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Are Debit Cards the Future?

PH2009052202311.jpgA couple days ago, I got some pushback for arguing that the credit industry's tiered model amounted to a subsidization scheme: Credit card users who fall into debt get socked with fees and interest rates that in turn subsidize reward programs and low APRs for the credit users with a steadier cash flow. And, admittedly, my argument was largely speculative. But over at Felix Salmon's blog, some credit industry insiders add to the point. One writes:

In the recent past, I worked as a management consultant for some major credit card issuers. I can tell you that internally, these companies have a common term for customers who pay off their entire balance every month: “freeloaders”.
These “freeloaders” aren’t necessarily unprofitable; some are, most aren’t, on average the group is mildly profitable, but not nearly as profitable as those who carry a balance. If you’re wondering how a “freeloading” customer can be unprofitable, there are several factors. For one, about 0.8% of the 2%-3% interchange fee goes to rewards, but a diligent customer can push that to 1.5% or more by optimizing the collection and redemption of rewards points. Beyond that, the credit card issuer finances everything the “freeloader” buys on the card for 15 to 45 days. Finally, there are the various expenses a customer costs: printing and mailing cards and statements, call center service, various card benefits, etc.[...]
There are tradeoffs for everything. If hotels were banned from charging $8 for a minibar beer and $2/minute for phone calls and $25 for breakfast, the hotel chains would have to reevaluate their pricing structure. The result would probably be higher room rates and some closed hotels. If airlines had a price limit put on their business class seats, you can bet coach tickets would go up in price and the number of flights would go down.
In these cases and in the case of credit cards, there is tremendous profitability in one customer segment that, to an extent, essentially subsidizes another segment because it is willing to pay ridiculous prices. The difference is that with airlines and hotels, the people paying the ridiculous prices are corporations and rich people, while in credit cards, it’s the stupid and the poor.

Another said:

I have worked for five years in the credit card industry for two major issuers, actually running and developing the financial models (NPV etc) on which the decisions were made to solicit and approve consumers...I have been intimately involved in decisions to lend more than $100B to US consumers through credit card. So, I am talking form reality here, not conjectures.
Credit card industry works on a bar-bell business model. All the profits (mainly through fees and very very high interest stretching into 30% or more) are made form people below 650 FICO, all the assets (loans or balances) are from people from above 700 FICO. The industry is just a giant wealth transfer mechanism from poor people to wealthly people. The profits from below (subprime) serve to subsidize the interest rate and rewards cost of people in the ’super prime’ category.

Both of Salmon's correspondents say the same thing: The credit card industry isn't lying. The new rules passed by the Congress mean the end of a business model based around the failures of irresponsible card holders. That means credit card companies will have to flatten out their structure and make slightly more off the "good" cardholder who have been getting something of an easy ride in recent years.

But it's not clear how far they can go with that. It used to be that a credit card offered two things: Credit, with all its benefits and dangers, and convenience. But with debit cards, you can now have the convenience of plastic without the temptations of credit. I, for instance, use a debit card exclusively. And so do many others. On May 1st, Visa made headlines by saying that transactions made on Visa-branded debit cards had exceeded transactions made on Visa-branded credit cards. If credit card holders with good credit are suddenly exposed to higher interest rates and less favorable terms -- if the dangers of credit, in other words, enlarge -- the changeover to debit will probably accelerate.

(Photo credit: AP Photo/Paul Sakuma)

By Ezra Klein  |  May 26, 2009; 10:11 AM ET
Categories:  Economic Policy  
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Next: As Goes California, So Goes the Nation?

Comments

I always wondered to what extent the 'freeloader' customers (good credit ratings and reliable payers) had a value to credit card operators by improving the credit risk profile of their entire customer base, and by smoothing the cash flow. After all, I assume that the value of the bonds sold on the revenue stream from credit card customers -- assuming that this kind of asset-bassed securitization is still going on -- depends in part on the credit quality of the people in the pool. A bond built on a pool consisting entirely of low-credit score/high interest rate cardholders will pay a high yield, but will also carry higher default risk. Such a bond could be seasoned by the addition of low-credit risk cardholders, lowing the interest rate but increasing the face value and lowering the default risk of the bond, no?

However, if this equation (plus the transaction fees) doesn't work for credit card issuers, I'm happy to switch to using only a debit card.

