Credit card vs Prepaid Debit card

There are many differences and similarities between credit cards and prepaid debit cards.  Depending on your situation may determine which is the most beneficial to you based on your usage.  This article from Yahoo Finance does a great job explaining the differences.  Hopefully, you will be able to figure out what will work best in your situation.

Yahoo Finance:

Sporting the Visa and MasterCard logos, reloadable prepaid debit cards are marketed as an affordable alternative to fee-laden bank accounts.

In the last decade, they have proliferated everywhere -- online, in grocery stores, drug stores and big box chains such as Wal-Mart. But consumer advocates argue that prepaid debit cards are brimming with an array of pricey fees and lack the regulatory protection of traditional debit cards.

Prepaid debit cards are not connected to a specific bank account. Cardholders deposit money with the card's issuer to "load" the card. Usage has grown sharply: Last year $28.63 billion was loaded onto prepaid debit cards, up 47 percent from 2008, according to Ben Jackson, senior analyst with Mercator Advisory Group.

The cards were initially designed for the millions of consumers who have bad credit or no access to traditional bank accounts. Up to 10 percent of American families are "unbanked," according to a 2008 study by the Federal Deposit Insurance Corporation. Prepaid debit cards allow these consumers to shop online, pay bills online and do other activities they can't do with cash. Some card issuers report bill-paying activity to smaller credit bureaus, helping consumers rebuild tarnished credit scores.

But the cards are also gaining popularity among consumers who are fed up with bankoverdraft and penalty fees. The industry is marketing the cards to people who routinely overdraw their accounts, arguing that a prepaid debit offers a less costly option.

Anna Daugherty, 23, an editor at a public relations firm in Michigan, starting using a prepaid debit card 18 months ago after racking up $250 in overdraft charges. "My bank always cleared the most expensive thing first, it wasn't chronological," she says, so several smaller purchases made on her debit card would push the account into overdraft, even if the transactions took place the day before a large bill, such as a rent check, was presented for payment.

"I was so angry with that bank it kind of woke me up, and I decided I had to start taking control of my finances," says Daugherty. "I use the card for my gas, so I know I'm not spending my gas money for other things; and if I know I have a group of friends coming over and have to make a big dinner, I take the money out of my normal grocery budget and set it aside on the card."

The biggest player in the pre-paid industry is Green Dot, which raised $164 million in an initial public offering in July and has 3 million active users. It offers cards and reload services at some 50,000 retail stores nationwide, and it offers co-branded cards through Wal-Mart, Kmart and Meijer. Competitors include NetSpend, AccountNow and RushCard.

"Banked customers come into a prepaid card very much around the issue of control," says Mark Troughton, president, cards and network, for Green Dot. "Using their debit cards on their bank accounts, they get into overdraft and penalty fees. On the prepaid debit cards, you spend what you load, which helps you stay on budget. There are no penalty or overdraft fees."

But consumer advocates say the cards contain a variety of fees that can make them equally expensive -- including overdraft fees. A study updated last week by Consumers Union found 12 different charges associated with pre-paid debit cards. They may include fees to acquire the card, a monthly maintenance fee, an ATM fee, a fee to use the card to pay a bill online or at point of sale (especially for PIN-transactions), a fee to check the balance on the card, inactivity fees and a fee to load money onto the card (the exception is typically people who have their paychecks direct-deposited onto the card, or load $1,000 a month).

The report reviewed 19 prepaid cards, comparing their costs using a hypothetical consumer's activity. It found costs in the first month ranged from $16.59 to use a Wal-Mart Money Card, to $17.60 for an AccountNow card, to $43.75 for a RushCard.

Moreover, some cards do indeed charge overdraft or "shortage" fees, says Michelle Jun, staff attorney with Consumers Union and author of the report. Many customers do signature transactions rather than enter a PIN because the latter sometimes triggers a fee.

"Those signature transactions are not in real time most of the time, so they don't get processed until the end of the day," Jun explains. "So you may have that amount on the card at one time, but at end of day you might not have sufficient funds because a transaction hasn't cleared yet. The terms and conditions say you need to make up that negative balance -- and some charge a shortage fee." Jun suggests consumers who have a checking account use a bank debit card and simply opt out of overdraft protection, so the transaction is denied if the funds are insufficient.

