The latest uproar from the world of big banks is the announcement that Bank of America is rolling out a monthly fee for using debit cards in 2012. Of course, Bank of America claims the right to make as big a profit as it can -- and it is a business with that right. (Naturally, customers who don't want to pay the fees can shop around for another bank. That's their right.) Banks have been piling on the fees over the last couple of years, looking to consumers to provide sources of revenue. Citing regulations on overdrafts, and caps on debit transaction fees, banks are charging fees for everything from checking accounts to statements, and raising ATM fees. Some banks have even made noises about limiting debit transactions. By making checking and debit more expensive, it seems as though big banks might be shooting themselves in the foot. After all, won't they just lose customers in droves? Maybe, maybe not.
Encouraging Credit Card Use
Instead, some of the big banks might find themselves making more money. Sure, many customers may shift away from using their debit cards. But what will they use instead? In a society that has come to rely heavily on the convenience of plastic for fast and easy purchases, it seems the answer is clear: Credit cards.
Instead of swiping your debit card, you might be more likely to pull out the credit card -- it it will save you a direct fee. And using your credit card would be more helpful to issuing banks anyway. Transaction fees on credit cards are a percentage of each purchase. Rather than being capped at a flat fee for the transaction, like debit cards are, the larger the purchase you make, the more the credit card issuer makes. This is probably one of the reasons that Chase has been considering a debit card purchase cap of $50 or $100. If there is a 24 cent cap on debit transactions, it doesn't matter how much you spend. The fee for merchants will always be 24 cents. However, if you spend $100 and the fee is 3%, that's a $3 transaction fee. Spend $500, and the fee is $15.
You can see why major and regional banks that issue credit cards might be interested in encouraging use. As for Bank of America's fee for debit card use, the institution stands to make much, much more if customers just decide to start swiping BofA credit cards instead of using their debit cards. This can apply to other banks as well; if you move away from the use of your checking account, and rely more on credit cards, they can make much more money in the long run.
Indirect Costs of Credit Card Use
It's important to realize, though, that credit card use comes with its own costs. Some issuers are adding annual fees to their cards, but there are other ways that credit cards might be costing you. These indirect costs mostly have to do with how credit card use raises costs for everyone. Chances are that merchants are raising prices to make up for the transaction fees they are charged when customers use credit cards. Many agreements with credit card companies specify that merchants who accept their cards can't charge lower prices for cash customers, so that means that prices are higher for everyone.
Others might point to the general cost of credit cards to society in general. While credit cards have provided a fast and convenient way to pay (not to mention adding a level of security; once cash is stolen, it's gone), they have also created a situation that encourages debt and instant gratification. Plus, the fact that almost anyone can "afford" almost anything using credit cards means that it's easier to raise prices on goods and services, adding to the price inflation we see. These indirect costs are not things we think about very often because they are harder to see. It's much harder to pick out the higher costs merchants charge because of credit card fees than it is to see a debit card fee that you, directly, pay each month.
Rewards Credit Cards
Of course, for some users, there are rewards for credit card use. Rewards programs can be lucrative for some. Cash back, travel perks and free merchandise are all rewards that credit card users can take advantage of. Many credit card users buy everything with cards, and pay off the balance each month, receiving the rewards and enjoying the benefits. (Those who carry a balance, though, will see rewards values eroded by the interest fees they pay.) However, there is a debate over whether not these rewards are truly worth it in the long run, considering the costs that everyone pays as a result of a society steeped in the use of plastic.
Is a Cash Only Lifestyle Feasible?
This debate over debit card fees, and the personal and societal costs of credit cards have some considering cash again. Many believe that "cash is king," and that a cash-only lifestyle is the way to go. However, there are some downsides to carrying cash around. It can be bulky. It doesn't come with any security measures. And, have you actually tried to pay cash for a car? Many dealerships make it easier for you to get a loan to buy a care than to pay for the whole thing in cash. However, even with these challenges, some feel that a cash-only lifestyle is worth it. And, if you use cash, you don't have to worry about those pesky debit card fees, and worry about falling into the debt trap. Because an aversion to debt and credit cards, brought on by the recent recession, and the possibility of debit card use fees, it seems as though cash really could make a comeback.
What do you think? Are big banks trying to steer us toward greater credit card use? Do you think a cash only lifestyle is feasible? And what would you do if your bank added more fees?
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