Prepaid debit cards can be difficult to differentiate from credit and debit cards, except for the high fees. Image: mecklenburg / Flickr / CC BY

It has been a few months since new card fees, banking rules and overdraft regulations went into effect. Some of the biggest banks are exploring prepaid cards as a way to recapture income lost from new fee limits. Prepaid card associations are lauding the product as a great alternative, while consumer groups are warning that they can be very expensive.

Growth in the prepaid card market

Between 2005 and 2009, the number of active users of prepaid cards grew from 700,000 to 3.4 million. The growth of the market is expected to continue, according to the Wall Street Journal. By 2014, prepaid cards are expected to have 7 million users. These numbers do not include payroll cards, which are very similar to prepaid cards. Combined, the prepaid card market could account for more than 9 million customers in the United States.

The argument for prepaid cards

The majority of prepaid debit cards are offered by non-bank businesses. The cards are often marketed in stores offering instant payday loans, convenience stores and grocery stores. Many big-box stores such as Walmart and Target offer branded prepaid cards. A report issued by Bretton Woods Inc., a consulting firm hired by the Network Branded Prepaid Card Association, argues that customers of prepaid debit cards will pay less than half the fees of consumers with standard checking accounts. The report also lauds prepaid cards as a money-management tool, as users can only spend what is loaded onto the card. Prepaid debit cards also offer an alternative for customers who do not use a traditional bank.

The argument against prepaid cards

A report by Consumers Union, the publisher of Consumer Reports, says most prepaid cards tend to be more expensive than checking accounts. Nine of the 12 cards studied were more expensive than the five comparative checking accounts. Checking account fees range from $0 to $438 per year, depending on the products and services used. Prepaid debit cards charge fees range from $18 to $606 per year. The analysis also highlights that most pro-prepaid studies assume that all checking accounts charge overdraft fees. However, since Dodd-Frank consumer protection laws went into effect, only about 22 percent of checking customers have opted into overdraft protection. In short, prepaid cards can be more expensive than traditional checking accounts. Prepaid cards can be helpful for customers who cannot get bank accounts, but card applicants should keep a close eye on the fees.

Sources

Consumer Reports
Bretton Woods
Wall Street Journal

When it comes to ATM fees, JP Morgan Chase is setting the bar higher. (Photo Credit: CC BY-SA/Thomas Belknap/Flickr)

ATM fees are an unfortunate fact of life for out-of-network banking customers. Now ATM fees are on the rise, as banks look to recapture the overdraft fee money lost to the Dodd-Frank Wall Street Reform Act. According to the Huffington Post, all JP Morgan Chase customers could face $5 ATM fees very soon.

Chase ATM fee in Texas, Illinois

Banking giant JP Morgan Chase has begun charging non-customers in Illinois $5 to use a company ATM. In Texas, it’s $4. If Chase’s ATM fee increases produce enough revenue, the company has told the Wall Street Journal that the increases will go global, sending even more customers in search of short term loans because they’ve been charged an exorbitant amount to access their own funds.

According to Bankrate.com senior financial analyst Greg McBride, Chase’s $5 ATM fee is just the latest in a wave of changes sweeping the banking industry. As banks expect to lose billions of dollars in revenue once Dodd-Frank provisions involving overdraft and other fees fall into place, the “too big to fail” financial monoliths are passing the inconvenience on to customers.

“The reality is that bank revenue is being squeezed by regulatory changes and the banks are going to be accounting for that in other areas,” said McBride.

Maintaining ATM networks is another expense cited by banks, as building and maintenance aren’t cheap. However, a Wall Street Journal study found that most of the 425,000 ATMs in the U.S. aren’t even owned by banks.

What’s going on behind the curtain

Consumer advocates believe that big banks are making noise about allegedly being forced to charge non-customers $5 at the ATM in order to drum up sentiment against the Dodd-Frank act, and consumer-oriented financial reforms in general. A lawmaker may hear this and be swayed. A consumer, on the other hand, may be too busy tracking down a short term loan to make up for the higher ATM fees to care about a bank’s problems.

The reality of the matter, according to consulting firm Oliver Wyman, is that banks generated $7.1 billion in total revenue from ATM fees in 2010. Of that chunk, $3 billion came specifically from banks charging their own customers for using another bank’s ATM, reports the Wall Street Journal. Non-customer ATM fees may only have accounted for 1 to 2 percent of total pre-tax operating profit for banks, but that’s still billions of dollars that the banks are scrambling to replace.

More customer restrictions

Chase’s $5 ATM fee is yet another prohibitive mark against the bank in the span of a week, as it is also considering a $50 cap on debit card transactions. Still, low to no monthly fee ATM and debit cards are a selling point for banks. Higher ATM fees are hidden in the fine print.

