward greater use of credit cards in paying utility bills.

'The last unconquered territory'
"Utilities are the last unconquered territory for the credit card companies," says Dennis Smith, vice president of research and information delivery at Atlanta-based Chartwell Inc., a utility industry market research company. A 2006 Chartwell survey of the top utility companies found card acceptance nearly doubled in seven years. While only 41 percent of the major utilities accepted credit cards in 1999, some 81 percent of the companies reported accepting credit cards by 2006.

"Not all utilities are sold on it, but a number of them have moved in that direction," Smith says.

Reduced transaction fees
Many utilities launched credit card payment options following marketing efforts by Visa and MasterCard in 2005. The giant credit card payment processing networks began offering special rates and reduced merchant interchange rates to utility companies to help remove one of the major roadblocks to credit card use for recurring monthly utility bills: the so-called convenience fees.

Customers who pay a utility bill on credit cards are likely to be charged such a fee. They typically range from about $3 to $6 per transaction. The CreditCards.com survey found the average fee was $2.60. Merchants and companies that charge convenience fees are simply passing on the cost of the transaction charges they must pay to the credit card networks. Historically, those fees have been enough to keep the vast majority of bill payers going to traditional payment methods: electronic checks from banking and savings accounts, walk-up windows or mail-in checks.

Visa and later MasterCard reduced rates from the 1 to 2 percent per transaction typically charged to merchants down to only 75 cents per transaction for utility bill payments. Those reductions have led some utilities to offer fee-free or reduced-fee credit card acceptance.

"These incentives make it increasingly beneficial for utility companies to accept MasterCard cards," says Steve Carnevale, vice president of U.S. commerce development for MasterCard Worldwide. A Visa representative declined to comment on its utility marketing program. Visa's website lists more than 700 utilities accepting its credit cards for payments; MasterCard says some 500 utilities accept its brand.

Other factors fueling the credit card acceptance boom for utilities:

  • More payment options. Industry experts say consumers -- now accustomed to buying everything from burgers to blue jeans with plastic -- are demanding more options for paying routine, recurring bills.
  • Convenience. Online billing and payments are more convenient than writing checks, hunting down stamps (which continue to increase in cost) or walking up to payment windows.
  • Rewards. Debit and credit card rewards programs that offer points and cash back based on the amount of credit card use have grown in popularity -- another incentive to put routine bills on plastic.
  • The economy. Some families may be hard-pressed to come up with utility bill payments because their overall living expenses have increased dramatically compared to previous years.

Words of warning
Consumer advocates caution that paying utility bills with credit cards may be unwise for budget-conscious families. Despite the convenience that paying with credit cards offers, short-term consumable expenses such as utility bills or groceries should be paid with cash whenever possible, experts say.

"I'm very, very concerned that this will be the way to keep their utilities on but increase their credit card debts," says Catherine Williams, national spokeswoman for Houston-based Money Management International, a nationwide nonprofit credit counseling agency. "Now you are paying extremely high interest on an extremely high credit card. You don't spread your basic consumer costs over a long period."

Adds Williams: "Transferring it over to a credit card and then not paying it off says you are living beyond your means and you've got to adjust your budget."

Brad Stroh, CEO of Bills.com, a financial services website, also advises against using credit cards for utility bills. His rule: Do not use high-cost credit cards to finance anything that depreciates or doesn't retain its value.

"There's one justification for using credit cards to pay utility bills," Stroh says. "It's convenience. That's the only benefit." He suggests using a debit card to pay the utility bill. "You still retain the convenience but you don't run the risk of not being able to pay your bills at the end of the month."

He adds: "Consumers that don't pay their credit card bills in full, consumers that don't budget effectively or consumers that are facing a cash flow crunch should never use credit cards for short-term expenses. Period."

Help for the needy
If you are hit with huge utility bills and don't want to pay with plastic, numerous state and federal programs are available to help low-income families pay their gas, electric and heating oil bills. Some states prohibit or limit shut-off of services during the winter months to prevent families from literally being left in the cold. Middle class families, however, generally are not eligible for assistance because they make too much money. For these families, paying the winter heating bill becomes a matter of choice: cutting expenses on other less important purchases (i.e., entertainment and dining out) or staying warm.

