When is the last time you went through your wallet and cleaned it out? It’s usually a task only done once a year (or if you’re like me once every few years. Oops!) When I clean out my wallet I am usually going through the side pockets throwing away old receipts, gift cards that are out of money, business cards I’ve picked up along the way, old appointment cards and such.
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This time though I’ll also be throwing out my debit card. Bank of America recently announced it will begin charging its customers $5 a month, any month that the customer uses their debit card to make purchases. This fee will be on top of any monthly service fees that apply.
Bank of America isn’t the only one to hit consumers with new fees. Several other large banks have already begun charging customers to use their debit cards. Wells Fargo and Chase are testing a $3 monthly fee in some states. SunTrust has added a $5 monthly fee on its Everyday Checking and Student Checking accounts, and Regions Bank has added a $4 monthly fee on some checking accounts. In all of these cases, the banks are only charging the extra monthly fee if the customer makes debit card purchases during the month.
Banks are blaming lawmakers for enacting the new debit card interchange fee regulation that took affect October 1st. Consumers may give little thought to the interchange fee charged every time they swipe their debit card, but the fee had been taking a significant bite out of a retailer’s profit for certain transactions. Before the recent legislation, the interchange fee averaged 44 cents per transaction. Now, the reduced fee will be 21 cents plus an extra 0.05% of the transaction price to cover fraud protection costs. That means the maximum fee on the average debit transaction of $38 will be about 24 cents, compared with 44 cents previously. The Fed’s rules are part of the 2010 Dodd-Frank financial overhaul law, and the changes only apply to debit cards, not credit cards.
Now that big banks are charging for debit card usage this will essentially eliminate all debit card reward programs. Programs like Bank of America’s Keep The Change program will probably be phased out rather quickly. Credit cards will go back to being the better fit for most consumers. Consumers can still benefit from credit card reward programs. Most credit cards are offering 1-3% cash back on everyday purchases like gas and groceries.
Another benefit of credit cards is that they are inherently safer to use. When debit cards are stolen, consumers risk losing everything in their checking account if they don’t report the theft before the card is used. With credit cards you don’t have to worry about that. As long as consumers pay off their balance each month to avoid expensive interest charges and fees, credit cards will remain a great way to avoid debit cards and their fees.
Since the credit crisis a few years back, credit card companies have been a lot stricter in who they allow to sign up for their cards. You need to have good credit, not something everyone inherently has. For those people pre-paid cards might be the answer. Pre-paid cards work like debit cards. Spending is limited to how much consumers load onto the cards each month. Now most pre-paid cards charge $10-15 in set up fees and monthly service charges of $5-10, but the new American Express prepaid card skips the fees most others charge. It also offers a few perks more often found on credit cards, like roadside assistance and theft protection on purchases. Without the fees, this card is a great alternative for debit cards. It eliminates most of the differences between the two, save for the low-rent reputation pre-paid cards have. Maybe that will change now.
If you don’t see yourself using a pre-paid card or credit cards more, then go back to using cash. With cash you never have to worry about fees. More often than not paying in cash gets you discounts. Gas stations, restaurants, doctors’ offices, and jewelry stores are the most common merchants that give discounts when paying in cash. Of course, if it’s stolen there is no way to recover it. Consumers that prefer to pay for everything in cash should still maintain checking accounts. At this time it’s still possible to find free checking and ATM withdrawals, but we’ll see how long that lasts.
For anyone who still really wants a debit card, smaller banks and credit unions may be the best alternatives. Banks and credit unions with under $10 billion in assets are exempt from fee caps in this new debit card regulation. And thankfully, the vast majority of credit unions are exempt from the cap (only three credit unions have assets over $10 billion, Navy FCU, State Employees’ CU and Pentagon FCU). Most credit unions offer free, interest-bearing or even rewards checking, because as small institutions they’re exempt from the Durbin Amendment fee cap. It’s also worth looking into online banks like ING, PerkStreet, and Sovereign Bank which all still offer debit card reward programs.
Readers, would you be willing to pay $5 a month ($60 a year) for the convenience of paying with your debit card? Leave me your thoughts in the comments section.
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Keeping Money in Your Pocket,