“It’s easy to compare debit cards by looking at the monthly fee, so banks are going to try to minimize the monthly fees and load you with (ATM transaction) fees,” said CardHub.com CEO Odysseas Papadimitriou.

Sources

The Atlantic

Huffington Post

Wall Street Journal

Don’t forget the high-to-low processing

Banks don't want you to opt out of debit card overdraft coverage, because they make fat profits by charging customers debit card overdraft fees. Flickr photo.

If you’re like most people, you have a debit card. By now, you should have gotten a letter from the bank asking you if you would like to continue with the bank’s standard overdraft coverage. This letter is a result of new credit card rules that require banks to ask you if you would rather opt out of paying for an overdraft and just have your purchase declined. Consumer complaints about spiraling bank overdraft fees helped spur the change in regulations. If you haven’t made your decision yet, keep in mind that banks are selling the service for one reason: they make money doing it.

Debit card overdraft coverage is a scam

When debit cards came into vogue, Jeff Gelles at the Philadelphia Inquirer reports that banks saw big money to be made by confusing consumers about the difference between debit and credit cards. Debit cards draw on money in your checking account. When you use your debt card and there’s no money left, overdraft protection charges debit card overdraft fee to make the purchase. That’s where the “$40 cup of coffee” came into being. If you’re short of cash, it makes more sense to get a payday loan than to let your bank rip you off with debit card overdraft fees.

Biggest bank admits overdraft coverage is bogus

Gelles said you should decline your bank’s offer to extend overdraft protection. Even Bank of America thinks that’s good advice. In March Bank of America announced that it will do away with debit card overdraft coverage. The New York Times reports that the decision could cost the bank tens of millions a year in revenue from debit card overdraft fees and put pressure on other banks to do the same. Debit purchases account for roughly 60 percent of overdrafts at Bank of America, the nation’s largest issuer of debit cards.

Bank overdraft fees get out of hand

Debit card overdraft fees can easily get out of hand because the offending transactions go unnoticed. Gelles said the Starbucks barista doesn’t say, “You know this is an overdraft, don’t you?” so when you get dinged once, you may get dinged again and again until you realize what’s going on. There are no legal limits to how many times you can get penalized. Wachovia will charge you for up to four overdrafts, or $140, a day. Citizens Bank will charge up to seven at $37 apiece, or $259.

Avoiding bank overdraft fees

The new credit card rules about bank overdraft fees draw attention to the problem that too many consumers are poor managers of their checking accounts. In a press release, Michael S. Kappas, President and CEO, Apprisen, offers tips for avoiding overdraft fees or the embarrassment of having a purchase declined:

1. Remember your true account balance is in your check register, not on your ATM slip.

2. Keep track of all deposits, withdrawal slips and purchase receipts. Record them in your check register.

3. Know your checking account balance before you make a debit card purchase or ATM withdrawal.

4. Balance your account at least once a month.

5. Put “ghost” funds in your checking account. Deposit a few hundred dollars and don’t record it in your register. Don’t forget to account for the ghost funds when you balance your account.

6. Talk to your bank representative about your options for avoiding all potential overdraft situations.

Even if you aren't snared by an EPPICard phishing scam, the fees can still get you. (Photo: Flickr)

Unemployed Americans looking to access their state benefits have had a difficult time with the EPPICard debit card system in the past. The ATM card-style distribution system was designed to make it easy for the unemployed to access their benefits money. Unfortunately, numerous media reports have indicated that the program failed to go off without a hitch. As recently as June 20, the Fayetteville Observer reported that administrative fees plague unemployed consumers who can ill afford to pay.

When EPPICard does NOT amp up your budget

We already know that unscrupulous third parties have, in the recent past, exploited holes in the EPPICard debit card system to create a phishing scam to dupe uninformed consumers into revealing sensitive personal data for the purposes of identity theft. Those issues were supposedly addressed by state agencies and EPPICard officials. Now welfare consumers can access their quick payday funds without worry – unless they have to use their EPPICards multiple times per month or they enter their EPPICard PINs incorrectly. One Fayetteville Observer reader reported that making more than two EPPICard cash payday withdrawals per month from his bank of choice (Wachovia) produced an “excess use” fee of $1.50. Entering an incorrect PIN generates an “ATM denial” fee of 50 cents. While these possible fees for EPPICard pay day advances are reportedly spelled out on the various state Employment Security Commission websites where EPPICard is used, it’s clear that the unemployed don’t need this kind of nickel and dime exploitation that’s passed off as “service.”