Posted by: PQuincy | May 26, 2009 10:25 AM | Report abuse


We are freeloaders. If we start getting hit with fees, etc, then we will cancel the card and use debit exclusively (which is almost what we do now anyway). The industry does make some money off freeloaders....if they start jacking with fees then they will have a heck of a lot less of them.

Posted by: scott1959 | May 26, 2009 10:56 AM | Report abuse

I hope that your prediction of greater use of debitcards and lesser use of credit cards proves to be true.

Interest rates above 30% on those who maintain a credit card balance is simply usury and should be illegal. For those on low incomes, it becomes impossible to escape paying on an ever increasing balance since balance reduction through payoff above the monthly interest charge isn't feasible for most low earners.

As a side note: the day before the President signed the new law, I received a notice from Chase Bank (JP Morgan-Chase) on a VISA card effective June 1, increasing the credit interest charge and other changes that the law now forbids. I have no balance, and my FICO score is over 800. I was about to cancel the card when I read that cancelling the card would reduce my FICO score - clearly Fair Isaacs (the FICO score owner) and the banks are working together to close off the escape route from credit card slavery even further. "We'll ruin your credit if you think we are greedsters and want to cancel" Lovely motto for a too-big-to-fail bank, isn't it?

Posted by: JimPortlandOR | May 26, 2009 11:00 AM | Report abuse

Hmmm. Where else but America would people who live within their means and pay off their credit card each month be known as "freeloaders" who are just sucking the lifeblood out of the banks?

And interesting approach to view those who pay off their credit cards as "taking somewhat of a free ride."

Please!

I have a feeling that if you poke around the credit card crisis, you'll find not just poor people who charge groceries when the money runs out before pay day - but people who earn what I earn and who charge a great many things they simply cannot afford - like $5k TVs and premium cable channels and a lot of new clothes they want but do not need and trips to Disney, etc. and so on.

So now, apparently, the "freeloaders" who square up each month must pay to pull the load for the "deficit spenders." What a way to work out of the credit card crisis!

http://wardonwords.blogspot.com

Posted by: anne3 | May 26, 2009 11:35 AM | Report abuse

Debit cards don't offer the same protections as credit cards, and thus I don't use mine for purchases. Good luck getting your money back into your account if/when the product or service you bought is not satisfactory.

I use a B of A Alaska Airlines CC for all my everyday purchases and some monthly bills, like cable. I pay it off in full every month. If my $75 per year and the merchant fee for each transaction isn't enough for B of A, and they decide to eliminate my grace period, that's the end of my business with them. I'll go to using my credit union visa exclusively, which gives me a 1% rebate; and I sincerely doubt my credit union is going to eliminate their grace period.

In short, unless all banks eliminate the grace period, those banks who do will lose customers to those who don't, and they won't even get their merchant transaction fees from my purchases. Their loss, not mine.

Posted by: jvlem | May 26, 2009 11:59 AM | Report abuse

@jvlem
---
Debit cards don't offer the same protections as credit cards, and thus I don't use mine for purchases. Good luck getting your money back into your account if/when the product or service you bought is not satisfactory.
----
I use a debit card exclusively. I have had to return products more then once. Both to online stores(Amazon) and also to brick and mortar stores(professional sports events, Best Buy, pennies). Never, and I mean Never have I had a problem.
These returns were for either:
1). Damaged goods.
2). Incorrect items sent.
3). Wrong sizes?

My money was back in my account within days?

I don't understand why you made this statement?

Posted by: LiberalBasher | May 26, 2009 12:47 PM | Report abuse

If corps and rich people quit paying $10,000 in Business Class for $1,000 coach ticket to London, then they would just replace the business class seats with (many more) coach seats.

If EVERYBODY quit buying stuff out of the minibar, hotels would quit installing.

AND IF, Ezra Klein would quit shilling for the credit card companies, then it wouldn't make any difference because, apparently, EVERYBODY who writes at WaPo thinks protecting consumers is a bad idea.

Posted by: Heerman532 | May 26, 2009 1:02 PM | Report abuse

I think bigger crime committed by CC companies is that they force the merchants to raise prices 2-3% to include the transaction fees by the credit or debit card. The merchants are forbidden from giving customers a discount for cash payments

Posted by: TechGuy | May 26, 2009 1:12 PM | Report abuse

First of all, credit card issuers make money on the "good" credit users, just not as much. The 2-3% they take in on each purchase is greater than their overhead and whatever incentives they of their own free will choose to offer the card holder. It's a viable business model. Thinking of "good" credit users as "freeloaders" is greedy hyperbole.

