Suze Orman, one of the most well known personal finance gurus in the media, announced a few days ago that she had created, and was releasing, a new prepaid debit card.  Prepaid debit cards, if you’re not familiar with them, are cards, like credit cards, where you prepay and then can only use the card for amounts up to what you’ve prepaid.  In most cases, they are marketed towards people who are unable to get credit cards because of bad credit.

Phil, from PT Money, blasted Suze for the card, on his site and on twitter.  I can’t say that I entirely disagree with him.  His problem with the card, and mine, is that prepaid cards should be a last resort for people who are unable to get a bank or Credit Union account that has a debit card attached to it.  What Suze is doing with this card, however, is pushing it to the general public who really have no use for it, and, by using it instead of a debit card from their bank or CU, are going to be lining the pockets of Bancorp (the bank behind the card) and Suze.  That’s shady, when you are claiming to be “America’s Most Trusted Personal Finance Expert”.  If she is an expert, she should know better. And, I think she does.  Which is why, instead of responding to PT (and others) on Twitter with a factual defense of the card, she had this to say:

Suze Orman Calls PT Money an Idiot

Terrible way to take criticism, Suze.  To some degree, I discount her response because of the “sassy” way that she responds to questions and such on her shows, but I think she crossed the line here.  It’s one thing to tell the guy who calls in and asks if he should buy a new car when he’s 500k in debt an idiot, but another thing altogether when you’re calling a guy an idiot simply because he thinks your new prepaid card is a bad product.

Is the card a bad product? To Suze’s credit, unlike some prepaid cards that have had celebrity endorsers, this one has plenty of good things going for it.  It includes a credit watch program, and a free credit report with credit score.  It’s got a program to allow you to put money into a separate account for an emergency fund, free bill pay, and the ability to transfer money from one cardholder to another.

But, my Credit Union has all those things.  A $3/month fee on the card isn’t the worst of the cards, but it’s still a fee.  $36 a year to have access to your own money via a debit card?  Come on.  Again, my Credit Union does that, and they do it for free.  Yes, there are some who are unable to get a bank account.  And for those people, if you absolutely need to have access to a Visa/Mastercard card, then go for it.  But, despite what Suze is claiming, don’t expect it to improve your credit score.

There is no way that any of the credit agencies are going to take your activity on a prepaid card into account.  They’ve never taken your cash spending habits into account, and a prepaid card is no different than spending cash.  Would it be nice?  Absolutely.  Many of us who make most of our transactions on debit cards or with cash would agree.  But, it isn’t going to happen.  Your cash spending has nothing to do with your credit, so why would a credit score take that into account?

I just don’t see enough difference between this, and other similar cards to say that Suze went out on a limb here and created a product that is going to change the industry.  As a prepaid card, it’s decent.  There are better.  In the end, it’s still just a prepaid card that should be used as a last option when you can’t/won’t get a bank or credit union account with a debit card.

Read what some other Personal Finance Bloggers are saying:

Suze Orman’s “Approved Card” gets Denied; Thinks PF Bloggers are Idiots

Suze Orman’s new prepaid debit card: The Approved Card

My two cents on Suze Orman and her prepaid card

Young, Gullible, and Broke: Suze Orman’s debit card FAIL

Suze Orman’s prepaid debit card scam

Suze Orman’s Card is Not Approved by Me

Suze Orman’s Approved Prepaid Debit card is Bad for Consumers

Suze Orman Shows True Colors with Her Approved Prepaid Debit Card

And that’s just a smattering of the posts on the subject.  I have yet to come across one that is entirely positive about the card. What do you think? Do you think that Suze did a good thing here, or is it just another way to milk some money out of her followers?

Despite the best of intentions and the clearest of budgets, sometimes holiday spending can snowball out of control. It can start with an innocent extra box of ornaments or a gift for someone not on your list, and before you know it, you’ve charged the entire month of December on your credit cards and you’re facing the New Year with bills you’re not sure how to pay.

Even if you have gone overboard this year, it doesn’t mean you have to spend all of 2012 digging yourself out of the hole. Here’s a step-by-step and (relatively) painless plan for paying off your holiday spending spree.