Charging the unemployed for state benefits

Larry Parker of North Carolina’s Employment Security Commission told the Observer that there are “plenty of ways” to use EPPICard without being charged additional fees for a quick payday. What he failed to mention is why consumers should be subjected to fees in the first place. How is it that state governments failed to negotiate the consumer exploitation elements out of their contracts with big banks?

Don’t call EPPICard on the phone, either

Calling EPPICard, of courses produces an additional charge. Currently, 19 states use the EPPICard cash payday system, and all of them have displeased consumers to some degree. As Personal Money Market has suggested before, perhaps a return to paper checks and direct deposit is indeed the way to go.

Sources:

Fayetteville Observer

Your EPPICard account isn’t locked. Don’t bite the phish-hook… (Editor’s Note: Buckle up, preaching ahead)

Illinois Senator Dick Durbin (Photo: Wikipedia)

Former White House Press Secretary and current Fox News commentator Dana Perino warns consumers that there’s trouble brewing in Congress. This trouble could make debit card purchases significantly more expensive. To be more accurate, it will actually affect nearly all consumer purchases and debit card interchange fees will be the cause, claims Perino.

Debit card interchange fees mean fast cash for banks

Courtesy of an unheralded amendment to the financial reform law as pushed by Illinois Senator Dick Durbin, the Federal Reserve would take control of fast cash debit card interchange rates. As Dana Perino describes them, an interchange rate is “money that a retailer’s bank pays your bank when you use your credit or debit card at their store.” This money is a valuable resource to smaller financial institutions; without interchange rates, it would be difficult for these smaller banks to offer basic services to their customers.

If the Federal Reserve were to cut off the income stream, smaller banks would have no choice but to pass on the cost to customers. In many cases, this would drive them to larger, more impersonal banks that won’t have as much competition and can charge more for credit services. Consumers who balk at this will have to rely on cash, checks or fast cash short term loans for their transactions, which offer no insurance on the back end in the event of fraud.

Dick Durbin’s amendment sullies advances in financial reform

Dana Perino paints the picture for consumers on the retail end as well. Imagine what retailers will do if debit card transactions cost them more. Of course they’ll pass the cost on to customers. Some retailers do this already, but with Dick Durbin’s financial reform law amendment, it would become commonplace.  In addition, no-fee checking would more than likely disappear, along with various rewards programs as banks look to make up for income lost after the Durbin amendment.

Price controls don’t work

Price controls of this nature have not found much success, historically. The blog Wizbang uses the example of gas prices in Hawaii. Dana Perino points to Australian legislation from 2003. At that time, retailers began to charge extra for consumers paying with plastic, and the trend has continued. What Perino and many other concerned consumers are wondering is how something like the Dick Durbin amendment can sneak in without much attention, and will these consumers have to depend upon fast cash short term loans with no credit check more often.

Sources:

Fox News

Wizbang

Related Video

Think banks will still love their customers after more stringent overdraft laws are in place? Don't be surprised when more banks simply fire their customers. (Photo: ThinkStock)

Bank overdraft fees have been a thorny issue for consumers who have argued long and hard that a single $.01 in the red transaction should not trigger a $35 penalty plus additional daily penalties. Congress has listened to consumers, and recent financial reforms voted into place will affect just how much banks are able to collect from customers who overdraw their accounts. According to Consumer Reports, losing such a major source of income may prompt banks to “fire” customers.

Banks without their overdraft fees will not go quietly

Instances of overdraft fees are at a 10-year high according to BBC News, and the numbers are similar in the United States. The Federal Reserve recently clarified the changes to come, reports the Kansas City Star, and one look at what’s to come could make a banker sweat like they do when they lose business to no credit check payday loans companies. If they can’t rake in obscene profits from overdraft fees, then banks need to stop the bleeding caused by careless customers. As new customers will by law no longer be automatically enrolled in overdraft protection schemes after July 1 (after August 15 for existing customers), bank income will decrease dramatically.

How dramatically?

The convenience of free checking is made possible by overdraft fees, claims the Boston consulting firm Celent. Their report “Reg, Reg, Go Away: Sorry Banks, They’re Here to Stay” indicates that up to 50 percent of all revenue generated for banks by retail checking accounts comes from overdraft fees. Consumer Reports points out that the new rules governing overdraft fees don’t eliminate fees charged to cover checks or recurring bill payments, but they will crack down on debit card purchases that induce overdraft. Considering that 41 percent of overdraft fees come from debit card transactions, that’s a big chunk of change that banks will lose.

Which leads to the friendly ‘banks fire customers’ policy

Celent advises banks to simply shut down accounts of customers who are simply too expensive to keep. Where that line will be drawn remains to be seen, but all banking customers should take heed and make sure that they have enough money in the bank when they go to make a purchase or payment. Of course, no credit check payday loans and military payday loans will always be an option for those emergency situations were fast cash is necessary. They are much better alternatives than being fired by your bank for overdrafting your account.