Re using debit cards instead, they are not a substitute for credit cards in terms of convenience. You need a credit card for some of life's transactions such as renting a car. Debit cards won't do. Since issuers have been known to cancel credit cards that aren't used often enough, you need to keep up the activity on one to be sure you still have it when you need it. Use it or lose it.

If you let your credit card go, you may have difficulty getting a replacement for it in the future. I recently had a disconcerting experience with that. I had used almost daily for twenty years a credit card issued through a brokerage. The card was set to automatically pay in full from my brokerage sweep account every month so payment was never late. It was used as a convenience, never to expand my buying power, just like a debit card. When I closed the brokerage account, I had to get a new card. As it turned out, the credit card I'd been using and paying so reliably all these years didn't report to the credit bureaus so my credit report was blank. Card issuers don't look favorably upon blank credit reports. They initially turned down my application for a new card and it took a bit of doing to get that decision overturned. Despite my reliable income, home ownership, investible assets, and lack of credit black marks, I would not have been able to get the new card had I not been able to prove that I had the old one.

The point is that one needs to have and use a credit card at least enough so that one gets to keep it. And be sure it shows up on one's credit report. Debit cards have their place but they are not a substitute for credit cards.

Posted by: Abalone | May 26, 2009 1:15 PM | Report abuse

Another 'freeloader' here. My take largely agrees with Ezra Klein's. I intentionally use credit cards rather than debit cards because I am getting free financing and rewards for nothing. I don't really object to being called a freeloader because I am exploiting the system and like scott1959 I'm quite willing to stop using it if it gets rationalized. I don't apologize for it though, I didn't set up this insane system and totally support reforms that means I'll lose my free ride. That said, I hope that debit cards are also reformed to automatically reject overdrafts rather than charging consumers through the nose for them.

One point Ezra hasn't addressed is the question of merchant fees. I'm not that familiar with the issue, but I've been seeing ads in the Post against allowing merchants to pass on credit card costs to consumers. I don't know the issue that well, but I don't find the ads convincing at all. People who pay with cash or low fee cards should pay less. It's only fair, why should the cash payers have to subsidize other people's rewards?

Posted by: greg_sanders | May 26, 2009 1:18 PM | Report abuse

I'm one of the bad guys. I automatically pay off my balance from my checking account. The credit card companies don't take the payment until the last day. I pay an annual fee for my 2 airline cards and collect the miles for 1st class flights.
I max my miles, buy thru the airline web site to get extra miles and use them as convenience cards. It costs me about $150 ayear for these upper scale cards even though I could get free cards. I wouldn't mind if they reduced the time between closing my statement and collecting the payment. I also have lots of options if the programs change to take away my benefits. I remember that my dad had over 50 cards in his wallet before Diners Club from restaurants in New York as well ad book stores, department stores and others who would bill him monthly and not pay 1-2% to the banks. Even as a college student I could go to a fine restaurant and have them charge my father for my meal. Boy did that impress my dates!

Posted by: msjn1 | May 26, 2009 1:22 PM | Report abuse

@Abalone
-
You need a credit card for some of life's transactions such as renting a car. Debit cards won't do.
--
??? Excuse me??? I've rented cars with my debit card. I've reserved rooms and ordered plane tickets. The hotels have been everything from Las Vegas on the 30'th floor of a casino to Hotel 6. Never had a problem.

Again, how do you make this statement. It is completely incorrect.

Posted by: LiberalBasher | May 26, 2009 1:26 PM | Report abuse

@LiberalBasher

Speaking as someone who work in the financial services industry and one who won't carry a debit card:

If someone commits identity theft and steals your credit card number to make charges on it they are stealing the credit card company's money. You can dispute the charges. If someone commits identity theft and steals access to your account via your debit card they steal YOUR money. You call your bank and they can take a couple of days or longer to restore (or not) the money in your account after they have investigated.

Posted by: keithmo | May 26, 2009 1:26 PM | Report abuse

I charge almost everything and pay the bill off in full every month. It saves me ATM fees, inconvenience, and gives me a outline of where all my money goes every month. Oh, and I get some cash back. I'm bothered by the term 'freeloader'. If the credit card companies can't make money simply by charging 2-3% on every single purchase then they have some serious issues with overhead. I mean most states charge about 5% on everything but groceries and that makes up about a third of their total revenue. The administrative costs of a sales tax are not half its revenue. Of course states don't spend 1/1000 of what credit card companies do on advertising or executive salaries.

