What's out: Paying with credit cards. What's in: Paying with debit cards.
Filed under: Banks, Borrowing, Budgets, Debt, Wealth
The status of using a credit card to pay for dinner, a movie, clothes or anything else you need or want immediately is a lot of fun to have -- until the bill arrives. And the joy of using a credit card, as almost everyone who has used one on a spending spree or a weekend out knows, can easily turn to sorrow a month later, if the bill isn't paid on time. Late fees, not paying off the balance each month, and 18% or higher interest rates add up and turn that $250 night on the town into a $300 debt.
With more people watching their spending in a sour economy, and the enticing lure of a credit card just sitting in their purse or wallet unused, more Americans are rethinking how they pay for things. Credit cards are so out.
Here's an example why credit cards are dangerous, according to the Delaware County Office of Consumer Affairs: On a balance of $2,000, making the minimum monthly payment, such as 2% of the outstanding balance or $20, whichever is less, can take 22 years to pay off at 19% interest. Interest payments will total nearly $4,800, which is more than double the original $2,000 borrowed 22 years ago! OK, so it gets somewhat better if the monthly payment is doubled to 4% of the balance owed, shortening the payment time to seven years instead of 22, and saving about $3,680.
Enough math for now. You get the point -- credit cards, if not paid on time -- can be a difficult way to pay off short-term debt over the long haul. Who wants that when they're not sure if they're going to have a job next month? A better way to go, at least if you want to avoid the long-term fees, is to pay as you go with a debit card.
While debit cards aren't new to the world of currency, they are being promoted a lot more lately. MasterCard hired Mr. Bill, the clay figure from "Saturday Night Live" fame, to pitch its debit cards as a way of being sure of what you're spending in an unsure economy. While a $2 cup of coffee charged to a debit card won't break anyone's bank account, people who use plastic tend to spend more than when using cash, Ed Mierzwinski, the consumer program director for the United States Public Interest Research Group, told the New York Times. Mierzwinski warns that cardholders can incur fines if they overdraw their accounts, and that the right to dispute debit transactions are not legally protected as credit card transactions are.
The federal government has a program for federal agencies to use debit cards for things such as payroll and disaster relief, so you'd think that if a government that runs the U.S. Treasury like it was a credit card without late fees goes with a pay-as-you-go method for some of its expenses, there must be something good about debit cards.
Some debit cards are a little too far out there, however. A company called Reserve Solutions offers customers to tap into their 401(k) retirement accounts with a debit card that essentially takes a loan against the account. Instead of taking money out in a lump sum, the card allows people to draw down the money as they need it. Two U.S. senators have introduced legislation that would outlaw the use of credit or debit cards with retirement accounts.
One of the latest promoters of debit cards is Russell Simmons, a founder of Phat Farm apparel. Unlike many debit cards, which deduct money from a linked checking or savings account at a bank, the RushCard is prepaid. It offers all of the same convenience as any other plastic piece of currency, but without the worry of late fees or overdrawing a checking account. Although there are still plenty of fees: $19.55 to activate; $1 per transaction, capped at $10 per month; and $1.95 to us an ATM. Not exactly free, but a better option to people with poor credit than a check-cashing store.
At a time when you don't know if you'll still have your job when the next credit card bill arrives in the mail, using a debit card and paying as much as you can afford now, without adding more debt to your bottom line, looks a lot smarter.
Aaron Crowe is an unemployed journalist in the San Francisco Bay Area. Read about his job hunt at www.talesofanunemployeddad.blogspot.com
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Reader Comments (Page 1 of 1)
11-21-2008 @ 7:06PM
eml said...
This article does not discuss the major downside of a debit card--thieves can drain your account completely and you have no protection. Credit cards typically limit your liability to a maximum of $50 in cases of fraud. Imagine a thief getting hold of a debit card linked to a 401(k) account worth tens of thousands of dollars! Self-discipline and account vigilance are far safer options than a debit card.
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11-22-2008 @ 2:54AM
Ray said...
Mr. Crowe misses some very important points about the differences between using a credit card and using a debit card. Many of them are pointed out by radio talk show host Clark Howard ( go to http://www.clarkhoward.com ). In fact, Clark talked about just this topic on today's (11-21-08) program which you can listen to via his rss (podcast) feeds, though you'll have to wait two business days to access it. (I believe it's in the 2nd half hour of either the first or second hour of the show.)
Banks USED to decline debit cards if the "customer" was overdrawn. Not any more! (I'm a merchant, and I haven't seen a DECLINE message in many a moon.) Instead - labeling it as a "Customer Service" - they allow the transaction overdraw to happen, then slap the card holder with MASSIVE ($30 or more) overdraw fees for that and every following transaction, until the card holder ultimately realizes what's happened - AND - is in debt over his/her eyeballs. Get the bank to to rescind those overdraft fees? Well, listen to Clark's podcast to hear what he has to say.
Now, banks are ripping merchants off big-time, too.
1 - If the debit card is processed as a credit card (which banks encourage card holders to insist on, by offering them little penny-ante perks to do so), the merchant is charged extra fees. The card issuer gets richer.
2 - Visa is pushing a "Signature" charge card, and Master is pushing a "World" charge card on to holders. What this means to merchants is additional fees / discounts each time we accept and process one. The merchant's additional fees (discount charges) are the same as those I am forced to pay when someone from (example) Brazil shops in my store and presents a Brazil-issued Visa or MC card.