Mercator's Jackson says part of the problem is that fees are based on customer usage. "The cost varies from card to card and cardholder to cardholder, so it's caveat emptor," he explains. "If the buyer knows what he needs the card for, and compares the fees, then he can come out ahead. But if it's willy-nilly 'I want this because it has the Visa logo and I can buy stuff online' -- but someone is not paying attention to what it costs to reload or do transactions -- it's going to become difficult."

The other issue is what costs are being compared. "Consumers Union typically compares prepaid cards to free checking accounts, and prepaid cards lose," says Jackson. "Prepaid card advocates compare their products to the cost of going to a check cashing store and paying for a bunch of money orders to pay your bills -- and prepaid cards win."

Aside from the issue of fees, consumer advocates are concerned that the cards don't offer the same protections as debit cards tied to a bank account, which are regulated by the Electronic Funds Transfer Act (EFTA) and Regulation E. If consumers contact a debit card issuer about a lost or stolen card within two business days, liability is limited to no more than $50. If a lost or stolen debit card is not reported to the issuer within two business days, a consumer's liability is capped at $500.

The industry says it offers similar protections in its terms and conditions. But consumer advocates say these can be changed or rescinded because companies reserve the right to change the terms of the contract at any time for any reason. Reloadable prepaid debit cards are also not covered by the new restrictions of the CARD Act, such as the rule prohibiting gift cards from expiring before five years, and banning inactivity fees in the first 12 months.

"We take it for granted that it is safe to use a debit card under the EFTA. Those same rules should apply to prepaid debit cards," says Jean Ann Fox, director of consumer protection with the Consumer Federation of America. In addition, "it's hard to tell from card to card which ones are structured so there is FDIC insurance" and if the consumer's funds would be protected if the institution issuing the cards failed.

"I think it's a valid concern," says Troughton of Green Dot, which sells FDIC-insured cards. "As far as I know, the vast majority is FDIC-insured, but consumers need to look program by program."

Perhaps the most contentious issue is that some companies link the prepaid debit card to an expensive line of credit -- a cash advance that essentially works like a payday loan. "A cash advance on a prepaid debit card has triple-digit interest rates, and is repaid by deducting the next deposit to the card all at one time, so consumers don't get an installment repayment schedule," says Fox. "This is a debt trap for consumers who might use these cards."

Troughton says Green Dot has no plans to expand into this service. "We don't believe there is a way to offer short-term credit today in a fair and value-oriented way," he says. "I don't think it's a good value to customers."

New Basic Credit Card Changes

It seems like there are many more changes happening in Congress that will affect your basic credit and debit card transactions.  From fee to rewards and discounts from paying cash.


Associated Press:

Hate those merchants that won’t let you use your credit card unless you spend more than a certain amount? Well, now they have Congress’s blessing, as long as the minimum is not higher than $10. The Federal Reserve can increase the minimum if it chooses. As for maximums, only the federal government and colleges and universities can limit what people spend. So if you are paying tuition on a credit card and earning a couple of free plane tickets each year, that fun may soon end.
Merchants are also free to offer discounts to people who pay cash instead of using cards, or use debit instead of credit cards. They will not, however, be able to charge one price for people using American Express cards and a lower price for people using Visa and MasterCard credit cards.
Merchants will also not be allowed to give discounts based on which bank issued the debit or credit card you are using. Why would a merchant want to do that? Because the bill gives the Federal Reserve the ability to set a limit on the fees that stores must pay to accept debit cards. The catch here, though, is that only banks with more than $10 billion in assets would be subject to the cap. As a result, merchants may have to pay more to accept debit cards from smaller banks and credit unions than big banks like Bank of America and Chase. And if that were to happen, stores might be tempted to offer discounts to people with big bank debit cards.
Oddly, community bankers and credit unions don’t want to end up earning more money from merchant fees than big banks do, even though it would give them a competitive advantage. Why not? They worry that the big banks will immediately put pressure on Visa and MasterCard to lower merchant fees for all debit cards, not just the big banks’ cards. Thus, the smaller institutions had hoped that the status quo would remain, with everyone continuing to earn fat fees from the merchants forever.
It is not clear what the Fed will do or how the big banks and Visa and MasterCard will react. This could take a few years to play out, or many years if lawsuits start flying. Some merchants may try to play fast and loose with the rules too. Bill Hampel, chief economist of the Credit Union National Association, figures that small retailers might happily accept debit cards with the names of big banks that they recognize and then ask shoppers with cards from no-name institutions to use cash or some other card.

New Basic Credit Card Law 2.22.2010 FAQ

This is a more personal Q&A I found on Kiplingers site. I thought they were good questions and answers and think you might find them useful.