Also, I don't feel too guilty about paying less in interest and fees to credit card companies than poorer individuals. Nobody is forcing anybody to sign up for these cards and nobody is forcing anyone to charge more than they make in a given month.

Posted by: bill3 | May 26, 2009 1:29 PM | Report abuse

The issue of safety with debit cards vs credit cards comes up when one has to dispute a charge, not when you are trying to return something you legitimately bought. The scenario goes something like this (and this exact problem with some local restaurants recently made the news):

1) Pay for meal in restaurant with card.

2) Waiter copies down said card information, and proceeds to go on a spending spree, purchasing items that don't require a signature.

3a) If you used a credit card, you dispute the incorrect charges, which then get set aside from your balance until the problem is resolved. If the charges are indeed found to be illegitimate, the cc issuer eats them.

3b) If you used a debit card, the money is already gone. You may eventually get paid back but, you're out the money in the interim.

I've also had occasional difficulties in the past getting refunds for things like airline tickets, where the paperwork is easily 'lost' in a large amount of corporate red tape. Disputing the charge with the cc company often gives the merchant that magical kick in the pants needed to resolve the issue quickly.

Posted by: astronomer | May 26, 2009 1:32 PM | Report abuse

thanks keithmo, for responding to liberalbasher (what a name!) re: debit cards. Debit cards have their place; in my wallet when I need to get some cash from the ATM.

Posted by: jvlem | May 26, 2009 1:57 PM | Report abuse

Hrmmm...interesting read.

I use debit for just about everything from car rentals to flight reservations and the like. I hate credit cards, always have. I have one. that's it. And I only use that in emergencies. If I can pay for it up front, I'd rather do it that way. I don't play the debt game well at all.

Posted by: cbmuzik | May 26, 2009 1:58 PM | Report abuse


without a credit card~dependent way of life, it is amazing to see how many things you can live without.

Posted by: jkaren | May 26, 2009 2:11 PM | Report abuse

I never ever EVER use debit cards for two reasons:

1. Pay now or 45 days later at the same price? The answer is obvious.
2. Allow a fraudster access to my actual bank account or just to a credit account where I can contest the charges BEFORE they hit my bank account? Again, the answer is obvious.

I'll go back to cash before I switch to debit.

Posted by: wp11234 | May 26, 2009 2:13 PM | Report abuse

"That means credit card companies will have to flatten out their structure and make slightly more off the "good" cardholder who have been getting something of an easy ride in recent years."

---------------------------------------

Statements like this (not just here, but in nearly every story I've read) make this freeloader want to pull my hair out.

No, it means companies will have to make reasonable profits from their credit card divisions instead of obscene profits from the spurious methods they've been using.

It's insane to think that card companies are entitled to a certain amount of profits. They either serve their customers or they die. They do not dictate to us.

As someone who has set up e-commerce sites for several clients, the credit card companies get their money coming and going. They do not need to gouge customers to make a profit any more than I have to embezzle from my employer to make a living.

And sure, as an embezzler, the money pours in, but if I'm caught, I do not turn around and say, "Fine, then I'm going to have to re-evaluate our employment structure: You're going to have to give me a raise."

Posted by: itch | May 26, 2009 2:15 PM | Report abuse

Oh, and furthermore, card companies need freeloaders more than we need them.

Faced with fewer options to gouge their hyper-profitable customers, card companies should be more inclined to keep every customer they can get. Annual fees would mean customers keep fewer cards active, resulting in even more competition among card companies to be the one of the only cards in a wallet.

And if card companies structure their services so that we no longer do business with them, there will be fewer card users and less incentive for retailers to accept credit cards, resulting in fewer card users and fewer participating retailers, etc.

Posted by: itch | May 26, 2009 2:24 PM | Report abuse

@keithmo

Thank you, I did not know that. I wasn't trying to be disrespectful to any of the previous posters... Just pointing out my past experience in contrast to what they were saying.

But, again. Thank you.

Posted by: LiberalBasher | May 26, 2009 2:25 PM | Report abuse

@jvlem
---
thanks keithmo, for responding to liberalbasher (what a name!)
---
I'm honest and straight forward in what I think and say. I do not like the far left, totally hate them. But then, I truly hate the far right also. I just consider the far left the greater of two evils.

