Credit Basics
'G Pen' Leading Credit, Debit Card Charge
BY
Michael Liedtke
Associated Press
01.10.06, 03:53 PM ET
Even though they aren't directly adding to consumer debt,
debit cards are diminishing the nation's already paltry savings rate, said Howard
Dvorkin, president of Consolidated Credit Counseling Services. That's because consumers
paying with a plastic card tend to spend substantially more than someone paying
with cash or check, Dvorkin said.
So even if they aren't increasing their debt by buying with a credit card,
consumers who use debit cards might wind up with less money to save than they would
if they paid for things with cash.
"There's no pain involved when you pay with plastic," Dvorkin said. "But there is
some pain when you go out and you have to part with cash. You worked hard for that
green stuff and you aren't as apt to spend it."
That's not how Alicia diVittorio sees it. The 24-year-old living in San Francisco believes her preference for debit cards is helping her to save more money because
"if you are walking around with some cash in your wallet, you are going to spend
it."
Visa hasn't analyzed how debit card usage affects consumer saving rates, but one
of the nation's largest banks is trying to address the issue.
Bank of America now offers a service that automatically rounds up each debit card
transaction to the nearest dollar and then transfers the difference from the purchase price into a consumer's savings account.
Under the program, a Bank of America customer who used a debit card to buy a sandwich
for $4.24 would have 76 cents transferred into a savings account. As an incentive
to sign up for the program, Bank of America matches the amount contributed to savings
during the first three months.
That's just one of the many ways banks have been encouraging younger consumers to
pay with plastic. Visa touts a prepaid "Buxx" card with a strict spending limit
as a smart way to teach kids about personal finance, while American Express' efforts
to connect with younger consumers include an "In" card that provides special privileges
at nightclubs and bars in New York, Chicago and Los Angeles, and its tech-savvy
Blue card.
MasterCard, meanwhile, has been aggressively expanding its PayPass program, which
relies on radio frequencies to allow consumers to pay by tapping a credit or debit
card on a terminal. MasterCard is setting up PayPass terminals in fast-food restaurants,
convenience stores and vending machines.
The penchant for plastic has intensified the pressure on merchants to accept debit and credit cards, propelling a recent push to lower the fees paid to card companies.
Fees for processing those transactions average $1.74 for every $100,
according to The Nilson Report.
Merchants have filed dozens of class-action lawsuits against Visa and MasterCard,
alleging they have illegally conspired to fix the fees. Visa and MasterCard have
steadfastly denied the allegations.
Driven by the demands of younger consumers, more mobile payment options are likely
to be introduced in the next three to five years, said Elisabeth Buse, Visa's executive
vice president of product development and management.
The innovation and demographic trends won't necessarily push checks into obsolescence.
"People are going to continue to repay their credit card (balances)," Robertson
of The Nilson Report said. "That means checks will increasingly become a means of
repayment for everything people buy on their credit cards."