1. Transfer your credit card balance responsibly. To avoid having to pay interest on your purchases, look into transferring what you owe to a 0% balance transfer credit card. This will give you a little breathing room to pay off your holiday excess—the transfer term is sometimes as long as year or more.

You will generally face a nominal transfer fee of around 3% of the balance, but that will still save you a great deal of money compared to your interest rate, provided you can pay the balance off before the 0% introductory rate expires. As always, make sure that you use this transfer along with a payoff plan (step 2) in order to keep yourself afloat. If you’re not sure about your ability to handle the temptation of a new credit card, then skip right to step 2.

2. Create a payoff plan. With your budget (you do have a budget, right?) and a calendar in hand, determine exactly how much you can send to your credit card each month or with each paycheck. If possible, set up automatic payments to the credit card for the day you receive your paycheck so you don’t even have to think about it. And to keep yourself motivated, start a debt payoff thermometer on a whiteboard or online. (Online thermometers are generally created for fundraisers, but they work just as well for debt payoff). A visual of how far you have come and where you still need to go will help you to remember the big picture when temptation strikes.

3. Find extra ways to make money. Even with a period of 0% interest and a payoff plan, a truly epic spending hangover may still take some time to recover from. If you want to make sure that this lapse in judgment affects as little of your New Year as possible, here are some ways to “find” extra money to send to the debt:

Go on a Financial Fast in January

Just as you might want to refrain from drinking for a while after an all night binge, you might also want to put the kibosh on your spending for some time after the holidays. Basically, you will choose a certain amount of time during which you will refrain from spending any money outside of absolute necessities. It’s very important to be brutal with the definition of a necessity. For example, you can eat through the food you have in your pantry, rather than go to the grocery store during your fast.

Michelle Singletary of The Washington Post recommends committing to at least a 21 day fast in order to see the best results. And after a month of excess, it will feel great to know just how little you need to spend in a month.

Sell Your Gifts

We all receive gifts that aren’t quite right. It may feel strange, but there’s nothing wrong with selling your gifts and gift cards on sites like Ebay and www.giftcardgranny.com. It means that the gift will truly be appreciated and that you can feel more financially comfortable. Just make sure you sincerely thank the giver. They are, after all, giving you an opportunity to get your financial ducks in a row, even if that’s not the gift they intended to give you.

Earn More Money

While there’s only so many ways you can cut your spending, your earning potential is virtually limitless. If you’re still not sure how you can pay off your debt quickly, try to find a second income stream that you can send directly to your credit card. If you find something that you really enjoy doing, you’ll be spending your time more wisely, as well.

The Bottom Line

We all make mistakes, particularly when temptations are around every cheery holiday corner. The bigger mistake would be to ignore the problem and let it get out of hand without dealing with it. Don’t start your 2012 in the shadow of your poor 2011 decisions. Take charge of your finances and make sure your New Year is a great one.

Emily Guy Birken is a freelance writer and regular contributor to PTMoney: Personal Finance. She lives in Lafayette, Indiana, with her mechanical engineer husband and infant son. Her musings on life, parenting and money can be found at The SAHMnambulist and Live Like a Mensch.

photo credit: faster panda kill kill

My family and friends can’t stand going shopping with me. I used to be easily influenced into buying anything. Now I simply don’t want to buy anything. I’m the worst person to go shopping with now. I second guess every purchase. If I do end up buying something, I ask myself, “what will I get rid of now?” You know, the one in and one out policy. I don’t like to fill up my place with stuff, I would rather experience more.

With Christmas right around the corner we’re all shopping and the malls are jam packed. It’s too tempting to bust out the credit card and buy that perfect Christmas gift for that person on your list. Financially gluttony is way too common around this time of the year. I could go in the direction of racking up massive amounts of credit card debt by buying stuff, but I’m going to go in a different direction. I wanted to get into the actual stuff that we buy. I wanted to focus on what happens with all of the things that we spend our money on.

Is your stuff owning you? How can you tell? Let’s look at a few warning signs when it comes to letting your stuff take over your life:

You can’t get rid of anything.

