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."

4 Basic Credit Card Errors

This was a cool article I wanted to share with you. These are mistakes anyone can make.

Christian Science Monitor:

1. Not Paying Attention to Due Dates

This recently happened to me. I got my email notification of the statement, logged it in the back of my mind that I needed to pay that bill and unfortunately got busy and never bothered to pull that statement out of the back of my mind until two days after the bill was due.

I know what you’re thinking – just automate your bill pay! Yes, I should do that, but I do like to take a look at what’s on the statement and make sure everything is correct. This forces me to do that.

Making a late payment even if it is only by a few days can rack up ridiculous charges that only compound your debt. Those annoying charges can also have an impact on your credit report. Being vigilant about paying your debt and paying it on time is key.

What I’ll do is give American Express a call and see what they can do for me. Since I don’t carry a balance, normally pay on time and have been a long-time, loyal customer I’m hoping they’ll waive those charges for me.

2. Not Paying Your Bill in Full Each Month

This is where it all begins doesn’t it? You’re a willing victim to the crazy cycle. You buy something you can’t afford and think, “I get paid in two weeks, I’ll just put it on the credit card and as soon as I get the bill I will pay it off” and then something else comes up.

Emergencies happen or you find some other trinket you want to buy and you put that on your credit card too. At the end of the of the month you receive a hefty bill. What do you do? If you only pay what you can and wind up leaving a balance on the card that accrues interest at insane amounts, you’re asking for trouble and perpetuating the cycle!

Just think, with a little discipline and some self control you could’ve avoided unnecessary spending and used that money to open a Roth IRA or fund some other type of investment account.

3. Not Realizing You Have Credit Card Problems

Okay, this sounds silly, how can you not recognize that you have credit card problems? Well, it’s actually fairly easy. I spent the majority of my college years and shortly after living the high life without any regard to the thousands of dollars I was racking up!

I didn’t even realize that I had a credit card problem. I just figured this was a normal part of existence and that once I made more money, then I would pay off that debt! No big deal right?

Little did I realize that I needed to make some drastic changes! Get real with yourself and ask if you’ve got some spending issues.

4. Not Negotiating With Credit Card Companies

It puzzles me that more people don’t call their credit card companies to negotiate with them. You can negotiate things like interest rates, late payment fees or even payment plans. If nothing else, it doesn’t hurt to give them a call and find out what they can do for you.

The person who never asks, never receives. Now of course there is no guarantee that the credit card company will do anything, but wouldn’t it be nice to know if they were willing to do something?

Getting out of debt is not easy, but don’t make it harder on yourself by making simple mistakes that can easily be avoided.

What do these new laws mean for basic credit cards?

The new credit card laws that go into effect this week are suppose to protect and help consumers. What do the experts think about it?

Huffington Post:

The credit card reforms enacted by Congress and signed by the president last year are set to take effect on Monday. Unsurprisingly, credit card issuers have already found several ways to get around the reforms.

Harvard professor Elizabeth Warren, chairwoman of the bailout oversight panel, said on Thursday that the shortcomings of the credit card reforms show the need for an independent agency that protects consumers from the financial industry.

"[The Credit Card Accountability, Responsibility, and Disclosure Act] is a good first step but it isn't enough alone," said Warren on a conference call with reporters hosted by the U.S. Public Interest Research Group. "The credit card industry and the entire consumer credit industry is broken. We need an agency, a cop on the beat that is flexible and responsive."

The House of Representatives approved a financial regulatory reform bill that includes a Consumer Financial Protection Agency. It's fate in the Senate is uncertain.

Warren described a new credit card trick to get around new restrictions on arbitrary interest rate increase and "hair trigger" rate increases for barely-late payments.

"Last week, somebody showed me a letter from their bank that raised their interest rate from 9.9 percent to 29.9 percent -- not because the person had done anything wrong or failed to pay, just a rate increase -- but then gave a so-called 'rebate' back to 11.9 percent," Warren said. "So now the company can impose its 29.9 percent rate increase anytime it wants because that is the actual rate on the card. In other words, this issuer has just figured out a way to slide slightly over from the rule of the CARD Act and avoid the intent of the rule in order to go back to the practices that Congress has deemed abusive."

That's a new one. In September, the Center for Responsible Lending issued a report titled "Dodging Reform" identifying eight new tricks credit card issuers had come up with. The Federal Reserve, when it promulgated rules for the industry to follow the reforms, squashed two of the evasions identified by the Center.