Sources:

Consumer Reports

BBC News

Kansas City Star

Related Video:

Eppicards can be used the same as a standard debit card. Image from Flickr.

There are currently 19 U.S. states that use Eppicard to process and distribute state payments. Recently, Eppicard users have been the target of phishing scams. Are Eppicards an effective way for states to distribute benefits?

How Eppicard is used

The Eppicard system is a third-party “servicing” company that provides financial services for states. In 19 states, Eppicards are used to provide child support, unemployment and state benefit payments. In general, an Eppicard works very much like a debit card – the payment is deposited into an Eppicard account, and then the money is debited electronically when the card is used at an ATM or store.

Eppicards targeted by phishing

In Ohio, many Eppicard users are being targeted by e-mail and text message phishing scams. Eppicard users are receiving messages asking for them to update their Eppicard PIN. The Eppicard users are told that they need to update their information in order to get a personal loan or continue accessing their account. If Eppicard customers use the fake link or text message to “update” information, the scam artist empties their accounts. The FBI and state benefit agencies have issued warnings to rely only on www.eppicard.com or the state agency for information on Eppicard accounts.

Are Eppicards best for benefits?

The Eppicard system is, in general, a contractor for state benefits. The Eppicard system does offer benefits for some users; because they look and act like debit cards, Eppicards can be much simpler to use than other available benefit systems. However, Eppicard has garnered multiple complaints for business practices that look more like a Rush Card than a public service. Eppicard charges as much as $1 for every ATM transaction. Calling Eppicard customer service also creates an additional charge. Card replacement, denial of funds, overdraft fees and even balance inquiries end up with charges. While the Eppicard may be simple for states to use, there are concerns that the additional charges are taking advantage of people receiving state benefits. Most states, though, provide an alternative to the Eppicard, such as paper checks or direct-deposit systems.

The Rush card is a pre-paid Visa card that charges customers money to access their accounts. Image from Flickr.

Rush Card is one of the many pre-paid credit card options available. The Rushcard service, like most prepaid cards, has features that can make it very useful, especially for people who cannot get or do not want a regular credit card. However, before you make a decision about getting a Rush Card, it is important to understand both the benefits and high costs of the system.

How Rush Card works

While Rush card markets itself as a “pre-paid credit card,” it works more like any other debit card. A customer can load the card with money, and then use it anywhere a Visa card is accepted. Money is debited from your Rushcard account, and when the balance reaches zero, any other transactions are declined. Some Rush card accounts also allow cardholders to write checks against the account balance. Rushcard charges fees for the use of the Rush card. Rush Card was created in 2003 by Russell Simmons, under the business name UniRush.

Benefits of Rush Card

The Rush Card does provide some benefits to cardholders. A credit card can be very difficult to get for individuals with bad credit. Because Rush Card works on the Visa system and has a full credit card number, it can be used to make online purchases and where a credit card would normally be used. The pre-paid system also means that it is impossible to overdraw your Rush Card account – no overdraft fees and no high interest rate credit.

High costs of the Rush Card

The Rush Card, however, does not work like a standard checking or debit account. Depending on which of the two types of Rush Card a customer gets, the fees can be very high. Activation and monthly fees can run as high as $19.95. There are fees for ATM balance inquiries and withdrawals. There are statement and “maintenance fees.” There is a fee for paying bills with the Rush Card. The highest cost fee, however, can be the “convenience fee.” This convenience fee charges between 50 cents and $1 each time your Rush Card is swiped or used to make a purchase. Long story short, the Rush Card could cost you $100 a month or more — to access your own money.

Alternatives to the Rush Card

The Rush Card does offer some convenience in accessing and using money. However, fees for standard transactions make it incredibly expensive. If you have bad credit or no credit, a checking account is most likely a better solution than the Rush Card. Many credit unions offer “starter” bank accounts designed especially for customers who would have difficulty getting a checking account at a bank. These starter accounts usually do not carry nearly the fees that the Rush Card does, and a debit card offers the same benefits as the Rush card. Even if you have had financial problems in the past, check with multiple banks or credit unions to see if they can offer help – before you sign up for the high fees of the Rushcard.

Sources:

Rushcard schedule of fees
Consumer Affairs . com

Zero percent liability

The FTC requires that consumer liability for fraudulent charges made to their credit or debit accounts be limited to $50. However, VISA and MasterCard, which control 100 percent of the U.S. debit card market and the majority of the U.S. credit card market, have taken it one step further, requiring that all of their card issuers adhere to a zero percent liability policy for customers affected by fraud.