This is a serious problem. Hoarding is very addictive and there can be no boundaries. Once you start to hoard it’s going to be difficult to stop. You’re going to want to hold on to everything. We all know someone that has a home filled with stuff from the 70s that they really don’t need any more. If you find yourself unable to get rid of anything, this is a sign that your stuff is taking over!

You have no space in your home.

If you can barely get around your place because of all of the stuff, then it’s definitely time to let go of a few things. Stuff is clutter and clutter sucks. There’s no other way to put it. I once rented out a mini disposal bin from a friend and got rid of a whole garage full of stuff. What’s the point of a garage (or basement or spare room) if it’s unusable because there’s too much crap in it? When you have no space this means that you got way too much stuff.

It feels like you never have enough.

When you can never have enough stuff, you’re letting your stuff take over. There’s always an excuse to get more stuff. If you feel like you don’t have enough you’re going to keep on accumulating more and more stuff until you can even find your bed in the room. If you can never have enough, it’s time to break loose of your stuff.

I hope I didn’t scare you hoarders away just yet. What if you’ve noticed some of these warning signs? Is there a solution? Of course there is. There’s no need to stress because you can easily get over this little love affair with stuff. How can you break free from your stuff?

Sell your crap for money.

This is the most obvious solution to dealing with stuff. Since there’s a monetary value behind all of our stuff it makes it difficult to just throw it out. Instead of throwing it out, you can always sell it. As they say, “one man’s trash is is another man’s treasure.” There are many theories and techniques on the Internet when it comes to selling stuff. Mine is simple.

Go on Kijiji, put up an ad, and wait for the responses. If you don’t get any then re-post the ad on a few other similar sites. I’ve always found success with selling my stuff on Kijiji. Just throw something on there RIGHT NOW and see what happens.

Done your stuff to charity.

If you can’t sell your stuff or just can’t get rid of it, then you can always donate it to charity. This is what I started doing with my clothes. I purge my wardrobe every few months. As time goes on, my style changes and as does my size. I work out often so I have plenty of clothes that doesn’t fit. I either give it to my friends or donate it to charity. Clothing is meant to be worn. Not sit in a closet.

Try to experience something cool.

I find that one of the main reasons that we all spend so much of our money and time on stuff is that we don’t know what it’s like to spend money and time on cool experiences. In the last few years I started to go on more trips, look for more unique experiences, and experience more in life. Before I started spending my money on experiences I would just random buy arbitrary crap. When I started to travel I learned that there was so much more to life.

At the end of the day, it’s perfectly normal to be a hoarder. The good news is that you can break free of this habit easily!

Are you ready to break free from your stuff? Let 2012 be the year where you become clutter free.

This was a guest post from Martin of Studenomics, a fun blog aimed at helping you figure out what to do after college and how to find the best credit card for students. If you want to invest your hard earned money you can learn about screening tenants to protect your rental property.

photo credit: justinpickard

Holiday shopping is in full swing now, and you may be feeling the financial pressure.  Shane recently quit his job and is working on a tight holiday budget.  My husband and I are in the midst of being gazelle intense, so we don’t have much extra money for gifts.  Yet even though we don’t have much money to spend this holiday season, I feel great about what we are giving because we are not overspending.  We can truly afford what we are giving.  Instead of overspending, we are empowering ourselves by spending exactly what we are able to spend.  Follow these tips to rein in your holiday purchases this season:

-Freeze the credit cards.

Literally.  Put them in water and freeze them.  Better yet, put them in peanut butter as we did.  Vow not to use your credit cards this month.  There is nothing worse than opening your credit card statement and staring at the large number you now owe.  The presents have been opened, the holiday is over, but you still owe for the holidays.  If, instead, you put the credit cards away, you have nothing to dread come January.

-Set a budget and fund it with cash.

Determine exactly how much you have to spend and withdraw that money from your bank account.  Pay for every purchase with cash.  Feel the pain as you part from the cash.  Acknowledge what you are spending, and feel empowered that you are sticking to your budget.
If you want to shop online, get a debit card.  Just avoid using credit cards.