Too many people hide who they are online. I don't and never will.

Posted by: LiberalBasher | May 26, 2009 2:30 PM | Report abuse


Annual card fee ----------$0
Interest charged ---------$0
Credit card companies going under due to excessive advertising and mismanagement ----------------------------priceless

Posted by: jazcatz28 | May 26, 2009 2:42 PM | Report abuse

Folks who talk about the convenience of credit cards ,rewards system and cash back as reasons to own credit card forget that all it takes is one late payment for them to jack up the interest rates to obscene levels and that coupled with a bit of balance is all it takes to erase any cash back received

Posted by: TechGuy | May 26, 2009 2:44 PM | Report abuse

Liberalbasher: You can be as honest and straightforward as you want, but you make a logical mistake by deeming your personal experience, i.e., having had no problem with debit cards, as the one and only real experience that cannot be disputed. You essentially attacked me and another poster with "that's not true for me, so how can you possibly say it's true"?

Perhaps a name like "bothsidesbasher" or "centrist" would more accurately protray your equal opportunity bashing and not elicit observations like "what a name." I'm all for being honest and straightforward, but I tend not to bash at all, which works for me.

I'm just glad that keithmo gave you an alternate observation that you may have not thought of with regard to debit cards.

Posted by: jvlem | May 26, 2009 2:45 PM | Report abuse

Like many who do not understand the financial system or the effect of the law of unintended consequences on daily life, you presume that everything will always be the same in the future as it is now.

A few years ago I got into a disagreement with an author friend of mine (she is no longer a friend) over the safety and reliability of her debit card. She lives in Ontario and she stated that she doesn't even own a check book, and NEVER uses cash - doesn't even keep the stuff around. Why? Because EVERYBODY has a debit card reader.

My comment to her was something along the lines of, "So, what if the electricity goes out?"

She sneered at me in that superior way that liberals have and said something amounting to, "Yeah. Like it's going to be out for more than maybe a day or two and over a large area."

My "It could happen" was scoffed at.

Some time later, the power went out for most of the Northeast, and for almost ALL of Ontario - and stayed out for almost two weeks, during which time she couldn't even buy a cup of Timmie's Coffee! I didn't gloat - but the point was made - and the point remains.

Things change - stuff happens - and if you suddenly find yourself without electricity or someplace where debit card readers aren't used - you're screwed!

Putting all of your financial transaction eggs into one little piece of plastic or RFID chip is a really really BAD idea.

Posted by: nofluer | May 26, 2009 2:46 PM | Report abuse

One issue with using a debit card for things like car rental or hotel rooms is that they may place a hold for additional money beyond just the listed cost. I believe this is in case of damages or additional fees, but it can cause you to accidentally overdraft if you don't carry a high balance in your checking account.

I am personally a "freeloader" and pay my balance in full monthly. I do tend to prefer my credit card for most purchases for the reason keithmo mentions -- if someone steals my CC info, they're stealing the credit card company's money. If they steal my debit card info, they're stealing my money, and frankly, I know which one I prefer.

Posted by: DavidE1 | May 26, 2009 3:13 PM | Report abuse

I am a "freeloader" who uses a credit card just enough to keep the card issuer from revoking the card for non-use. This is a very good thread. I now not only understand better why I should probably keep the card even if I have to pay an annual fee, but also why I should try to pay for restaurant meals with cash rather than with a debit card, as I sometimes have done.

Posted by: phillyreader | May 26, 2009 3:43 PM | Report abuse

Someone above mentioned how one's credit score gets lowered upon cancelling a card.

I never understood this, especially for someone who is in no financial trouble and just wants to get rid on an unused card.

Posted by: Bartolo1 | May 26, 2009 3:51 PM | Report abuse

With a debit card, hotels and car rental vendors will do an authorization for a round amount, say $500, for use as a deposit during your stay or use of the car. Later, they will run the debit card for the actual cost of your stay or car use.

But the original $500 amount remains blocked off on your linked checking account (authorization typically expire 3-5 days later). Why is that? During processing, the bank matches up authorization holds with actual merchant charges, before dropping the hold. If the bank never receives a $500 charge from that merchant, the hold will stay on your checking account for several days.