New Basic Credit Card Rules and Changes

New Basic Credit Card Rules

This coming February we have many new basic credit card rules going into effect. Anyone who has a credit card or obtains one in the future will be affected.

Here are some examples that may be similar to your situation. Of course, this is just a small sampling.

Kiplingers:

Can the bank still raise my interest rate?Yes. The issuer can raise the rate on an existing card as long as you are given 45 days’ notice. If you apply for a new card, however, the issuer may not increase your interest rate for one year, and then it may charge the higher rate only on new purchases, not your existing balance. There are, however, some significant exceptions to this prohibition. Even on a new card, your rate can go up if it is based on an index that fluctuates, such as the prime rate, or if you are more than 60 days late making the minimum payment. (Your minimum monthly payment may increase, too.) Issuers have been switching cardholders from fixed interest rates to variable rates for months to take advantage of this loophole.

I changed cards to snag a low rate on balance transfers. But the rate for new purchases is much higher. What happens when I pay my bill? The CARD Act really helps here. It requires issuers to apply your payment to the balance with the higher rate. Previously, issuers automatically applied payments to the lowest-rate balance.

I lost my job, and I’m having trouble paying my mortgage. But I’ve kept up the payments on my credit card. Can the issuer cancel my card? No. Paying your mortgage or any other bill late no longer affects your credit card. Your payment record on the card itself is all that matters.

My credit score recently dropped to 680. Can I still qualify for a credit card? A few years ago, banks liberally offered credit cards to people with scores in the 650-to-680 range and then raised their rates if they paid late. With default rates hovering around 11%, however, issuers are making it more difficult to qualify for a card if your credit score is below 700. Try applying at an institution where you have a checking account, mortgage or certificate of deposit, recommends Ken Lin, of CreditKarma.com. If that doesn’t work, you could get a secured card – you’ll deposit a sum in the bank, which then becomes your credit limit. After a year of making on-time payments, you may qualify for an unsecured card.

My daughter is going off to college next fall. Can she get a credit card? It’s unlikely that she will qualify for one on her own. If she is under 21, she can obtain a credit card only if an adult cosigns or if she can prove she has adequate income to pay the bill. If you decide to cosign, you accept responsibility for all her expenditures, so you need to talk to her in advance about using her card wisely.

Credit cards harder to obtain

You may have good credit or some credit challenges, but in the past you would of been able to get a credit card albeit a higher interest rate. Now, it may not be as easy because the economy is hurting all the credit card companies.

This in turn has forced them to scale back on the amount of credit available to loan out. They simply have been forced to become more conservative in their lending practices. According to Bloomberg:

Jan. 8 (Bloomberg) -- Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The series of 10 straight declines was the longest since record-keeping began in 1943.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

So if you are turned down now for a credit card, don't take it completely personally. The credit card companies are just in their own struggles.

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.

Why is my interest rate going up?

The laws have passed and will soon be in effect. There will be many emails and letters sent out to numerous customers letting them know their interest rates will be going up.

You might be wondering why was I targeted? I haven't made any late payments, never been over the limit, and have a long credit history with that credit card company. The reason lies not in your credit profile, but in the actual credit card company itself.

But here's what the new law won't do: It won't prevent interest rates from going up for the vast majority of customers.


Credit card rates: Nowhere to go but up

Even after Feb. 22, holders of so-called variable-rate cards can expect to see increases. Variable rates are based on the prime rate and meant to follow the rise and fall of that index.

The problem for consumers is that the prime rate is at 3.25%, an historic low. It will almost certainly go up, experts say. And so will credit card rates, which currently average 14.9%, according to the Federal Reserve.

"It does leave a lot of room for growth and prices will go up," said Joshua Frank, a senior analyst for the Center for Responsible Lending.

While most credit card holders already have variable-rate cards, banks have been busy these past few months making sure nearly all customers have those kinds of cards. In addition, some banks are setting a floor on certain accounts to prevent rates from sinking below a minimum level, according to a Pew Charitable Trusts study.

"The credit card reforms outlawed some seriously abusive practices, but the cards will still be loaded with other tricks and traps," said Harvard University professor Elizabeth Warren, an advocate for consumer financial protections.

Indeed, the expectation that interest rates will tick higher exemplifies the difficulty lawmakers faced when crafting the new rules: They wanted to protect consumers without killing credit availability at a time when bank loans are already choked.

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%.