Don’t Dump Your Credit Cards. The Alternatives Are Worse

Credit Cards Unpopular

Credit card companies have, over the last few months, almost gone out of their way to make consumers hate them. They’ve increased rates, slashed credit limits, introduced fees, unilaterally amended credit card terms, and switched deals from fixed-rate to variable-rate. There’s been no end to the pain they seem to have been willing to inflict on cardholders.

Small wonder, then, that consumers are reducing their credit card debt by paying down balances. And they’re avoiding those increased credit card rates by turning to alternative payment methods.

Are Debit Cards Better?

But should you follow suit? Debit cards, for example, seem to have just as many highly expensive traps for the unwary as credit cards are.

The Center for Responsible Lending (CRL) has been campaigning against high overdraft fees for some years. And it points out that 46 percent of all overdrafts are triggered by debit card rather than credit card use.

Keep on Debiting

In the old days, your bank would decline a transaction if you had insufficient funds to cover it. Now, without giving you any warning, it allows the purchase, and charges you a substantial fee. The CRL found one student who’d made seven small purchases on his debit card when he hadn’t realized he was overdrawn. The total value of all seven transactions was $16.55. The total value of the charges levied by his bank for those purchases was $245.

And, as a recent New York Times editorial pointed out: “Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the FDIC, overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.”

Even a payday loan would be cheaper. But, for a more reasonable comparison, earlier this month, indexcreditcards.com reported on credit card fees. It found that the average credit card late fee is $34.35, while the average over-the-limit fee is $36.74.

Credit Card or Prepaid Card?

You’d think that prepaid credit cards (they’re really prepaid debit cards) would be a cheap option. But that’s not necessarily so.

You can pay up to $99 just to activate the card. And after that there can be fees for just about everything: monthly fees, transaction fees, ATM fees, and balance enquiry fees. One man was so shocked by how much his prepaid card was costing him that he went back to the store to complain. There he was presented with a list of more than 24 different types of fees and charges for which he had unknowingly signed up.

It’s Who You Are, Not How You Spend

The CRL did research back in 2005, well before the credit crunch. It found that more than 70 percent of the $10.3 billion charged in overdraft loan fees that year had been paid by “…chronic borrowers, living on the margins of solvency.”

If you’re a member of that group, then you almost certainly ended up paying a great deal no matter which payment method you choose. But, if you’re not–if you are good at managing money and disciplining yourself financially–then the opposite is true.

So why not just stick with the credit card you know?