Less Credit, More Cards

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It helps
to have lots of readers. In a large group, there are specialists
who help clarify issues that an author skips over, overlooks,
or forgot about. They tip him off to what’s missing.

I decided
to extend my
original report on credit cards
, because there are subtleties
that people should know about. There are also options available
that deal with specific problems.

Not everyone
is the same. One size doesn’t fit all. So, every form of debt
has specific risks. There are no free lunches.
There is no risk-free plastic. But you can lose currency, too.
As Jesus warned,

Lay not
up for yourselves treasures upon earth, where moth and rust
doth corrupt, and where thieves break through and steal: But
lay up for yourselves treasures in heaven, where neither moth
nor rust doth corrupt, and where thieves do not break through
nor steal: For where your treasure is, there will your heart
be also (Matthew 6:19—21).

This applies
to digital treasures. They don’t rust, but thieves do break in
from time to time. One analyst, Clark Howard, says identity thefts
totalled 10 million in 2003. I have not seen official statistics
on this. Ten million would indicate close to 5% of American adults,
including those with barely any money.

When it comes
to identity theft, the richer you are, the higher the time-value
of sorting out the mess in your credit rating. Credit cards are
only one means of stealing your identity. They are surely the
most convenient form.

One of the
most amusing TV ads is the Citicorp ad for identity theft, when
a person of one gender (a card thief) lip-syncs over another gender.
There are several variations of this ad, which indicates that
the marketing strategy is working. The old saying, "clever
doesn’t sell," is modified by this series.

CREDIT
CARDS

A person
who is deeply in debt and who can’t pay off 100% of the card’s
balance each month should not use the card except in emergencies.
If the person just can’t stop spending, it’s time for someone
in authority to cut the card in half, with the card’s numbers
split.

Credit cards
do offer goodies, such as those wonderful frequent flyer miles.
Then there is the lost card benefit. You are limited to $50 that
a thief charges to your stolen or lost credit card. Not so with
some debit cards, as we shall see. Here is the law, according
to the Federal
Trade Commission
.

Credit
Card Loss or Fraudulent Charges (FCBA). Your maximum liability
under federal law for unauthorized use of your credit card is
$50. If you report the loss before your credit cards are used,
the FCBA says the card issuer cannot hold you responsible for
any unauthorized charges. If a thief uses your cards before
you report them missing, the most you will owe for unauthorized
charges is $50 per card. Also, if the loss involves your credit
card number, but not the card itself, you have no liability
for unauthorized use.

After the
loss, review your billing statements carefully. If they show
any unauthorized charges, it’s best to send a letter to the
card issuer describing each questionable charge. Again, tell
the card issuer the date your card was lost or stolen, or when
you first noticed unauthorized charges, and when you first reported
the problem to them. Be sure to send the letter to the address
provided for billing errors. Do not send it with a payment or
to the address where you send your payments unless you are directed
to do so.

You also
may want to check your homeowner’s insurance policy to see if
it covers your liability for card thefts. If not, some insurance
companies will allow you to change your policy to include this
protection.

Credit cards,
especially Visa and MasterCard, are accepted in most retail outlets.
Sellers are charged between 2% and 3% on the transaction, which
is why you can sometimes get a 2% to 3% discount for cash, but
only from a small store where the owner makes the decision. Debit
cards and other cards are not equally acceptable.

Rebates,
rewards, etc. are fine, if you are self-disciplined and budget.
But if you have had problems with spending in the past, you need
help.

DEBIT
CARDS

A debit card
is not as widely accepted as a credit card.

This is a
defect.

A larger
defect is the fact that you can spend everything in the bank account
from which the debit card draws down the money. Thus, if your
card gets stolen, you can lose more than $50. Clark
Howard
is a major critic of debit cards. He stresses the risks
of theft, with the thief drawing down your bank account.

Note: the
lawsuit over the credit card firms’ double charging that he
refers to was settled in 2003 against the card companies. Merchants
are allowed to refuse debit cards. But it will be bad business
if they do. If a merchant refuses any debit card, he must post
a sign to this effect. I have not seen such signs this year.
Here
is Visa’s version of the settlement
.

The FTC indicates
that fears regarding debit card theft are overblown. You can protect
yourself. The law provides the following protection:

ATM or
Debit Card Loss or Fraudulent Transfers (EFTA). Your liability
under federal law for unauthorized use of your ATM or debit
card depends on how quickly you report the loss. If you report
an ATM or debit card missing before it’s used without your permission,
the EFTA says the card issuer cannot hold you responsible for
any unauthorized transfers. If unauthorized use occurs before
you report it, your liability under federal law depends on how
quickly you report the loss.

For example,
if you report the loss within two business days after you realize
your card is missing, you will not be responsible for more than
$50 for unauthorized use. However, if you don’t report the loss
within two business days after you discover the loss, you could
lose up to $500 because of an unauthorized transfer. You also
risk unlimited loss if you fail to report an unauthorized transfer
within 60 days after your bank statement containing unauthorized
use is mailed to you. That means you could lose all the money
in your bank account and the unused portion of your line of
credit established for overdrafts. However, for unauthorized
transfers involving only your debit card number (not the loss
of the card), you are liable only for transfers that occur after
60 days following the mailing of your bank statement containing
the unauthorized use and before you report the loss.