Equal protection for both accounts

This means that whether you use a credit or debit card, you are equally protected and will receive a 100 percent refund on fraudulent charges made to your accounts. Since both your credit and debit card issuers are required to adhere to the same zero percent liability policy, you should feel equally comfortable when using either account, right? Not necessarily.

Your debit account

When you use your debit card, you’re risking direct access to your checking account. Someone making fraudulent charges to your debit card is stealing your actual money, making the logistics of a refund to your checking account a more difficult and nerve racking process.

What you can expect as a victim of debit card fraud

As a victim of debit card fraud, you run the risk of bouncing important checks, such as your electric and water bill, or even your mortgage payment. Your cash flow for day-to-day expenses is cut off until the dispute is resolved with your bank. While you will get your money back eventually, you have to act fast.

The difference using your credit card

Your credit account, on the other hand, exists on the basis of borrowed money. If someone makes fraudulent charges to your credit card, it has no direct effect on your cash flow for your day-to-day living expenses and you’re generally not responsible for the debt for 25-55 days.

What you can expect as a victim of credit card fraud

For example, let’s say fraudulent charges are made to your credit card account 10 days before you receive your bill. Assuming that you don’t notice the charges until your printed bill comes in the mail, you have a minimum of 25 days to resolve the matter before your bill is due. However, if you’ve been a little more diligent by checking your account online, you will have an additional 10 days to resolve the dispute. Either way, with a credit card, you should have enough time to detect, report, and resolve fraudulent charges before you become responsible for paying them.

And the winner is…

These practical matters clearly make credit cards a more convenient payment method when it comes to fraud protection. However, if you have trouble handing your credit responsibly then credit cards remain an unfit choice.

*Source: CSCU, The Nilson Report, VISA

Not Creating a Budget

Besides planning to pay a few basic bills, a lot of people who struggle with debt do so because they don’t carefully plan their spending. Instead of creating a written itemization of how every dime of their income will be spent or saved, some people simply wing it. While a cash advance can help people out in a bind, everyone should create a personal budget in order to avoid creating debt.

Failing to Pay Yourself First

In crafting a personal budget, a person must remember to pay herself a predetermined amount of money out of each paycheck. To not do so creates a level of frustration of working without reward. It is not surprising that people who neglect paying themselves a percentage of their income end up ditching a personal budget not long after its creation due to a lack of personal satisfaction.

Not Having a Rainy Day Savings

Similar to paying one’s self is having a rainy day savings set aside. People who neglect to designate a percentage of their earnings to a savings account find themselves in a bind when an unforeseen expense or emergency arises. Although a loan till payday is available for these times of need, a rainy day savings account specifically designated for unexpected circumstances adds to a person’s feelings of comfort and security, not to mention such a savings protects people from falling too far into debt when these circumstances occur.

Not Recording Purchases

Most people carry a debit card. For some, this convenience has almost completely replaced the practice of carrying cash. Unfortunately, however, some people end up making major financial mistakes while using debit cards simply because they forget to record small purchases like a cup of coffee or a small item purchased on any given day.

It is not unusual for such purchases to cause a person’s account to be overdrawn and result in costly bank fees. To avoid this, a person can create room for these incidental purchases in a personal budget and either plan to carry cash to pay for them, purchase a gift card that will cover these purchases or just remember to write each one down and carefully balance one’s checkbook accordingly.

Plastic People

Perhaps the largest and the most frequent of all financial mistakes that people make is when individuals rely on credit cards to pay for daily needs. Even worse are individuals who use plastic to pay for items that they don’t need, but that they want anyway. This is also the fastest and easiest way to fall into serious debt, particularly if only the minimum balance is paid on credit card bills each month as interest payments and other fees continue to accrue. Experts agree that credit should only be used when absolutely necessary, as the cost of using plastic is simply too high to use on a daily basis.

While most people make costly financial mistakes once in a while, everyone can avoid making them with careful planning, budgeting, record keeping, and self-discipline. If a mistake is learned from and adds to a person’s financial education, it has value. If it is ignored and repeated, it is a complete loss for the one making the mistake and can seriously compromise one’s financial future.

Debit cards are useful in a lot of ways. For instance, a payday loan can be deposited into your bank account within hours of your online loan application being approved. Money is then yours to spend via a cash withdrawal, personal checks, or your debit card. During this recession, many have begun using the latter more and more instead of making credit card purchases. While most are already familiar with the convenience of using plastic to pay for items or services, some may not realize the pros and cons of using a debit card, specifically.

The pros of using a debit card:

Debit cards can hamper impulse spending. While they cannot completely eliminate this problem, their use does a lot to curtail it. Unlike with credit cards, debit cards will only cover purchases when money is available to do so in the bank. In short, a debit card is just like cash and that money is automatically debited, or deducted, from your account after each transaction. This is unlike credit card spending, which allows a certain spending limit followed by installment payments to pay for charges later. A debit card does not offer this luxury. As a result, for most people, this means thinking twice before spending cash that will severely skew their budget.

