Credit – Page 3

Prepaid debit card fees and facts

Last week I wrote about two factors that influence people to opt for a prepaid debit card. I also wrote about pros and cons of prepaid debit cards a few months ago. In this post I am going to list out a few additional things that you should be aware of while using such a card (which werenâ€™t covered earlier).

Negative Balance Fees: Although prepaid debit cards donâ€™t allow you to overdraw, in some rare transactions like a restaurant bill or rental car, you may be overdrawn. In such cases, you will be charged a negative balance fee.

Decline Charges: In most cases your transaction will be declined if you try to overdraw your prepaid debit card. However, when this happens, some cards may charge you a decline fee. So, even though you canâ€™t overdraw your account, you can still end up being penalized if you try and charge your card for more than the available balance.

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Prepaid debit cards to control spending

I wrote about the pros and cons of prepaid cards a few months ago, but at that time I missed out two prominent reasons why people get a prepaid debit card.

My initial feeling was that a large majority of prepaid debit card holders are simply unable to get a credit card or open a regular bank account with a debit card. But apart from that – there are at least two big reasons why people go for a prepaid debit card.

1. Control spending: Many people who have had debt problems in the past choose a prepaid debit card because it keeps a check on their spending. It is far better than using a credit card because there is no control on how far along your debt can go. It is also slightly better than using a debit card, because if you are in the habit of going over limit, then overdraft fees can kill you with a bank debit card.

Prepaid cards don’t allow you to overdraw, so there isn’t much risk of an overdraft fee in most cases. However, prepaid debit cards may charge you a decline fee, which is charged if you try to make a purchase which overdraws your funds. If you shop around though, you can get a card, which has decline fees in the single digits (much lesser than overdraft fees of most big banks).

2. For their Teens: Parents use prepaid debit cards to give their teens the convenience of a plastic card, while retaining some control over their spending. A prepaid debit card is easy to fund, and while it does have fees that you wouldnâ€™t normally pay with a debit card, the up side is that there are limits to what your teens can spend, so spending can be kept under checks. Some prepaid cards come with features that allow you to set daily limits or exclude transactions from certain categories of places. This is a useful feature to have if you are using such a card with your teens.

These are interesting uses, but you should be aware of the flip sides of such a product too. The obvious ones are all the fees and expenses associated with prepaid cards.

Then there is the subtle issue of not attacking the root of the problem. If you are using a prepaid card because it forces you to control your spending, you are not really altering your behavior, which gets you into trouble in the first place. Prepaid cards are a good start to get control over your spending, but ultimately, you should strive to reach a position where you have credit cards without worrying about getting in debt.

How Easy Money and Tax Policies on Debt Are Ruining the US?

Mr Credit Card from www.askmrcreditcard.com is writing a guest post today for us. Today, he is going to write about how easy credit is destroying America. Mr Credit reviews lots of credit cards and there are lots of credit card offers on his site. If you are in the market for a credit card, he has also compiled a list of the best credit card offers and deals.

The after effects of the 2008 financial crisis that originated from the sub prime crisis still lingers on for many folks in the US. Lots of finger pointing and lots of blame to pass around. But at the root of the crisis, one variable stands out – and that is the amount of debt and leverage in our economy. This applies to both the federal government and individuals. At the root of the problem is easy monetary policy and our tax policies towards debt and I’ll go on to explain other factors that made us such a debt dependent country.

Policies that reward debt

In the US, taxation policies are geared towards taking on debt, taxing equity and not taxing consumption. If we think about things logically, one should not be taxing capital but instead be taxing consumption. But here is the US, it is really lopsided. Capital is taxed. So if you have a capital tax gain, you pay a capital gain tax. If you receive dividends, you pay a tax! The interest that you make on your bank’s savings account is taxed! If you own a “C Corporation”, you are taxed twice! First at a corporate level, and then at an individual level! Talk about work incentives!