3 - Merchants are charged additional processing fees / discounts when a business card or a "cash back" or a "flyer miles" (or similar) charge card is presented by a card holder. Many times, the merchants can't even tell if they are processing one of those types of cards, and Visa & MC won't tell us how to differentiate them from other "normal" (no "card-holder perks") cards presented to us.
4 - Visa calls their "piece of trash fake Visa card" (Clark Howard's words) "Debit" or "Checking" or "Cash" or other, similar names, printed in small font size SOMEwhere on the face of the card, so the merchant hopefully misses this fact and processes the debit card as a credit card, generating extra Visa fees / merchant charges.
5 - MC calls their "piece of trash fake Master card" a "Money" card and lately they've taken to 'hiding' that word somewhat by printing it in small font size, in white ink, in the hologram on the face of the card, again in an effort to trick the merchant to process the debit card as a credit card, generating extra MC fees / merchant charges.
So it's not only the card holder that is "taken to the cleaners" by the card-issuing banks; the merchants are, too. Not satisfied with cleaning out both the merchant and the holder, they've now gone to Congress claiming "We're broke! We need money to continue ..." Yeah, continue ripping the public off while they hold Congress in their hip pockets.
Am I angry? As a merchant and also as a consumer, you're danged right I am. The devil is in the details.
Mr. Crowe, since when should we require someone else (the banks) to be our consciences? What's wrong with good old-fashioned personal responsibility! I can only say, "A pox on you and your 'sales pitch,' wanting everyone but the card holder to assume responsibity for a card holder's irresponsibility. Eat crow!"
(c) Ray
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11-26-2008 @ 10:31PM
Burly Bob said...
This is one I disagree on. I use credit cards but simply pay off the balance each month so I don't ever pay any interest. Also, I use a Discover card which pays me cash back or a Visa card that gives me rewards. If you pay your balance off and get free rewards and cash this is better option than a debit card. Plus Discover card and my Visa are both ZERO annual payment. Be sure to get ZERO annual payment cards.
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11-30-2008 @ 7:56PM
chris said...
We have been using debit cards for years, it's just that you tap into your checking account and don't write a check. When you know you only have a certain amount like $1500 to spend for the next couple weeks and some bills yet to pay, you become a lot more careful about how you spend your hard earned money. Since we paid off our credit cards a few years ago we have been credit card free. WHAT A RELIEF! Believe me, you do have more money, it's just that you have to save it up to get something big like a laptop or a new sofa, but it's worth it when it's paid off and you don't have to be paying a monthly payment that seems never ending. YOU CAN DO IT!!!
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11-30-2008 @ 2:01PM
Dan Ray said...
The example Mr. Crowe cites from the Delaware County Office of Consumer Affairs no longer accurately reflects market conditions. No major card issuer charges just a 2% minimum payment any more. In about 2003, under pressure from federal banking regulators, they raised their minimums.
The most common in today's market is to require a minimum payment of all interest plus 1 percent of the principal. That would cut the repayment time of his example about in half -- still a ridiculously long time to pay off a minor debt, but at least it's not the nearly permanent debt albatross he describes.
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12-01-2008 @ 10:39AM
Kelly Maxwell said...
Right up my Alley! Payment Processing and Unemployment. I was laid off two weeks ago by a payment processing company as a "relationship manager" who took care of the company's independent sales people. The holidays bearing down and a ten year old to take care of...I decided to give the world of sales in payment processing a whirl! Actually, my love of being social and providing community business owners with the truth on a part of their business that they find so confusing (it's that way on purpose) I am hoping to find a niche. I have spoken to several merchants who are absolutely horrified of change as well as untrusting of payment processing. It's worse than the "used car salesman" analogy, in fact with car sales in the toilet, I suspect that must be where most of them went. (just going on that industries rep, nothing personal) Well, to date and possibly that these holiday shopping days are quite frantic for the merchant anyway, I have not signed one new merchant. Many comments about the banks and processors in previous blogs are quite true, if you seem to be getting a great rate, please watch for other fees etc... after all, the bank, the processor are in it to make money and that money comes out of the merchants profits, not that these services should be free, but these merchants are what builds our economy. It's seems the banks greed has deteriorated it.
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12-02-2008 @ 8:30PM
Saul H Segan Esq said...
Why are we tolerating this? Why are we allowing the credit cadr companies and the banks to contrive ways to steal our money? Bank fees are also clerly designed to appear by claiming that surveys prefer the larger payments to be made first and then charging an outrageous amount per debit transaction that happens to fall on the same day. It is legalized usury.
Our legislators do NOT protect us, and the banks foam at the mouth for the chance to exact these huge fees. hey give out misleading information about funds availability and then charge you the fees if you make a mistake that they told you that you would NOT be making.
America, stop being led around like blind sheep! Write to every legislator in your state and every Congressperson and GET INDIGNANT! By the way, FIND OUT who your legislators are. Most folks don't even know. Another thing that should be prohibited is unilateral changing of terms without agreement or advance notice in brochures that they KNOW nobody is going to read.
Now that we4 have a new Government to be--let's remind them of other concerns of Americans beside NATIONAL SECURITY and MEDICAL CARE, albeit most important, the items reflected hear cut t the heart of individual financial well-being.
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