By blocking off funds in your checking account, waiting in vain for a matching merchant charge, you could end up bouncing checks and other electronic debits. And those, of course, come with their own set of overdraft and non-sufficient funds fees.

This is why a credit card can be useful. The merchant can run the authorization hold against your card limit, instead of your checking account balance.

Posted by: taskforceken | May 26, 2009 4:02 PM | Report abuse

I use my debit card all the time. Here are my tips.

Debit card tips.
Have two accounts preferably at a different banks both with debit cards.

Have one that is used only for web, mail, fax and phone transactions.

Have another checking that used for in person purchases and atms.

Do not use it at pay at pump, pay inside.

When using a pin cover the entry so people and the camera do not see what you put in.

Lower your daily authorization limit to $1,000

One other tip, if the cashier looks untrust worthy and there is not a swipe terminal. Don't use the card, pay cash.

Posted by: gpatrick900 | May 26, 2009 4:13 PM | Report abuse

Someone above mentioned how one's credit score gets lowered upon cancelling a card.

I never understood this, especially for someone who is in no financial trouble and just wants to get rid on an unused card.

Posted by: Bartolo1 | May 26, 2009 3:51 PM | Report abuse

******
The most basic way this can happen is if you have debt. That credit card counted towards your available credit. If you close the card, your available credit drops and your debt / available credit ratio increases (ie. you're closer to maxing out). If you have no debt, then this shouldn't matter.

However, you need to stop thinking of a credit score as just a measure of your credit worthiness.

Instead, think about it as a combination of credit worthiness (i.e. ability to pay back new debt, considering current debt load) combined with the likelihood that you will make money for the debt issuer.

Loaning money is a business, and won't make much money off of a borrower who pays in full (or in the case of a traditional loan, makes payments on-time or early). Instead, it is more profitable to loan to someone who will eventually pay it back, but while doing so misses a few payments here and there, or occasionally pays late, or pays the minimums. These actions net loan issuer significant profits in fees and interest, and they also eventually recoup their capital.

Since the credit monitoring agencies exist for the benefit of those making the loans, they are of course going to account for the likelihood of 'extra profits' into your credit score. They are not in business for your benefit, regardless of what they might say!

Posted by: astronomer | May 26, 2009 4:29 PM | Report abuse

Well, someone has to be lying because the first credit cards didn't give you an option of carrying a balance. You had to pay it off at the end of the month. These credit cards were profitable with no fees, no interest, no loans, etc.

Credit card companies would be profitable if every single person paid off their balance because they make money from merchant fees.

And they need customers to use those cards to make money...so they're going to get rid of customers who use their cards and generate a profit each month?

Posted by: AlanGoldberg54 | May 26, 2009 4:30 PM | Report abuse

Personally, I would prefer not to write off up to $1000 but that's just me. ;-)

Another problem I have with debit cards is that you need to be prompt -- a day or two -- about calling the bank about irregularities with your account. That's not always possible if you're on a trip. With a credit card you get 30 days.

Posted by: keithmo | May 26, 2009 4:35 PM | Report abuse

@jvlem

You stated that the debit card COULD NOT BE USED for car rentals. I flat out gave examples it could.

You were wrong. Period. you should have qualifier your remark if you meant differently. The statement you made was incorrect.

If your that thin skinned to consider what I said as an attack, go put your tin foil hat on and don't comment when others can offer experiences other then yours. Now that jvlem, was an attack against both your personality and communication skills.

Posted by: LiberalBasher | May 26, 2009 4:40 PM | Report abuse

Debit cards are for weaklings and/or suckers. Why on earth would you give a merchant a direct portal into your checking account, with less legal protection than you have with credit cards? The legal limits on personal liability for unauthorized charges are higher with debit cards, and when you get ripped off, you have to fight to get back the money which has already been sucked out of your account. This transfers the leverage from you to your bank, and makes it easier for them to deny reimbursement to you. Here's a message to any fool with a debit card: get yourself a credit card and pay your balance off every single month.

All this talk about punishing responsible customers is just another line of BS from the greedy crooks who run our credit card industry. If they can't make money charging usurious interest rates and fees that would make a loan shark blush, then they don't deserve to be in business. And they are way too smart to kill the golden goose -- it's much more profitable to bleed it to death slowly.