But the US taxation policy towards debt is totally reversed! You actually get tax deductions for interest payment on debt! On an individual level, your mortgage interest is tax deductible!

The result of these policies is an incentive to take on excessive debt. In the area of economic studies the Miller Modigliani theory states that there is an optimal cost of capital in a tax neutral world. A corporation having 100% equity in their capital structure can lower its cost of capital (up to a point) by taking on some debt. In the world of taxation where equity is taxed and debt interest is given deductions, it skews US corporations to have more debt than necessary.

Generous Tax Policies on Mortgage and Home

In the United States, policies are geared towards encouraging home ownership. Interest payments on mortgage interest is a tax deductible item. There is also no capital gains taxes on the first $500,000 for your primary residence. Most major developed nations have no such policies that reward home owners. Yet, they have similar home ownership as the United States.

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ChexSystem for bank accounts

I came across information about ChexSystem via The Dough Roller.

From DR:

Have you ever been turned down for a checking account? While denials are more common when applying for credit, you can also be declined when applying for a bank account. If you have been declined, it’s likely due to a reporting agency that many have never heard of, but who has a lot of information about and influence over banking customers. It’s called ChexSystems.

Most have heard of the three major credit reporting agencies–Experian, Trans Union, and Equifax. But there is a lessor known but equally important reporting agency for checking accounts called ChexSystems. Run by Chex Systems, Inc., ChexSystems provides account verification services to its financial institution members to aid them in identifying account applicants who may have a history of account mishandling (for example, people whose accounts were overdrawn and then closed by them or their bank).

Check out the link for more info about ChexSystem.

Here is something useful from their FAQ:

How can I opt-out of pre-screened offers of credit?

Under the federal Fair Credit Reporting Act (FCRA), consumer credit reporting agencies are permitted to include your name on lists used by creditors or insurers to make “pre-screened” offers of credit or insurance that are not initiated by you. The FCRA also provides you the right to “Opt-Out”, which prevents consumer credit reporting agencies from providing your credit file information for “pre-screened” offers. If you choose to opt-out, your name and address will be removed from the lists these offers are based on. You may opt-out with the nationwide credit bureaus at 1-888-5 OPTOUT (1-888-567-8688). You may opt-out with ChexSystems at 1-877-OPTOUT 5 (1-877-678-6885).

What is Credit Card Insurance

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Yesterday, a friend noticed that he was getting charged $4 every month for credit card insurance. When he called them up to find out what it was, they said that it’s a type of insurance that protects him from a credit card default due to any emergency.

He got that canceled and though the concept itself is good, the umpteen riders render it useless. If you are considering credit card insurance then you need to think about a few things first.

1. When will the coverage trigger? You can’t simply stop paying your credit card bill and expect that the credit card insurance will cover it. Normally, the coverage kicks in, if you face death, disability, unemployment or other such emergencies. Find out what conditions will trigger the coverage.

2. What will not be covered? You need to ask questions about things that will not be covered. Things like, if you are unemployed at the time of getting this insurance, will you still be eligible for unemployment coverage. Many of these things will be specific to your situation and until you ask, you will not know whether it is covered or not.

3. How much will it cover? This is probably the most critical point. While in a lot of cases your full outstanding balance will be paid, sometimes this is not so. In some cases, your credit card insurance will only ensure that if you default, they pay the minimum balance for six months and after that – you are on your own. As you can well imagine, this is pretty useless. You need to specifically check, if this is the coverage you are getting.

4. When will the free coverage end? In a lot of cases, credit card insurance will be offered free for a few months and if you don’t decline coverage in those few months, you will be automatically enrolled for it. You need to find out how many months you get free, and how easily can you cancel the coverage.

I think these are some important point that you should consider before taking credit card insurance. Do you have anything to add to this list?