Merchants who do not accept personal checks are more inclined to accept a debit card for payment of an item or service. This makes carrying a debit card as convenient as a credit card in terms of the point of sale payment method. Today, many debit cards are referred to as Visa check cards and bear the Visa logo while others bear the Mastercard logo. This means that anywhere a Mastercard or Visa card is accepted, a debit card with one these logos may be used, instead.

The cons of using a debit card

Unlike what is offered with most major credit cards, cash advances or a line of credit is not offered to debit card holders. Therefore, when emergency cash is needed or when fast cash is needed to help a person survive until their next paycheck, a debit card is of no help. However, a person in this situation, even with bad credit, may be able to consider a loan till payday or a cash advance from a company offering personal loans.

Federal regulations, which protect credit card consumers, do not apply to debit cards. This means that in a dispute over charges, the consumer has little recourse once money has been debited from their account.

Also, banks that issue debit cards with checking accounts sometimes charge a fee when cards are used. While this practice is becoming more and more obsolete, consumers are advised to check with their individual bank before using debit cards and accruing possible fees. When inquiring about this, be sure to ask, specifically, about using the card to access cash at another banking institution or ATM machine. While some may not charge fees on purchases, it is still very common for banks to charge when a card is used at another institution or at a privately owned ATM machine.

A lost or stolen debit card can also be very costly depending upon what state you reside in and the time that the card is reported missing. While very limited protection may be offered, consumers should be aware of their level of protection ahead of time. For instance, if someone does not report their card missing within 48 hours of a thief taking it, it is possible for the original card holder to be left with some or all of the liability on purchases and cash withdrawals made by the thief. The amount of liability, of course, depends upon the bank’s policies and the state laws governing any such limits.

While debit cards definitely come with advantages, such as providing immediate access to cash advance or personal loan deposits, the drawbacks involved with using them can be costly if a person is not very careful. Overall, however, they offer freedom from high interest rates while offering many of the same conveniences as a credit card. Debit cards do not help build a person’s credit, but they also do not present the risk of creating bad credit like some may have a tendency to do while using a credit card.

William Hazelgrove of St. Charles, Ill., is tired of mortgage loans, auto loans, unsecured loans and debt. He’s not alone in his sentiment toward credit and debt, but unlike other consumers, he is doing something about it. In the past Hazelgrove and his family dealt with credit much like most people did. When expenses came in, he immediately put it on his credit card. It wasn’t until his credit company hiked the interest rate due to the recession that he realized the problem. “I realized if I ever wanted to live within my means, I would have to switch to using cash only.”
Hazelgrove took stock of his finances, and slowly but surely, began paying down debt and increasing savings. He took on a second job and channeled the money directly to both. His complete solution included:

• Keeping a debit card balance above $100
• Liquid savings of $5,000 for emergencies
• Using Quicken to keep track of every expense

One of the main commitments he had to subscribe to was not spending when cash was low. He said, “It was hard, especially towards the end of the month, but I had to forego credit card spending. If I couldn’t afford it, then it had to wait.” It was difficult, he admitted, but now his goals are all realized. His commitment to living credit-free is not a bad idea.

Statistics on credit

When it comes to credit, almost everyone has it. For example, a recent survey done Hoffman & Brinker showed that as of September 2009, Americans owed $917 billion in revolving credit lines. Just about 70 percent of that credit is currently past due.

It’s no secret that consumers over-used their credit, and the harsh reality is that lenders have changed their rules in terms of lending and limits. Without an action plan, many Americans will find themselves at a difficult juncture in their finances. Mortgage loans, car loans and unsecured loans are no longer given out to just any applicant. Prior to the recession lending laws were lax. It was easy to get funding and almost every credit-scored applicant could find some lender to extend money. Granted, the money most likely would come with a hefty interest rate, but for most consumers that was a price they were willing to pay.

Today’s world of cash management

The lending crash had the biggest effect on people going cash-only. Because of the huge number of defaulting borrowers, credit card companies decided to take drastic action in an effort to mitigate their losses. They raised interest rates to unmanageable levels and cut limits. One consumer, Daphne Harringe of Cincinnatti, Ohio, said, “We always used credit to manage our monthly bills. Always. Then suddenly our interest rate shot up to 27 percent after one delinquency. It was difficult to manage, but we realized that we had to switch to cash if we were going to save our future.”
More and more consumers are heading towards a cash-based money management system. In particular because of the way credit lenders handled the recession, borrowers realized how unreliable credit can be. More consumers are now moving away from traditional funding methods like unsecured loans, mortgage loans and credit cards. They are opting for cash as they forge ahead and create their financial futures.

