Tuesday, September 27, 2005

Alternative to the Credit Card

I posted this before, but it has become difficult to find in the archives. Since I have recommended this to many people, here it is again.

People tell me that credit cards are necessary in today's economy, for the convenience of payment. That is why many people never carry balances. These people are considered "deadbeats" by the credit card industry. Why? Because they don't provide profits to the credit card company. Banks and credit card companies make over 75% of their profits on fees. See commentary on the Business Week (Registration required) article from the May 2, 2005 issue. The article is titled "Protection Racket?". When you understand this, you understand why they specifically target people who are likely to trigger these fees.

My suggestion these days is to cut up your credit card and start using a debit card. Now, before you go out and do this, there are some things you need to be aware of. First, banks are often setting up "overdraft" protection accounts without your knowledge. If you accidently overdraw your account, they will pay the demand, and then tap into your overdraft account. You get charged exorbitant fees for it, plus interest in some cases. You must request that the bank close this overdraft account, and bounce any demands beyond your balance. You still get overdraft fees, but you protect yourself being held liable for unathorized demands on your account. If your bank won't do this, go somewhere else. My credit union did it, no problem. Second, set up a checking account specifically for the debit card, and keep only the money you intend to use with the debit card. Treat your card like cash in your wallet. That way you can block significant unathorized charges. Just remember. NEVER use a debit card on your primary checking account, because a problem from losing your card could wipe your account out, and bounce all your payments on household bills if a thief got their hands on your debit card.

Banking regulations recently changed to allow your ATM/Debit card to be used like a credit card. These are the VISA CHECK CARD and the MASTERMONEY CARD. In other words, the merchant can't tell the difference. So if you are worried that a debit card won't be accepted by the hotel you are traveling to, don't worry anymore. This is a good thing because it means you don't need the credit card to get the payment convenience. You also get fraud protection, though you have to be more careful about monitoring your account. See a PIRG article for more information on protecting yourself. Credit card companies don't want you to know this because you won't need their card anymore.

I am still looking for other "gotcha" clauses in the account agreements, I'm sure they are there, but it is still better than a credit card from what I can tell. I say that because I have learned about sneaky credit card policies the hard way. At least with this kind of debit card arrangement, you can put a lid on potential charges against your account.