Kiplingers:

After the new credit-card legislation takes effect February 22, I know that a bank can’t raise my interest rate if I pay my credit-card bill on time, even if I am late paying other bills. But can an issuer restrict use of my card in other ways?

Yes. Under the Credit Card Accountability Responsibility and Disclosure Act, if your credit report shows late payments, your card issuer could decide you have become a risky customer and cut your credit limit, impose an annual fee or raise your interest rate on future transactions. You must receive 45 days’ notice of any rate increase.

What happens if I decide to opt out of a rate increase?

You won’t be able to use the card to make new purchases. You’ll have five years to pay off your account balance at the old rate, or you will have to continue to make monthly payments. Your new payment may not be more than twice as much as the old minimum payment.

I bought a new refrigerator using my card last spring and was able to defer payments for 12 months. The grace period ends in April. How can I be sure that my monthly payments are applied to the deferred balance and not to more recent purchases?

The CARD act requires that any payment you make over the minimum be applied first to the balance with the highest interest rate and then to balances with lower rates. However, for the two months before the grace period ends, the entire amount you pay in excess of the minimum must be applied to the deferred balance.

My credit-card company used to insist that my payment arrive by 10 a.m. on the day that it was due and charged a fee if I didn’t meet the deadline. Do the new rules offer any relief?

The CARD act imposes clear and simple payment rules. Payments are always due on the same day of the month and are considered to be on time if they are posted by 5 p.m. If the due date falls on a weekend or holiday and your payment isn’t processed until the next business day, it is still considered on time. Your card issuer may not charge you a fee to pay by phone or electronic transfer unless you receive expedited service.

Can retailers still offer customers approval for a store credit card at checkout?

Instant credit isn’t going away, but it could be a lot less instantaneous. The CARD act requires that issuers consider your ability to pay before extending credit. Previously, retailers could enter your name, address and Social Security number into the computer, get your credit score and immediately decide whether you were creditworthy. It’s unclear how the new system will work and how much financial information you will have to provide (perhaps income and any debts), but the process is likely to be more cumbersome.

Does the CARD act apply to gift cards?

Yes, although the provisions that cover them do not go into effect until August. After that, gift cards will have to remain valid for five years. Dormancy or inactivity fees will be forbidden unless the card has not been used for 12 months, and then you may be charged only one fee per month. Fees to replace expired cards that have money on them will be forbidden. You may still be charged a fee of $4 to $8 to purchase or activate a card.

Will my monthly statement look different?

Yes, it will show how much you really pay in principal and interest if you make only the minimum payment, as well as how long it will take to pay off your entire balance. It will also tell you how much you’d have to pay each month to repay the balance in 36 months and the total amount you will pay[MSOffice1] in principal and interest. Plus, the statement must conspicuously display the payment due date, any late-payment fees and the late-payment penalty rate.

I never keep those fine-print agreements that come with new credit cards. Is there a way to verify the terms and conditions of my card?

Yes, issuers must now post card agreements on their Web sites and provide a copy to the Federal Reserve Board, which will compile and post them on its Web site.

New Credit Card Fees

With the New Year here come new credit card laws. However, banks have already taken action to make sure they are able to make up lost revenues. In the previous posts, we discussed the interest rate increases, changing fixed rates to variable rates, and reducing credit limits and canceling cards.

If you escaped the notice of the credit card companies from taking these actions against you, then you are lucky. However, the credit card companies have made sure not to have any fees fall through the cracks. When you receive your latest statement, there will be no doubt little inserts in tiny print explaining new and extra fees for things that used to be complimentary.

Wall Street Journal:

Credit-card companies already have been racing to slip new fees and practices into customer contracts ahead of the law. Issuers are closing accounts, switching cards with fixed interest rates to variable rates and introducing cards that have an annual fee.

Christopher Moss, who regularly shops at sporting-goods chain Gander Mountain, recently was notified that he will be charged a $1 "processing fee" each time he receives a printed statement of his Gander credit-card account rather than an electronic one. The 50-year-old paralegal said he is prepared to cut up the credit card even though he likes the loyalty rewards that come with it.

"It's not like I can't afford it, but it's another little stick in the consumer's eye," Mr. Moss said.

The Gander Mountain card is issued by World Financial Network National Bank, a unit of Alliance Data Systems Corp., of Dallas. The company, which also issues credit cards for women's clothing chain Ann Taylor Stores and lingerie maker Victoria's Secret, says that the decision to charge the fee is partly tied to the costs that it will incur from the new rules.

