Beauty pageants are perhaps less popular than they once were, but would anyone object to a plastic pageant? Credit cards, debit cards and prepaid cards may look very similar, but they have very different vital statistics in the forms of consumer protections and benefits. And almost certainly one of them has ambitions of "bringing world peace" and "curing cancer." So, in the tradition of pageants everywhere, let's announce our winner and runners up in reverse order.
Prepaid Cards: Miss Congeniality
Prepaid cards (a.k.a. "prepaid debit cards" or "general purpose reloadable cards") are breathtakingly attractive in one unique respect: They're friendly to pretty much everyone, regardless of an applicant's credit history. If you can mist a mirror, you're in, which is an offer that's rarely passed the lips of a beauty pageant contestant.
You load your own money onto the card -- which is co-branded with a payment network, American Express, Discover, MasterCard or Visa -- and then spend it, just as you would using any other payment card. You can buy things in stores or online, and you can withdraw cash from ATMs. The only problems you're likely to face are in using them (at least with big chains) when you rent cars or reserve hotel rooms.
One of the big selling points for prepaid cards used to be that they prevented people from overspending: you preloaded your own money, and when it was gone, it was gone. But, a couple of years ago, some prepaid card issuers started to offer high-interest "overdrafts" or lines of credit to their customers. The National Consumer Law Center noted at the time that these were clever ways to exploit loopholes in consumer-protection legislation, and commented, "Permitting abusive credit products to be coupled with prepaid cards is unfair, deceptive and abusive."
It was only a few years ago that almost all prepaid debit card issuers were widely regarded as predators: ones who shared all the killer instincts of sharks, but who lacked their moral boundaries. They often charged a bewildering range of exorbitant fees, many of which were hidden, to the most vulnerable of consumers.
Things have changed since then, and there are now some good products out there, a number of which provide an affordable alternative to checking accounts. However, you still have to choose your card very carefully. These products currently remain totally unregulated, at least on a federal level, although the Consumer Financial Protection Bureau (CFPB) recently began to accept complaints about them. While that may signal the possibility of future regulation, for now it remains perfectly possible for bad issuers to legally charge outrageously high fees -- not as penalties, but just for using the card normally. You might also face problems if your card issuer goes bust, if you need to dispute a transaction, or if you're the victim of fraud when someone else uses your card illegally.
Debit Cards: First Runner Up
Debit cards are a way to pay for goods and services using money in your checking account. When it comes to purchases and ATM withdrawals, these are used in exactly the same way as prepaid cards: you can pay with them wherever your payment network (American Express, Discover, MasterCard or Visa) is accepted, although some merchants may decline them for car rentals and hotel reservations. Fees for using ATMs are also likely to differ.
Millions of Americans switched to debit cards after the credit crunch when they burned their fingers with -- or at least grew scared of -- credit card debt and the high penalty fees that most credit card companies used to levy. But, for many, this may have been a frying pan/fire decision. When federal legislation restricted the fees credit card issuers could charge, some banks seemed to refocus their price gouging on checking accounts -- or, at least, those customers who chose to opt in to overdraft protection. The CFPB just published a report on debit card fees. It found that most overdraft fees arose from transactions valued at $24 or less, and that the overdraft itself was cleared within an average of three days. It also found that the median fee charged for each such violation was $34. The federal regulator did some math: "Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate (APR)."
You think that's bad? Wait till you hear about re-ordering, a practice still used by nearly half of American banks. Imagine an example, which might apply if you've opted in for so-called overdraft protection. You wake up one morning, believing your checking account has a couple of hundred bucks in it, when the balance is actually $40. You visit a coffee shop on your way into work, and pick up a skinny latte and a pastry, charging $6 to your debit card. At lunchtime, you buy some food, and charge another $10. You then pay $20 for a book. On the way home, you pick up some wine and you splash out another $45. Oh no! You only had $40 in your account that morning, and you've already charged $36 earlier in the day. Surely that means you're going to have to pay an overdraft fee on that last transaction. Yeah, right! If your bank practices re-ordering, it will process the biggest transaction of the day first, regardless of the chronological order. So you're on the hook for $34 for each of that day's four transactions. Maybe it's time to revisit that frying pan.
Credit and Charge Cards: The Winner!
At the end of every beauty pageant, a significant proportion of the audience is going to find the judges' decision incomprehensible. The winner's a blonde, she's a brunette, she's a redhead, she's too curvy, she's not curvy enough, she said she supports Israel, she said she supports Palestine... All pageants are like that, including this one.
Some readers are bound to hate credit cards because of the damage caused by card debt they've experienced or witnessed. But, for the huge majority of responsible Americans, they're by far the best way to pay for any purchase. That's not a judge's individual bias. That's a fact. Assuming you're not among the minority who can't manage plastic responsibly, credit cards are uniquely good ways to pay. Here's why:
- If you have the right card, you get rewards. It's usually not a huge amount, but it's frequently one or two percent of your spending, and special offers can sometimes increase that to five percent. Unless you spend your life obsessing about card rewards, these aren't going to make you rich. But every little helps, and a year's worth of them can buy you a lot of treats.
- What happens if you order something (online or from a brick-and-mortar outlet), and things go belly-up? Maybe the supplier goes broke, or the item's useless, or the thing you ordered simply never arrives. What are you going to do? Well, with a prepaid or debit card, you could ask your issuer for help. There's a reasonable chance that, in the end, they'll rescue you. In the meantime? Well, it's your money -- not theirs -- that's disappeared. No doubt, they'll get right on it! With a credit product, you have a legal right to refuse to pay, at least until a dispute has been resolved.
- Your washer dies 367 days after you bought it. Dammit, it came with a one-year warranty. Don't worry. If you bought it with one of many credit products (but not all), your card issuer could pick up the bill for fixing or replacing it -- right up until double the expiration dates promised by many manufacturers' warranties.
- The same may apply if one of your recent (frequently within the previous 90 days) purchases is lost, stolen or accidentally damaged. Some credit cards will replace that for you -- absolutely free. Your plastic may also offer price protection, which can under some conditions refund the amount by which you've overpaid for an item compared with other suppliers' advertised prices.
- Many of these cards provide perks such as free car rental insurance. Others may offer concierge services, privileged access to events, or give you hotel room upgrades or free entry to airport lounges, though some of those tend to come with plastic that levies an annual fee.
- The Credit CARD Act of 2009 reined in many of the old bad practices that gave some issuers a bad name, and has reduced penalty fees and limited all sorts of rate rises.
Charge cards offer the same benefits and legal protections. The only difference between those and credit products is that you're obliged to clear your balance at the end of each billing cycle.
No benefit or perk should be enough to persuade those who can't resist the temptations of card debt to use this sort of plastic. But, for the majority, credit cards are the most beautiful way to pay -- and fully deserve our pageant crown.
Now YOU be the judge. Compare our credit cards and pick a winner.