Customers of Columbia Gas of Ohio, which services 1.3 million homes and apartments in Ohio, can choose from a half dozen payment plans and options to help pay their gas bills. These are in addition to state and local grants. "Our general philosophy is we don't want to shut anybody off, because obviously it's a hardship on them," spokesman Ken Stammen says. "From a business standpoint it costs money to send someone out to disconnect and then to turn it back on again. We encourage people to call us directly right now and let's work out a payment plan." (See "7 tips for paying high utility bills.")

Regulatory hurdles
Paying utility bills with credit cards still faces hurdles. Smith, from the Chartwell research group, says regulatory restrictions are preventing many utilities from charging convenience fees, but consumer demand for convenient payment options is pushing others to adopt credit and debit card payments. In previous years there were so few customers paying with credit cards that utilities were reluctant to -- or prohibited from --charging everybody for a convenience that only a few used. "The percentage of people who pay online has been below 20 percent," says Smith, who adds that times -- and consumer demand -- are changing. "Now, more and more people are demanding it."

MasterCard consumer research shows credit card recurring payments are the No. 1 method of paying bills automatically: 38 percent of households have at least one recurring payment linked to a credit card. Insurance, utilities, telecommunications and cable/satellite television services account for $810 billion, or 57 percent, of the annual recurring payments in the U.S.

Paperless, fee-free option
The Chartwell survey notes that some utilities are offering customers fee-free credit card acceptance. The companies offset the transaction fees by requiring e-billing or paperless billing. Savings realized by eliminating mailing and processing of paper utility bills each month help defray the cost of the merchant fees charged by Visa, MasterCard and the other networks.

The Sacramento Municipal Utility District, which provides electricity to 520,000 residential customers in Sacramento County, Calif., offers free Visa card acceptance when customers pay on the Web or use an automated phone payment system. Visa is also accepted free of fees to consumers who enroll in recurring monthly payment plans. People who call the utility's customer service hotline to pay their monthly bills are charged a $4.25 fee when paying with Visa, MasterCard or Discover cards.

The district offers the payment service free because Visa charges the utility a reduced rate -- less than $1 a transaction, says Carol Novak, a customer service coordinator. The utility absorbs that cost as a customer service, she says.

Credit card payments more than doubled in the program's first year. Novak says 13,151 people made recurring payments with credit cards in October 2007, compared to only 5,051 in January 2007. That's only a fraction of its customer base and a small amount compared to the 40,000 people a month who pay with electronic checks, but the trend for credit card payments is increasing. Novak says credit card payments may be attractive to her region's mobile population of computer-owning government and state capitol workers.

Kansas City Power & Light Co. convinced regulators in Missouri and Kansas to allow the utility to launch a fee-free credit card acceptance program. Credit card payments went from 0.5 percent of collections in February 2007 -- when the program started -- to 3 percent in October 2007. Randy Vance, the firm's e-services manager, predicts: "It will probably kick into higher volumes once we offer the recurring payment options."

Consumers, do the math on fees
Consumers who do the math will quickly see that convenience fees wipe out the benefits gleaned from the typical 1 percent cash back or reward program. Making recurring monthly utility bill payments with credit cards means you are paying interest on past finance charges as well as the convenience fees.

Nick Ferris, a Rockville, Md., homeowner, says he would use the credit card payment option offered by his utility company, Washington Gas, but for $4.55 a month transaction fees charged by Online Resources, a third-party vendor that processes the payments. His bank's bill payment service, "though it doesn't offer reward points or anything, doesn't charge a fee," Ferris says. He pays off all of his credit cards every month.

During the winter months, his average electric bill is only $20 a month. Their primary heating source is a gas-burning furnace and the bill runs $150 to $200 a month during the winter.

Ferris sees the potential benefits of paying with a credit card. He has a card that gives him 2 percent cash back on all purchases. He adds: "That's like getting 2 percent off of my gas bill. That would be a good thing."

See related stories: "Interactive map: utilities that take credit cards," "7 tips for paying high utility bills", "Readers respond to 2008 oil and gas outlook", "Poll: Millions will borrow to pay '08 heating bills"

Thinking of paying your utility bills with a credit card? Dead set against the idea? To comment on this story, write to editors@creditcards.com.

Updated: March 25, 2008


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