If unauthorized
transfers show up on your bank statement, report them to the
card issuer as quickly as possible. Once you’ve reported the
loss of your ATM or debit card, you cannot be held liable for
additional unauthorized transfers that occur after that time.

So, it really
matters how fast you tell your bank that a card is missing. Maybe
you can take a chance that you will find your lost wallet or card,
but don’t push this to a third business day.

Report
the loss or theft of your credit cards and your ATM or debit
cards to the card issuers as quickly as possible. Many companies
have toll-free numbers and 24-hour service to deal with such
emergencies. It’s a good idea to follow up your phone calls
with a letter. Include your account number, when you noticed
your card was missing, and the date you first reported the loss.

This is the
reason why you should have your various cards’ numbers and the
bank’s toll-free number written down. If you’re on a trip, put
this list in your luggage. If you are out of the country, you
had better have non-toll-free numbers to call. Alternatively,
pay an annual fee to a company that, with one phone call, notifies
all of your card-issuing banks. A reasonable fee is $10/year.
But handing out such information to strangers is risky. I have
not used one of these services.

The
following steps ought to be obvious, but they aren’t
:

Don’t carry
your PIN in your wallet or purse or write it on your ATM or
debit card.

Never write
your PIN on the outside of a deposit slip, an envelope, or other
papers that could be easily lost or seen.

Carefully
check ATM or debit card transactions before you enter the PIN
or before you sign the receipt; the funds for this item will
be fairly quickly transferred out of your checking or other
deposit account.

Periodically
check your account activity. This is particularly important
if you bank online. Compare the current balance and recent withdrawals
or transfers to those you’ve recorded, including your current
ATM and debit card withdrawals and purchases and your recent
checks. If you notice transactions you didn’t make, or if your
balance has dropped suddenly without activity by you, immediately
report the problem to your card issuer. Someone may have co-opted
your account information to commit fraud.

One defensive
strategy is to make sure that your account is low enough so that
a thief can’t hurt you too much if he starts his spending spree
while you are still dawdling or are unaware of the lost card.
The problem is, low account balances usually mean high transactions
fees or a monthly charge. What you need is a debit card issued
by a bank that doesn’t charge fees. Here is a list, which may
be out of date, of banks in major cities that offer zero-fee
checking accounts
.

Another downside
of some debit cards is that you don’t have the law on your side
when you refuse to pay a merchant for poor goods. You do with
a credit card. The money goes out of your account instantly with
a debit card. A credit card is a loan issued by the bank. The
bank can refuse to pay a bill that you decide should not be paid.

This is not
that big a deal. First, banks are now beginning to offer intervention
on the buyers’ behalf with debit cards. They offer coverage against
defective goods. It’s a low-cost service for them. Second, no
retailer likes to get a report from a bank that a buyer has refused
to pay. A retailer who gets too many complaints can lose his merchant
account privilege. For a direct marketing firm or on-line company,
this is the kiss of death: no more credit card sales. The retailer
will typically do whatever he can to get this settled.

PRE-PAID
CARD

These cards
are handy. You load money into them, usually monthly, from your
paycheck. When this is done automatically, there is probably no
fee for depositing money.

The card
can be used anywhere, but there are charges, such as 50 cents/transaction.
Some cards charge $5/month. Others don’t.

You can spend
only what you deposit, or whatever is left over from previous
billing periods.

It is not
tied to a bank account.

You can
get a slight reward of about 1% on purchases.

Check
with your local bank
. To compare pre-paid card programs, use
this site as a model. Click on "benefits," "questions,"
and "fees."

There
is a site that offers reviews of cards issued by hundreds of banks.

Your bank may be on the list.

VISA-BUXX:
FOR KIDS OF ALL AGES

The Visa-Buxx
card is designed for teenagers. In my view, it’s an ideal card
for anyone who knows he has a spending problem. Once a teenager
gets a Visa-Buxx card, he or she should keep it until retirement.

The card
may run $15/year. The parent or teen puts money into the card’s
account. The holder can buy things anywhere that a regular Visa
card is accepted. The money is deducted from the account. There
is no line of credit. There are no minimum balance charges.

The cards
are designed to let teenagers make the transition to adulthood.
The merchants get charged by Visa. The
students can’t go on spending sprees that they have not already
budgeted.

The
Visa-Buxx web site has a quiz for teenagers
that lets them
in on some of the secrets of debt. As far as I’m concerned, it’s
an ideal exam for anyone who has a credit card that has more debt
on it than the holder can pay off at the end of the month. Any
prospective bride who doesn’t take this quiz is asking for trouble.
There is nothing like a credit card run-up to end the honeymoon.

CONCLUSION

For credit
card people who pay their bills monthly, you don’t need to change
your means of spending. It never hurts to do better budgeting
at the beginning of the month.

For people
with spending problems, a debit card or a pre-paid card is a solution.
You cannot spend more than you have in the account. A prepaid
card may be the best route if you know you are likely to overspend,
drawing down your checking account. If you budget carefully and
have your employer deposit the money in your prepaid card’s account,
the debit card’s checking account can serve as an emergency reserve.

There are
many ways to skin a cat. Don’t be the cat.

July
10, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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North Archives

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