The emperor still has no clothes

Back a long, long time ago I used to be a banker.  No, not the Wall Street kind you’d like to see given the tar and feather treatment but rather a manager of a small, community bank.  The job, while it had it’s charms was not for me and I quite distinctly remember opening up a Christmas Club account for someone and thinking to myself, ‘Oh my god, please don’t let this be my fate for the next 50 years.’

The rest is history…

But, I flashed back to those days while reading this article from the NY Times today (H/T Baseline Scenario).  I remember when debit cards were introduced by our bank.  They were hailed as a great money making product for us but for the life of me, I couldn’t figure out how we’d sell these things.

“Well,” our toothy vice-president excitedly told us, “it’s so convenient for our customers.  They won’t have to carry cash or write checks anymore!”

“So it’s like a credit card.” I said “Except instead of getting 30 days to pay the money comes out of your account immediately.”

“Yes!  Exactly!  See, customers will love it!”  He replied.

“Why not just use a credit card?” I asked.  I clearly wasn’t understanding something.

At this point I think he either just repeated his earlier assertion or just spoke some gibberish that made everyone else around the table nod and smile approvingly but left me just as confused as when I started.*

You see, debit cards are a scam.  They benefit the bank (they get to charge retailers, get the money out of your account faster and therefore get to pay you less in interest while your money ‘floats’) but not so much you.  They are more convenient that writing checks and safer than carrying cash but that’s about it.

And those benefits can be had through another service that has even more benefits:  credit cards.  Now, when I say that I have a huge caveat to go with it.  Everything I say from here on out assumes you pay your bill off, in full, every month**.  If you do that you essentially get a 30 day, interest free loan every month.  That allows you to keep that money in your account, earning interest (ok, not that much these days but you’re still making money) AND you have the freedom, in case of an emergency, to make a less than full payment if you have to.  In addition, lots of card companies offer rewards programs that can add up to real money.

Finally, you should also know that just about every time you buy something you’re paying a fee for using a card regardless of if you’re using one or not.  Card companies (Visa, MasterCard, etc.) charge retailers every time someone uses a card in their store (that’s why sometimes you’ll see retailers attempt to set a minimum purchase for using your credit cards).  That cost gets passed along to the consumer in almost all cases (unless you find a retailer who charges different rates for cash and credit purchases but they’re pretty rare nowadays) which means you’re paying that fee if you use a card or lay out cash.

So, if you’re going to pay to use a card, why not get the benefits of them?  If someone offered you a no-interest loan, why wouldn’t you take it?  If they offered to pay you for purchases you were going to make anyway, why wouldn’t you take that?  For reasons that continue to escape me, many people do, preferring to allow their bank to take money out of their accounts quicker, charge outrageous overdraft fees if you exceed your balance  and not give you squat for your business.

*Which probably explains why banking just wasn’t for me.  I was not, for the life of me, able to see the gobs of money debit cards were about to bring the banking industry or understand what the attraction is for these cards among the public.

**If you don’t pay your credit card bill off in full you’re generally screwed and so you should only consider carrying a balance in cases of emergency (a real emergency, not because the flat screen TV at Best Buy would be so totally cool to watch the game on Sunday with).

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