The Lopsided Credit Card Model

Image by Sumanth Garakarajula

Every time I travel by Delta I get some air miles, which is a reward for being loyal and profitable to them. If I buy stuff worth $50 from Kohl’s, they give me $10 in Kohl’s cash. Panda Express has given me some kind of a discount card, which I use to get 10% off on every meal. Discount Tires will rotate my car tires free for life because I bought them there.

So basically, the airline, retail, food, auto and I think most other industries give me a discount if I am loyal and profitable to them. The more money I make for them, the cheaper they make their services for me.

If you look at the credit card industry – it is the exact opposite of this.

The strongest criticism of the credit card regulation changes that were recently passed was that the credit card companies will have to cut back on their rewards program or charge an annual fee. This would hurt people who paid off their monthly balances and had good credit habits.

What is interesting is that no one defended the rule changes saying that they were fair, and that says a lot.

What they said was that if you don’t let us screw the people with bad credit habits, we won’t reward the people with the good ones.

The credit card model is such that it makes money off of people who spend a lot, don’t pay off their balances, take cash advances, forget making a payment etc. etc.

If you pay off balances in time, not run up too much credit and generally be good; your APR will go down. So, that means that if you don’t make much money for the credit card company, then they will reward you and allow you to make even lesser money for them.

On the other hand, if you run up a high balance that you don’t pay in full, take cash advances, hover close to your credit limit and other such things – your APR goes up.

So, if you make money for the credit card company, they will punish you by slapping higher interest and fee charges.

This is just the inherent nature of the credit card business and has generally worked well over the years. But, we must recognize that this is how it works and that you can’t use these arguments to say that you shouldn’t get rid of unfair rules that push troubled people deeper in the hole.

If you tell me that I won’t get 1% cash back because you can’t charge a penalty rate on someone else who defaulted on some other credit line, I won’t mind at all. In fact, I may just thank you for being nice all these years and say that it’s time to be nice to someone else.

Credit Card Regulation Changes

Last week, the Credit Cardholders’ Bill of Rights was enacted and a lot of unfair credit card practices will be eliminated with these credit card regulation changes.

Universal Default is Eliminated

Universal Default meant that if you had four credit cards and defaulted on any one of them — all four credit card issuers had the right to impose the default APR on you. So, even if you hadn’t defaulted on a particular card — you could be charged the default rate because you defaulted on some other credit balance. This practice has been eliminated.

Any – Time Any – Reason Changes in Terms is Eliminated

This was a standard disclaimer on cards and meant that the credit card companies could change your rates quite easily on existing balances.

Say, your credit score went down a few points because of some reason — the card companies had the right to increase your APR because of this credit score drop.

This rule has been eliminated now, and the credit card company can only change your fee or APR — after the expiry of your contract, or for reasons that have been specified in your contract.

Advance Notice on Credit Card Rate Increase

In cases, where the credit card issuer wants to increase your APR — they will have to give you a 45 day notice.

This rule is not applicable to introductory rates. So, if your 0% introductory rate is about to end, then they don’t need to give you any notice. Similarly, if your APR is indexed and the index rate itself changes — the credit card company doesn’t need to give you a 45 day notice.

Your APR can’t be Increased Retrospectively

The 45 day notice above means that credit card issuers can’t increase your APR retrospectively. So, you won’t wake up one morning and find that you have to pay a 15% APR instead of your usual 7%, on the shopping you did for Christmas.

Right to Cancel, When You Receive a Notice for Increasing APR

If your credit card issuer sent you a mail telling you about a rate increase — you have the right to cancel your credit card by paying off your balance and not incurring any extra fee or interest on your outstanding balance.

The time you get to cancel your credit card starts when you receive the notice and ends when you receive the third periodic statement after the effective date of the increase.

Double Cycle Billing Prohibited

The double billing cycle meant that the credit card company had the right to calculate your interest on the past two cycle’s daily balance. In some cases, this amounted to extra interest needed to be paid by you (on top of the interest on the current balance).

This has now been stopped and credit card companies can’t charge you interest on the balance that you have already repaid.