-Shop the bargains

There will be plenty of deals to come this holiday season.  Stay focused on the deals and only buy items you can get on sale.  Take advantage of buy one get one free sales such as buy one toy of a certain brand, get the second toy from the same brand free.

-Buy sets

For children, especially young children, buy toys that come in sets such as a baby doll with a stroller and a high chair.  Take those out of the package and break them into three different presents for the price you paid for the bundled gift.

-Look in unconventional locations

My children get presents from Santa and from me and my husband.  Since they were little, the toys that get from us are often gently used.  I shop garage sales throughout the summer and hide gifts away.  This year my three year old will get a new in the box baby doll that I picked up at a garage sale for $3.  My son will get a wooden box with five different games in it that I found at a garage sale for $5.

Obviously you may not have time to go to (or even find) garage sales now, but you can shop children’s resale stores for quality toys at a steep discount.

They say ‘tis better to give than to receive, and that is true more so when what you give is what you can afford.  Why not enjoy watching your family open their presents this Christmas without worrying where the money will come to pay for everything in January.  It is possible.  Beating Broke and I are both proof of that.

photo credit: aussiegall

With the recent increase in new fees at banks, and the backlash it has caused, people are starting to determine what the alternatives are.  At the moment, there are still banks and credit unions that are maintaining their current fee structure without adding anything new.  Many of those are also maintaining their “free” accounts.  But, if the Durbin Amendment remains, it may be only a matter of time before they buckle under the costs and start removing “free” accounts and adding fees.

What then?  It that happens, we might see a financial world where all debit cards have a monthly fee.  We might see more annual fees on credit cards, and higher interest on credit cards.  We might see more and more checking and savings accounts having a minimum deposit amount and/or a monthly fee.

As a card-carrying member of the NGPAF (Not Gonna Pay Any Fees) club, that might just make me decide that I don’t want to use any of their services anymore.  My depository institution might just have to become the coffee can in my backyard.  Seriously, though.  If all of those services become services with fees, we might see a pretty drastic increase in the usage of cash again.  Many of us don’t use cash all that much.  I know I don’t.

And what happens if we return to a cash economy?  The banks get even less transaction fees.  Their income drops because of it.  And we all see what happens when their bottom line is threatened.  More fees.  It could send the banking industry into a never ending spiral of more and more fees until the only people who still use banks are the ones who don’t feel comfortable keeping thousands of dollars in a coffee can in the backyard.

Luckily for me, I belong to a credit union that isn’t likely to add any additional fees anytime soon.  What about you?  Do you belong to a Credit Union or Bank that hasn’t added fees recently?  What if they did?  How long do you think it will be before we have to choose to either pay fees or carry cash?

photo credit: flattop341

As I was traveling to the Financial Blogger Conference a few weeks ago, all the news was talking about how Citi had announced that they would be charging more fees on debit cards.  In fact, there have been quite a few banks that have announced an increase in fees over the last few weeks and months.  There are very few that have free products like free checking or free savings anymore. All told, there’s a lot of anger aimed at the banks right now.  But, is it all their fault?  Or, are they getting a bad rap? Let’s examine where all of this fee increase stuff is coming from.

Durbin Amendment of the Dodd-Frank Wall Street Reform Bill

The Dodd-Frank bill did quite a bit, but the bit we want to look at is the Durbin amendment.  The Durbin amendment was an amendment added with the intention of creating some competition in debit card processing fees.  Specifically, it’s goal was to “To ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred, and to limit payment card networks from imposing anti-competitive restrictions on small businesses and other entities that accept payment cards.”

Which doesn’t really explain it all that much.  I’ll try, but no guarantees that you’ll be any less confused. (NerdWallet does a really great job of explaining it, actually.) When a credit card/debit card is used as a payment, it gets swiped through a reader.  The reader reads the data, and then sends the data along with the purchase data to a card processor.  The card processor then routes the data and purchase data to the institution that holds the account the card is attached to.  So, a Ally bank’s card and transaction would get routed to Ally bank.  The institution accepts or declines the transaction and sends that back to the card processor.  The card processor sends that on to the merchant.  For it’s (necessary) work as the middleman, the card processor charges an interchange fee.  Basically, a fee for all the routing it did.  The Durbin amendment put a cap on how much that fee could be.  The end result is that some of the larger card processors have to charge larger fees.  Fees that are paid by the banks.  The banks had two options.  They could charge the merchant a larger fee to make up for it, or they could start charging fees to the user (that’s you) and cease many of the “free” programs that were previously supported by the profit margin they were making on the cards.