"One requirement of the Credit Card Act of 2009 is that monthly billing statements will now have to include significantly more information pertaining to the cardholder's terms and conditions, thus increasing the amount of paper, production and postal expenses as well as having a greater environmental impact," the company said in a written statement.

Issuers also are likely to water down rewards programs and introduce fees for inactive accounts. "There are so many things that issuers can do that the Card Act doesn't touch," said Bill Hardekopf, chief executive officer of LowCards.com, a Web site that tracks the industry.

In addition to the credit-card rules, the government will crack down next year on ways banks charge overdraft fees, which are assessed when a customer overdraws an account.

New Federal Reserve rules will require banks to receive customer consent before they can be charged such a fee. That is a significant change from the current practice, in which banks typically honor withdrawals and then levy a fee if the account is overdrawn. The Fed estimates that banks generate $25 billion to $38 billion a year in overdraft fees.

The changes come against a backdrop of rising anger at the nation's banks—having been largely supported by hundreds of billions of public bailout dollars in late 2008 and 2009. One recent survey by Chicago's Bank Administration Institute found that 43% of retail-bank executives feel that consumer trust in banks has eroded in the past six months.

79.99% Interest Rate Cards

You have to read the fine print to make sure you don't get something that is not beneficial to you. In a recent article, it mentions a credit card that charges 79.99% interest rates!

NEW YORK —

It's no mistake. This credit card's interest rate is 79.9 percent.

The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It's a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card's credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit — $75 in the first year for a credit line of $300. But the new law doesn't set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.

"It's the highest on the market. It's the highest we've ever seen," said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The terms are eyebrow raising, but First Premier targets people with bad credit who likely can't get approved for cards elsewhere. It's a group that tends to lean heavily on credit too, meaning they'll likely incur the steep financing charges.

So for a $300 balance, a cardholder would pay about $20 a month in interest.

First Premier said the 79.9 APR offer is a test and that it's too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21, 2010. However, customers will still be able to use their existing cards. The bank said "no final decisions" have been made regarding any rate changes for those cards.

First Premier noted that it needed to "price our product based on the risk associated with this market."

The bank declined to specify how many people were offered the 79.9 APR card.

According to First Premier's Web site, the credit cards are serviced by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.

In a mailing sent to prospective customers in October with the revamped terms, First Premier writes "...you might have less-than-perfect credit and we're OK with that." The letter notes that an online application or phone call is still required, but guarantees a 60-second status confirmation.

The letter also states there are no hidden fees that aren't disclosed in the attached form. That's where the 79.9 percent interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your $300 credit limit.

Even if First Premier doesn't stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9 percent to offset the lower fees, said Shahani of Synovate.

The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.

The bank typically mails offers to subprime households, meaning those with credit scores below 700. In the third quarter, however, 84 percent of its offers were sent to subprime households, down from 91 percent the same period last year, according to Synovate.

First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean First Premier won't issue cards as liberally to those with bad credit.

As harsh as First Premier's terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.

"Even when the cost of credit is astronomical, for people in true emergencies, it's much better than not having access to credit," said Papadimitriou.

Until Feb. 21, First Premier is still offering its even-higher-fee card online. So the price for credit the bank charges is at least $256 in first-year fees.

Basic Credit Card Annual Percentage Rate

One of the most basic credit card stuff you need to understand is annual percentage rate. This is not just the nominal interest rate. Interest rates are what you are charged for purchases and cash advances.

However, the annual percentage rate (APR)includes annual fees, late fees, over the limit fees, and any other fees the credit card companies charge. All these charges are just a form of interest, so when you add these fees in as interest the APR increases dramatically. All fees are a cost of borrowing credit. Once you pay any fee, the APR increases accordingly.

Wikipedia:

There are at least three ways of computing effective APR:

* by compounding the interest rate for each year, without considering fees;

* origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest;

* the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.

For example, consider a $100 loan which must be repaid after one month, at 5% interest, plus a $10 fee. If the fee is neglected, this loan has a (year-long) effective APR of approximately 79% (1.05^12 =~1.7958). If the $10 fee were considered, the interest increases by 10% ($10/$100) for the month, with the effective APR being approximately 435% (1.15^12 =~5.3502, as 535%-100%=435%). Hence there are at least two possible "effective APRs": 79% and 435%.