If my credit card company tries to jack me by adding annual fees and cutting my benefits, I'll go back to the old-fashioned way of doing business -- I'll write checks or pay with cold hard cash. If every consumer was this stubborn, these greedy crooks could never have gotten away with their actions. Thirty-three percent interest? We used to put people in jail for charging 33 percent interest. If for any reason my credit card company raised my rate to 33 percent, I would tell them to go F themselves...

Posted by: jerkhoff | May 26, 2009 4:58 PM | Report abuse

Bartolo1: go to Google and type in FICO or credit scores. That should answer your question about why closing a credit card account will sometimes affect credit scores!

Posted by: cowboyjohn57 | May 26, 2009 4:59 PM | Report abuse

Credit card companies managed to operate prior to the time when they deliberately targeted risky borrowers and charged outrageous fees and interest. The current legislation passed limits their ability to make a profit in a very small way.

If they need to reinstitute annual fees or limit the incentives they offer cardholders to use the card, they will and the world will keep turning for us all.

If more people use debit cards, I hope the laws will be amended to provide similiar protection against fraud and theft as exist for credit card holders. At present, the banks usually will reimburse the cardholder for theft or fraudulent charges, but the law does not compel them to do so. This is a major flaw with debit card use.

Posted by: pezzhome1 | May 26, 2009 5:04 PM | Report abuse

One more thing I'd like to add. My daughter is battling with her bank right now over a series of small charges which were made with her debit card. She cancelled the card as soon as she noticed, and disputed the charges with her bank. Her bank denied reimbursement on the grounds that this was a store where she "habitually" did business.

If my daughter had been using a credit card, the leverage would have been all on her side since the disputed money would still be in her pocket. Instead she will probably have to eat $40 in theft losses. She was fortunate that the theft from her account was small enough that it didn't start a wave of bounced checks with the accompanying fees from both bank and merchant.

This is why debit cards are for suckers -- limited legal protection and the need to recover your money after the fact in case of error or fraud. The only people who should use debit cards are those who are simply too weak to commit to paying their bills in full, on time, every month.

I would like to respond to a couple of other comments here. To jvlem, the card you use to withdraw money from your ATM is known as an ATM card. If you ask, your bank will give you an ATM card instead of a debit card. ATM cards are MUCH safer than debit cards.

And a minor correction to keithmo: with a credit card, you legally have 60 days (not 30) after you notice an incorrect charge to dispute that charge in writing with your credit card company.

Posted by: jerkhoff | May 26, 2009 5:17 PM | Report abuse

jerkhoof, I understand where you are coming from, but I have never had a problem with my debit card, which I use either in person to buy groceries, books, and other retail items or in over-the-phone transactions for such things as refilling drug prescriptions and buying concert tickets. When I engage in Internet transactions or make travel arrangements, I ALWAYS use my credit card.

The big advantage for me in using the debit card is that the debt is paid off instantly; I do not have to think about getting a bill eventually. I monitor my account by telephone just about every day to make sure that my checks have cleared, that my credit lines are what they should be, and that nothing else has gone wrong.

I do not consider myself a weakling or a sucker.

Posted by: phillyreader | May 26, 2009 5:20 PM | Report abuse

Look. 2% interchange royalty on less than a 60 day loan is somewhere between a 12-24% annualized return. So the CC calling me a freeloader is like the casino accusing me of not losing enough money at the dollar table. Its just not credible. Guess what, Las Vegas? Your $15 tables are why I dont gamble any more.

Posted by: Aatos | May 26, 2009 5:36 PM | Report abuse

Phillyreader, I think that you are making the best of a bad situation, but why go to all the trouble? It's obvious that you already realize that your debit card is a direct portal which allows merchants to beam money out of your account. You say that your card is safe because you've never lost money, but that's the same thing people were saying about their 401(k)s last September. It's nicer when you can lock your barn door BEFORE your horse gets stolen.

You seem to manage your debit card as responsibly as anyone could, but it sure seems like a lot of extra risk and hard work just so you can have one less monthly bill to pay. And I speak from (semi)-personal experience, having just watched my daughter get screwed by her bank over unauthorized charges on her debit card. I've been preaching to her for years about the benefits of credit vs. debit cards, but she needed to get burned herself before she learned the lesson.

I hope your luck holds out, but personally I would recommend that you get yourself a credit card with a cashback reward, make a note of the due date, and pay it off every month. An ounce of prevention...