If they had passed all of the larger fees on to the merchant, many merchants would have likely stopped taking their cards.  So, believing that the majority of users would lay down and take the extra fees and loss of “free” accounts, they passed the added fees on to the user.  Again, that means you.  What they didn’t count on was the size of the backlash they would get from the added fees.  An educated user base, that has direct access to so many public outlets like social media, is making far more out of the situation than they ever thought would happen.

Does it really mean anything?

Here’s the funny part.  (not really)  There will be a small percentage of users who will move their business to Credit Unions and online banks who are absorbing the added costs and keeping their “free” accounts without adding any additional fees.  But, the majority of users will pay the fee, complain about it, but, ultimately, do nothing.  The new fees will become normal after a year or so, and things will continue on like they were before.  Just with less “free” accounts and more fees.

You should be mad as hell!

But, not at the banks.  They are merely doing what makes the most business sense to them and trying to maintain their profit margin.  Credit Unions don’t work on a profit margin because they are not-for-profit businesses.  Online banks have a higher profit margin due to not having any physical buildings and fewer staff.  The people we should be mad at are our representatives in Washington.  There’s a bill about to be introduced in the House of Representatives that aims to repeal the Durbin Amendment.  If you feel strongly enough against the fees, you should send your state’s representatives (house and senate) a note (or make a call, email, whatever) and tell them you support the repealing of the Durbin Amendment.

Whatever you do, don’t just lay down and take the fees.  Call, email, or write your representative.  And, in the mean time, find a Bank or Credit Union that isn’t passing the added costs on to their users.  Open an account at one of them and move your business.  My personal favorites are ING Direct, Ally, and PerkStreet,  but a local Credit Union would be great too.

photo credit: kevin dooley

According to CNNMoney, Wells Fargo will begin testing a program to charge a $3 a month fee for debit cards.

Wells Fargo said Tuesday it will start charging a $3 monthly fee for debit card usage to customers in Georgia, New Mexico, Nevada and Oregon beginning Oct. 14.

“We regularly review our pricing and take into account the needs of our customers, industry trends, the market competition, and our cost of doing business,” a Wells Fargo spokeswoman said. Customers who don’t use their card during the month won’t be charged the fee and the fee will be waived for select accounts, she added.

I’m beginning to wonder if it isn’t lost on the companies that adding new fees like this is a step backwards on usage?  When there was only cash to pay with, the banks were only able to make money by usury.  You gave them your cash to safe-hold.  In exchange, the bank paid you a small interest rate on that money and then loaned it out at a higher rate to other consumers.  They kept the difference.  Simple, no?  With the advent of credit cards, they’ve found any number of new ways to nickel and dime us out of our money.  All in the name of “cost of doing business”.  (Side note: Part of the reason I like being a member of a credit union is  that they usually don’t go looking for profit at every turn.)

Eventually, as the regulation piles up, and it becomes harder and harder for the banks to make any money on credit and debit cards, they’ll find more and more ways to fee us for those services and others.  As the fees increase, more  and more of us will revert to using cash as a medium of exchange.  And the more of us who are using cash, the less of us are using those services which means they’ll have a smaller income on those services and will need to squeeze more fees out of the users.  Do you see where I’m going with this?  Good.

I just don’t see the Wells Fargo fee as good business, or any of these new fees, for that matter.  Some of the regulation should be pared off, but if the banks can’t figure out how to operate without passing the buck on to us, they’ll find themselves with far fewer users than they had before.

Although the commercial sector would like to have you believe romance is strictly related to the wallet, the contrary is actually true. Most people will tell you the most romantic gift they’ve ever received cost very little, if any, money. This is great news for the guy or gal on a budget, and could stand as a lesson even if you aren’t financially challenged. You don’t have to have a platinum credit card to make a favorable romantic impression, even if it is your first credit card and you feel like showing off.