No Default or Penalty for: Only Accrued Interest

If your account balance consists of just accrued interest on previously repaid credit and you don’t pay it, then no fee will be imposed on this sum. Also, this will not constitute as default on the account.

Pro Rata Payment on Card with Two APRs

Normally credit cards charge a different APR for cash advances and regular purchases. In the past they had the option of using your repayment towards the amount that had the lower APR before applying it towards the amount with the higher APR.

Say your card charges you 10% on regular purchases and 20% on cash advances. You took a cash advance of $200 and made purchases worth $200. At the end of the month — you paid off $200. The credit card company had the right to apply a 20% rate on your outstanding balance of $200.

But, they can’t do that any longer. They will have to charge you 10% on $100 and 20% on the next $100. But, if they want to use the amount you repay to pay off the higher APR balance — they can still do that.

You Can Decline: Over the Limit Transactions

If you have a card with a limit of $3000 — there is a possibility that your credit card company allows you a purchase worth $3,500 and then charges you a hefty penalty because you went over your credit limit.

The change in credit card rules give you the right to stop over the limit transactions. You can tell your credit card company that you don’t want them to allow a transaction that crosses your credit limit and has you pay a big penalty. Let them accept credit card payment from you before allowing you to make more purchases on your credit card.

Wait For A Year Please!

These rules are not effective immediately and will only come into play after the lapse of an year from the enactment of the act.

Photo Credit: Credit Cards

Prepaid Cards: Pros and Cons

Prepaid Cards have been around for a long time now, and a lot of people use prepaid cards despite their costs and charges. Prepaid cards have their pros and cons and are targeted at people who find it difficult to open a bank account and need a card to shop online or just avoid carrying cash.

When you buy a prepaid card — you have to load it with your money and then you can use it like you would use a debit card. Most prepaid cards will charge you a fee when you are loading it initially and then other fee like — annual fee, reloading fee etc. Each card differs in their fee and charges so you can compare a few prepaid credit cards and see which one is best for you.

Here is a take on the top pros and cons of prepaid cards.

Benefits of Prepaid Cards

1. Safety: Prepaid cards are a good option for people who are not able to open a bank account and don’t want to carry cash with them all the time.

2. Shop Online: It is impossible to shop online without having a debit or credit card. If you need to shop online and don’t have a debit card, then you can use a prepaid card to do this.

3. Use for Car Rentals, Air tickets and Gas Stations: A lot of people use prepaid cards for getting car rentals, at gas stations or booking airline tickets. There are some places which don’t accept cash and prepaid cards come in handy at such places. However, there are some disadvantages to this, which we will discuss later.

Disadvantages of Prepaid Cards

1. High Fee: If you are using a prepaid card — you will be charged every step of the way. There will be a fee when you load it, then another when you re-load it; it is quite likely that you will be charged if you ever call them up and then there is the annual fee. The high fees of prepaid cards make them the last option for anyone.

2. Does Not Help Build Credit: A lot of people get a prepaid card because they are not able to get credit cards and want to build their credit histories. Prepaid cards don’t help in this at all. They are not means of credit and don’t report to the credit bureaus, so they don’t help you build a credit history in any way.

3. Not all Rentals and Hotels Accept Prepaid Cards: This is a really important point because a lot of people get a prepaid card to rent a car and then find out that it is not accepted at their rental. If you plan to get a prepaid card for renting a car or booking a hotel, then first check with them if they accept any prepaid cards or not. Often, you will find that it’s not easy to rent a car with prepaid cards.

4. Hold Money For Over a Week: The other thing that takes people by surprise is that some gas stations or hotels will put a hold on your prepaid card that lasts over a week. So, if you fill gas worth $20 worth with your prepaid card, some gas stations may even put a hold of $75 on your prepaid card, and you won’t be able to use this money till the hold lasts.

These were some important pros and cons of prepaid cards that you should keep in mind while deciding whether one is right for you or not.

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