Using credit cards can be a pleasure and a pain. Will anonymous credit cards make security one less thing to worry about? (Photo: flickr.com)

Credit cards are both a blessing and a curse for millions of people worldwide. Managed use of this form of consumer credit can help build one’s credit score and provide a convenient means through which to transact with merchants who require a credit card in order for a consumer to secure services (automobile rentals, hotel rooms, etc). The key to managing one’s credit card usage, however, is a something that many consumers do not practice: paying off the balance each month. By making only the minimum payment, credit card debt grows significantly as interest is compounded. Revolving lines of credit like credit cards can saddle a consumer with a lifetime of debt.

Then There’s Identity Theft

Use of credit cards can expose consumers to the nightmare of identity theft. Whenever you pay a restaurant bill with your card, you’re exposing yourself to risk if the server is less than honest with your sensitive information. If you’re shopping online at a site with less than industrial-strength security, great potential for an information leak is there. Giving your credit number over any form of telephone connection is highly problematic as well.

Such scenarios of financial pain and horror might cause you to wonder how you can keep yourself from becoming a victim. One answer is to use payday loans rather than credit cards in emergency situations where you need quick cash, as the process does not generally expose you to potential identity theft. However, having a small number of credit cards can be beneficial to your FICO score (indicating diversity in your credit portfolio, which creditors like to see), so perhaps a better long-term answer would be how to make credit card usage less dangerous.

Make it Anonymous, Perhaps?

Elli Androulaki and Steven Bellovin of Columbia University recently published a study entitled “An Anonymous Credit Card System” which proposes a system that could serve as a solution to this problem with credit cards. Consumers would be able to kept close track of their credit card usage while banks would be able to justify the payments it makes to merchants through an anonymous E-cash system.

An Anonymity Barrier

One of the benefits consumers enjoy when using credit cards is that logs of transactions are readily accessible. In addition to convenience, this provides a level of security in that consumers can challenge erroneous charges. However, such logs can be a double-edged sword in that banks can (and often do) sell that consumer profile information to third parties. What the study authors propose is a system that maintains the benefits while at the same time protecting consumer and bank privacy through a barrier of anonymity. For consumers, however, the anonymity system express is conditional in that the consumer must make honest attempts to keep up with payments. If an overspending transaction occurs, the consumer is blacklisted from the anonymous service.

For online retail, truly anonymous credit cards would prevent any unauthorized outsider from acquiring information about a transaction or those involved in the transaction. Androulaki and Bellovin stress that banks would not be able to create profiles that they sell without the cardholder’s permission. In order to achieve this level of privacy and security, the authors have created a theoretical system whose high points will be discussed here.

The Dawn of Credit Card Security

According to previous studies of credit cards and state-of-the-art security methods, measures have existed since at least 1994, but such schemes have involved extraneous trusted parties to maintain security. Furthermore, previous credit card protection schemes offered no expense reports or means of error correction for consumers. Using E-cash as a money substitute that cannot be copied or spent more than one time has furthered security schemes, but it requires prepayment to function and works only for online transactions. It also provides no avenue for error correction or clear listing of transactions. Prepaid debit cards are limited in their security application for similar reasons.

What the authors propose is a system that combines an E-cash system for making payments and a combination of “blind and plain digital signatures” for other operations. Consumers, merchants, card-issuing banks, acquiring banks (institutions merchants are authorized to receive payments through) and credit card associations (Visa, MasterCard and others who set transaction rules between the different bank types named here) would all be served by this system. Credit cards under the new system, write the authors, “should not be forgeable or usable by any third party. It should be possible for cardholders to track their transactions (Expense Report Service) and provide an undeniable proof of any mischarge (Error Correction Service) without endangering their privacy.”

How E-cash works

There are two types of E-cash used in this system, drawn from “wallets.” One is accessed by the consumer while the other is where merchants deposit E-cash received from the consumer. Blind signature schemes are used to ensure that merchants get paid and consumer identities are protected from third parties. If set limits are exceeded, conditional anonymity of the consumer is revoked – an added incentive to make payments, which appeases the banking establishment. For the most part, merchants and consumers are identified only by signature keys when they open their E-cash accounts with their banks. In order for consumers to access their E-cash credit cards, they create an anonymous pass code. Backups, multiple layers of encryption and loss recovery systems are present here, as are timestamps for online transactions; consult the study for a more detailed account. It is interesting to note that encryption is performed by the consumer during the anonymous credit card origination process, via secure home software. Thus, a home computer would be required.

How are Anonymous Credit Cards Paid?