Put The Credit Card Away and Reach Into Your Heart

Okay, that probably sounds really corny, but a gift or romantic gesture really doesn’t mean anything if it doesn’t come from the heart. Anyone can charge a gift to a credit card – but if it’s not a gift your lover can appreciate, what’s the point? A diamond encrusted vacuum cleaner is still a vacuum cleaner, if you see the point. Want to make an indelible romantic impression? Try some of these inexpensive ideas to start off a new romance or to inject some romance into an established relationship:

• Use candles everywhere. Use them when having dinner, taking a bath or eating dinner together. They’re inexpensive, good for the power bill and good for the environment. Plus, they emit a lovely glow which will put anyone in a romantic mood and ease a bad day.
• Pucker up and kiss! Remember the good old days when you’d mack out until your lips were chapped? Whatever happened to that? Instead of just pecking each other on the cheek like two old-maiden aunties, lay a liplock on one another.
• This might seem corny too, but you will absolutely melt his or her heart with a  love letter or post-it notes in unexpected places. In the car, on the bathroom mirror, in his sock drawer, in the fridge, on the TV, in the book she’s reading…use your creativity and the options are limitless.
• Keeping up the physical aspect of romance, holding hands or sharing a hug is sure to ignite romantic feelings. A hug out of the blue is one of the most romantic things ever, and holding hands inspires the same kind of response.
• There’s also nothing wrong with snuggling on the couch and watching television or a movie you can both enjoy. If you have children, put them to bed early or snuggle up with them, too. After all, they’re the fruit of your romance and it’s nice to include them on occasion in a family moment.

You don’t have to spend any money to be romantic, because romance is a state of mind, not the state of your wallet. The personal touches and reminders of why you’re together in the first place are the most romantic activities of all.

photo credit: jonrawlinson

The following is a Guest Post By Odysseas Papadimitriou, founder of Card Hub, a marketplace for the best credit card deals and operator of the nation’s biggest gift card exchange

Locks, alarm systems, man’s best friend, even security cameras and gates—you know the best ways to protect your home from burglars. But do you really know how to protect your bank account? Many people think they do, but considering the myths and poor information circulating around this topic and the constant evolution of digital theft, what you think you know might not really be practically effective. So how do you truly protect yourself from such fiscal thievery?

Many people believe the answer to be use of a debit card. Debit cards, they believe, have better fraud protection capabilities than do credit cards and are thus safer spending vehicles. But, since the safety of your money is far too important to rely on hearsay, what say we test the veracity of this belief ourselves?

To do so, let’s consider what would happen if someone managed to access your account, either by physically stealing your card or by intercepting your account information online.

Credit Card

If a thief got hold of your credit card information, he could rack up some serious charges on your account. However, all credit card issuers provide fraud protection guarantees that ensure you will not be held liable for unauthorized charges made with your card. This feature is usually called a $0 Liability Guarantee, and information about it can usually be found on your credit card agreement. For example, the following was prominently displayed under the heading “Did you know” on a Capital One credit card application:
“If your credit card is ever lost or stolen, you’re covered by $0 Fraud Liability protection against unauthorized charges. That’s peace of mind you can count on!”

Therefore, you aren’t ultimately on the hook for any fraudulent charges made by whoever accessed your card. The exact process you go through when dealing with credit card fraud differs on a case-by-case basis. In some cases, credit card companies notice fraud before you do, thanks to software that analyzes spending patterns, and block fraudulent transactions proactively. In others, you have to report charges that you did not make, and in all cases, you should report your card as lost or stolen as soon as you notice.

Whatever the case may be, you won’t be required to pay for disputed charges until your credit card company confirms your claim is legitimate. This prevents collateral damage as a result of credit card fraud. For example, since you’re not responsible for the disputed charges, you aren’t at risk of running out of money to pay for your other monthly obligations because of disputed charges.