Posted by: jerkhoff | May 26, 2009 5:56 PM | Report abuse

jerkhoff, I will keep your sugggestion in mind if and when my present credit card gets a monthly fee. But most of my transactions are with entities with which I have some sort of relationship. The reason why I am not too concerned about the debit card is that I have a strong relationship with the bank that issued it. I know the branch manager, and I have a number of accounts there. When something has gone wrong on anything else, things have gotten fixed immediately.

I did not mention this earlier, but I do a large number of transactions with checks and cash. Looking at my checkbook, I see that I have written 50 checks (four to the credit-card company) so far this year; I have had 70 debit-card transactions involving a total of only 16 merchants. (If I keep posting, I wonder what else I'll learn about my life.)

I manage my finances aggressively because there was a time when I had severe financial trouble caused by another person. I learned to get a debt paid off as fast as I possibly could; I came to hate the very idea of float. One major consequence of all that I went though is that I now have trouble understanding the mindset of people who have no idea how to make and keep to a budget; another is that I find myself increasing my savings, even though I am retired. So my approach is not yours, but it seems to be working.

Posted by: phillyreader | May 26, 2009 6:29 PM | Report abuse

@jerkhoff

I stand corrected. But 60 days is an even better argument for a credit card vs a debit card.

Just list me as another member of the "freeloader" club.

Posted by: keithmo | May 26, 2009 6:43 PM | Report abuse

I admire your financial discipline, phillyreader. I think you may be the exception which proves the rule... ;^)

Posted by: jerkhoff | May 26, 2009 7:31 PM | Report abuse

This statement is incorrect:
__________
The merchants are forbidden from giving customers a discount for cash payments
__________

Merchants are allowed to have a cash discount. They may not have a credit card surcharge.

Posted by: eorysiek | May 26, 2009 11:39 PM | Report abuse

Well, not all banks cancel a card that isn't used often enough. The first credit card I ever got after college in 1976 was a Texas Commerce Bank Visa card. They were eventually swallowed by Chase which is now JP Morgan Chase. I hadn't used the card for 30 years and didn't even know the account was still open until I went open a joint-account for my college bound son. You could have bowled me over with a feather when the new accounts clerk welcomed me back like a prodigal son. Now JPMC has my joint-checking, my graduate MPA soon-to-be-CPA son's credit card and my reissued one. We fully pay off our balances occasionally, but the rate is not unreasonable compared to my other cards, so guess which one I'm using these days. By contrast my wife and I both had Republic Bank of Dallas Master Cards when we both worked there in the '70s. When they were absorbed by NCNB, now BofA, NCNB wiped out all our credit records and made everyone start over. We declined. Interesting to see which of the two is in a stronger position today. Like poor judgement, arrogance goeth before the fall.

Posted by: fbcx | May 27, 2009 2:13 PM | Report abuse

That's not my experience with a debit card.

I discovered my debit card was stolen actually at the bank when I made a deposit and found out the account was overdrawn. I went over to a manager to check the balance and lo & behold, no wallet. (I'm not a big shopper as you can tell)

The bank closed the account and reimbursed the money. Now it did take a few days for the money to show up, but other than that, I didn't see any difference between Amex and the debit card. And any time I've had to dispute a charge, the bank has reimbursed me until the charge was settled.

So, while other experiences may be different, mine is the debit card is just fine.

And for all of you complaining that you have given the merchant a portal into your account, you don't have your utilities set up for auto pay?

Posted by: brcollins42 | May 28, 2009 2:23 PM | Report abuse

Liberalbasher,

The last time I rented a car (from Hertz) a credit card was required. The instructions provided by Hertz stated that a debit card could be used to pay for the rental after the car was returned but that a credit card was required to pick it up.

I am aware that debit cards have begun to be accepted but if you check on the internet you will find that only some companies accept them and that within companies it may vary by location.

Perhaps I should have made a less absolute statement. Let me amend it to say that you'd better have a credit card in your wallet if you want to be certain that you'll be able to drive off in the car you reserved.

Posted by: Abalone | May 28, 2009 5:22 PM | Report abuse

Do what we did. Our Advanta cards where discontinued and we replaced them with prepaid business expense cards. Since we pay off our cards every month, there was no problems. We prefund a central account, and move money on the employees cards when we need to. We used Bank Freedom (http://www.bankfreedom.biz). Good luck! Robert

Posted by: rbchristiansen | May 29, 2009 5:44 PM | Report abuse

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