by Gary North
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.
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.
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.
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.
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.
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
Copyright © 2004 LewRockwell.com