Obviously a consumer honor system would be inappropriate, so the consumer is required to report the amount of money spend each month to the card-issuing bank. Regular backups and reporting are required to protect both banks and consumers. Spending is proven through receipts. The card-issuing bank then computes the consumer’s monthly payment through the same formula used today for standard credit cards.

How Does Error Correction Work?

The consumer has the right to contact their credit card association in the event of an error or fraudulent use. In the event of a error, a receipt is required in order for a correction to be made. When the merchant makes the correction and gives back funds via E-cash, the currency passes the refund to the credit card association, who in turn moves it to the merchant’s acquiring bank. It is the acquiring bank who finally moves the funds back to the consumer’s card-issuing bank. If fraudulent charges require purchase cancellation, the exchange is handled in a similar fashion.

Breaching the Veil of Anonymity

As mentioned previously, consumer anonymity is dropped if credit cards are charged over their limit. In that instance, all E-coins withdrawn by the consumer are traced. The authors mark this as necessary for loss recovery. But seeing as how a cardholder may open as many anonymous accounts as desired, being able to achieve transaction linkage is possible.

Buying into the Checks and Balances

The anonymous credit card system proposed by the study authors could eliminate identity theft altogether (until someone figures out how to introduce decryption technologies in the middle of the process). That could occur, but the system proposed could be the best current option for safe credit card use.

I find it interesting that the proposed system would require consumers to hang on to their receipts. It’s something consumer groups and banks (not to mention mom and dad) always advise us to do, but how often do we practice what they preach? If you’re a conscientious consumer who already keeps track of such things, your adjustment to such an anonymous credit card system would likely be painless. For those of us who are forced to become more accountable, the transition would be more difficult. However, it is a much safer financial road to travel. It is also a responsible road. Sure, payday loans are still be more desirable in situations where carrying a balance over from month to month becomes too expensive, but credit cards will still have their place. The layers of checks and balances that preserve security may sound inefficient to some, but remember that the financial world rarely gives us something for nothing. This isn’t trading freedom for protection, in my opinion.

A little trim saves a lot of money (photo: flickr.com)

Today, many families are struggling with tight budgets. Even in better economic times, it can be difficult to find ways to save money when there’s little or none left at the end of the month. But when you take a really close look at your spending habits, there’s almost always one more way to save a little money. Small, incremental savings really do add up.  Here are a few ideas to help you trim your budget and free up some extra cash:

Food and grocery expenses

Take a look at where your food dollars really go. Make a list of how frequently you eat in a restaurant or visit the coffee shop on the way to work. Perhaps there are extra impulsive buys at the grocery store that aren’t necessary. If you are purchasing brand name items, there are usually generic brands available that can offer you the same (or nearly the same) quality.  Eating at home more often and buying generic products can save you money every week.

Gauge your utility usage carefully

Utility bills are major expenses in most household budgets. Electricity and water are necessities; however, can you usually find ways to use them more efficiently. Are you switching off the computer when you’re not using it? Are you turning off the water at appropriate times? Are you turning down the heat when you’re not home?  These and other simple things can make a big difference in the bottom line.

Check your bank statement for ATM fees

When you look closely at your bank statement, you may find fees you’ve never noticed before. If you use the ATM frequently, you may be paying several dollars for each transaction. You can avoid this unnecessary expense, by use your debit card for a purchase and asking for cash back.  It doesn’t cost anything extra to get cash back from a purchase at major grocery, drug, and hardware stores.

Cut down on bank account fees

Another thing to look for on your bank statement is fees for services you don’t use.  Some bank accounts have monthly fees for multiple transactions, and others charge you for each one that you make. Count the number of transactions that you make, and find which route is cheaper for you.  It’s easy to find banks who offer accounts with free services.  Change banks if doing so will save you money.  At some banks, you can also save a few dollars by opting for online statements rather than paper statements

Stop using credit cards

If you owe a balance on your credit card, cut the card up and throw it away. If you have any extra cash that you would normally deposit into your bank account, use it to pay down your card instead. You may be paying hundreds of dollars in interest on this debt.  Make every effort to pay it down quickly.  Once you start to make a dent in the principal balance, you’ll notice the difference in your available cash each month.

Pay your bills on time

Paying your bills when they are due will save significant amounts each month.  When money is tight, late fees and other penalties make your struggles so much worse.  Cut back on other expenditures in whatever way you can and pay your monthly bills on time.  If you’ve incurring late fees, you can save hundreds of dollars each month – literally – by make timely payments your first priority.

Add up your extra cash!

When you get serious about cutting your expenditures, you’ll notice the savings right away.  It’s surprising how quickly these little changes can make such a big difference.

If you need Extra Cash, Apply Now