Wednesday, October 7, 2009

The Cost of Payment

There's been a lot of discussion lately about whether to pay for purchases with credit cards, debit cards or layaway. It's a great conversation to have, and one that is truly long overdue.

Back in the day, credit was given sparingly. One went into debt for a house, and maybe for a car. Of course, back in the day, most everything was purchased with cash. If you didn't have the entire purchase price, many stores would allow you to buy with cash over time. That quaint practice, central to my family's back-to-school clothing purchases, was called "layaway."

Nowadays, I have heard many people remark that they rarely carry or use cash.

I rarely keep cash in my wallet, instead use my bank card attached to my checking account. I keep cash for those embarrassingly small transactions, when purchasing a snack shouldn't be a challenge. Frankly, this can go both ways: either I don't process a $2.65 purchase, saving some hard-earned money, or I find another $10 to tack on to make the purchase "worthwhile." (By the way, merchants may not require a minimum purchase for use of credit cards, as a rule; if they do, report them to your credit card company.)

Debit cards are a blessing — usually. My card is tied to my checking account and I make purchases on it all the livelong day. Oh, don't get me wrong, I'm not a spendthrift. I can't be: every penny in my checking account is banking on my wise purchases. If I don't have the money, I don't use the card. Period. Purchases on my debit card keep me honest. I'm not the only one, according to The Washington Post ("For Gun-Shy Consumers, Debit is Replacing Credit," October 7, 2009).

I also have to understand the system. My bank, for some unknown reason, charges a transaction fee for every debit purchase — but "credit" purchases are different. I could change my service, and one of these days I might. However, in the meantime, I know how to process a transaction that doesn't cost me and still pays for the purchase directly from available funds.

My husband David learned the hard way about how debit and credit card purchases differ. During a recent trip, he paid for a hotel room with his debit card — only to discover two charges on his card: a temporary charge to hold the room and the final, permanent charge to pay for the room. While it may be standard practice for credit/debit companies to reserve those funds for those kinds of "reservation" purchases, it's not always common knowledge to customers. Most people don't have an extra few hundred dollars in their checking accounts for this kind of temporary charge, so be sure to inquire when using a debit card.

This brings up a different angle to debit cards: the purchase and use of debit cards as a sort of "gift" card. Many traditional credit card companies offer gift cards, which are a lovely idea — but my attempt at using them last summer soured me to them. I was given hundreds of dollars on multiple Visa gift cards, but half the time the vendor could not process them, so the money was unavailable. Then there was the time the MTA told me the train ticket wasn't processed on the card, only the MTA received payment. Or did they? Visa wasn't sure. (My advice: just give cash. It spends easier.)

Some companies, however, are providing "debit" cards that can be purchased by the public. These will provide cash at ATMs as well as process as a traditional debit card at stores. While a convenience, the card is not without its costs. Apparently not only is there a cost to activate the card, but some merchants and banks charge per use of the card ("Prepaid — but Not Prepared for Debit Card Fees," New York Times, October 5, 2009).

Every convenience has its price and consumers are warned with a hearty caveat emptor. Always know the rules of the card: additional costs, transaction costs, expiration dates and the like. I have lost value on gift cards that have hidden expiration dates or whose merchants withdraw a fee per month when the card carries a balance after a certain period of time. Usually when I call the merchant, I receive credit (on the card) for these fees, or the expiration date is extended. As time continues, merchants are changing their policies. If not, we can shop with our feet and use only those vendors with reasonable policies.

There are times when credit cards are a necessary evil, so to speak. I use mine when purchasing items online, or when I travel (see hotel and car rental reference, above). If I have a particularly large expense (car repairs come to mind) that might stretch my checking account, I will put the transaction on the credit card until I can transfer sufficient funds into my checking account. I do not carry a balance on my credit card. I think we can agree: few purchases are worth paying (sometimes usurious) interest — and even then, lending institutions offer better repayment programs than "plastic."

In the end, the question remains: why not use cash? There's little advantage to the cards, and certainly the cost can outweigh the convenience. Anyway, the recipient can always spend them to purchase a card if they prefer. Sometimes cash seems, well, gauche — I've purchased gift cards rather than put cash in the last two baby shower cards I have given only because cash seemed artless, lazy. I am going to help change that attitude, starting — well, tomorrow, when I next plan to purchase gifts.

In the meantime, wish me luck with Visa. Maybe corporate America isn't completely soul-less yet.

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