Debit Card

Like with a credit card, you aren’t liable for any unauthorized charges made on your debit account. Just consider the liability statement found on the fine print of a Bank of America application:
“The $0 Liability Guarantee covers fraudulent purchases and payments made by others using your Bank of America credit and debit cards. To be covered, report purchases made by others promptly, and don’t share personal or account information with anyone.”
This just goes to show that credit cards and debit cards provide the exact same protections against identity theft and fraudulent transactions. So, whether someone physically gets their hands on your card or steals your information digitally, you aren’t out any money…in the long term.

As you probably know, when a purchase is made with a debit card, money is removed from the checking account tied to this card instantaneously. And while debit cards also have protections that block fraudulent transactions proactively, some unauthorized purchases might slip through the cracks. Thus, while you’re guaranteed to get your money back, the very nature of a debit card actually makes fraud particularly difficult to deal with in some cases.

For instance, if you don’t notice that money had been withdrawn from your account before you mail checks to whomever you owe monthly payments, you’ll have a mess on your hands. You’ll get your money back from your debit card provider, sure, but you will also have to go through the hassle of sorting out bounced checks and possible credit score damage incurred as a result of them.

Conclusion

Thus, while credit cards and debit cards technically provide equal fraud protection, credit cards actually make unauthorized transactions easier to deal with. The bottom line is that, no matter what type of electronic spending vehicle you use, there’s always a chance you could fall victim to fraud. Luckily, while you’re unlikely to be able to prevent a determined and capable cyber thief from accessing your accounts, you will not lose money because of it. Your bank might, but that’s what insurance is for, isn’t it?

photo credit: Håkan Dahlström

There’s been a lot of talk about the recent legislation that affects the interchange rate, and how that will affect the fees and rewards that we currently get from banks.  So, I thought it would be fun to take a look at how banks and credit unions make their money.  What exactly is it that gives them the revenue to pay the bills. It’s one word.  One that many of you who are investors will recognize.  Margin.

Specifically, rate margin.  A quick definition for those that aren’t up on their financial jargon.  Margin is the difference between two things.  The space (difference) between the print on the newspaper and the edge of the page?  Margin (or gutter depending on your profession).  So, when I talk about rate margin, I mean the difference in rates. Clear as mud?  Ok, some more detail then.

In order to lend money out to consumers, a financial institution must first have money.  They get that money by taking in deposits and by borrowing money from other institutions.  In most cases, they have to pay some sort of interest to either the depositor or the other institution.  They then take that capital, and lend it out to consumers at a higher rate.  The difference is their margin.  Let’s look at an easy example.  A bank has a simple savings account that is paying 0.25%.  They have 1,000,000 in deposits at that rate.  They then lend that money out to consumers at an average rate of 5.25%.  They have a margin of 5%.  They’ll pay $2500 in interest to the depositors and receive $52,500 in interest from the borrowers for a revenue of 50,000.

Obviously, that’s a small example.  Many banks and credit unions operate at a much higher level.  Wells Fargo, for instance, had $93,240,000,000 in gross revenue in 2010.  Not all of that is from lending interest, but a majority of it likely is.

In truth, the revenue from interchange rates is rather small as a percentage of overall revenue.  And changing it directly isn’t going to bankrupt any of the institutions.  However, there is some truth in the claims that it will likely mean the end of the rewards and cash back cards as well as some of the other perks like free checking.  Many of the institutions use that interchange revenue to pay for the rewards and cash back and to cover some of the costs of other perks.  Reducing the interchange amount means that the institution will have to drain money from other revenue streams to continue the programs, or shut those programs down.

This is where banks and credit unions will become differentiated over the next years.  Banks operate as for profit entities.  They have shareholders and owners who they must perform for and who expect them to make and increase profits each year.  They’ll be much more hesitant to drain from other sources to pay for those programs.  Credit Unions, on the other hand, are a not-for-profit entity.  They aren’t designed to make a profit.  While some may cut back on those programs, many will simply continue them.  Because they don’t have shareholders and owners that are demanding profit, they can cater to the owners of the Credit Unions, their members.

What it also may mean, is that we will have to be extra vigilant in watching our accounts for missing rewards, and for extra fees.  If pressure to keep the programs is significant enough, some of the institutions might reduce savings rates further, or increase loan rates to try and increase their margin and help pay for the continuing programs.

photo credit: MyTudut