A good portion of my practice consists of helping people in New Jersey through bankruptcy and defending against collection actions by creditors. Part of that representation is getting my clients onto a budget and into a mindset of responsible spending.
For most (especially those filing bankruptcy) this meant a little "plastic surgery." That's right, cutting up the credit cards.
But You Kinda Still Need Them
However, life today is filled with things that cannot be done without a credit card, especially if it happens online. In the past, I have recommended the use of a debit card. It functions like a credit card, but takes the money directly out of your bank account.
This is convenient, but takes discipline, and an eagle eye on your account balance (which can often be checked in real time on smartphones these days). Now, this option is going to get even tougher.
Debit Cards Becoming More Unattractive
Many of you may have read in the news that Bank of America is instituting a $5 monthly fee for debit card use, starting January 1, 2012. Other big banks are expected to do the same, citing that they needs the fees to recoup revenue they will lose because of new government regulations taking effect that cap what they can charge merchants for debit-card transactions.
Alternatives for Those Not in Bankruptcy
For those not in bankruptcy, or contemplating it, credit cards can often be the better option. People who pay off their balances in full (which happens anyway with debit cards) not only avoid expensive interest charges and fees, but also earn rewards of 1% or better. Credit cards can often offer better protections than debit cards in the case of fraud or theft.
Options for Those in Bankruptcy
But what about those in bankruptcy or those whose cards have been closed out due to delinquency in payment? Well, there are some options:
- The secured credit card, which offers charging privileges as long as your balance does not exceed your security deposit (or a multiple thereof). Often they will convert to conventional credit cards after 12 - 18 months.
- The prepaid card, but those often involve fees and may not report your payment history to the credit reporting agencies, thus not helping you inprove your credit (FICO) score.
- A debit card at a smaller bank or credit union.
There is no question that in the months to come people will have to take a hard look at the cards in their wallets and decide which ones to keep, and which ones to toss. Unfortunately, even for those in good financial shape, it isn't getting any better.