Financial Literacy

"Paying with plastic" has become so common today that finding a merchant who doesn't accept credit cards can be a rarity. In fact, some stores have stopped accepting cash altogether, becoming what are known as "cashless businesses."

Because paying without cash is so common, many people don't think twice about how they pay. However, the costs, rights, and responsibilities can vary significantly depending on whether you're using a true credit card, a prepaid card, or a debit card. Some cards include rights mandated by law, while others offer benefits that can vary from company to company.

Like it or not, it's hard to avoid cash alternatives altogether – just try renting a car or buying an airline ticket with cash. Non-cash payment is so prevalent that it's more important than ever to make informed choices about which option is right for you.

This week, we're examining the differences between common non-cash payment methods, including smartphone payment technology like Apple Pay and Samsung Pay. Each method offers benefits and potential risks, and some of the best options require more than simply choosing one over another - they require a solid credit score. So, we'll also explore non-cash payment options for those with no credit or bad credit.

Security is a crucial consideration when it comes to non-cash payment methods. We'll explore the various security measures and protections offered by different payment options, helping you understand how best to protect your financial information in an increasingly digital world.

Since the actual cost of one payment method over another may not be clear, we'll also explore the fees associated with each method. For credit cards, we'll explore how to make informed choices when comparing cards and companies, including the Schumer Box – a standardized way card companies are required to describe their credit card products. For non-credit payment options, we'll explore potential fees and other risks.

It's important to note that regardless of the payment method you choose, it's crucial to read and understand the terms and conditions associated with it. While often lengthy, these documents contain vital information about your rights, responsibilities, and potential costs.

No matter your financial situation, choosing the right payment product can play an essential role in helping you reach your financial goals – from improving access to credit to minimizing interest charges to maximizing card rewards. Let's get started!

While all credit cards offer the ability to pay for purchases without using cash, there are significant differences between cards. The best cards are reserved for those with the best credit scores, but even those "elite" cards won't be the best option for many consumers. Here's an overview of the major card types and their typical benefits.

Standard Credit Cards

These cards offer the basics – the ability to charge purchases and pay them back over time. They tend to have few other perks, carry a middle-of-the-road interest rate, have no annual fee, and are available to those with average and higher credit scores. These cards can be a good choice for those planning to use a card rarely or for emergencies.

Reward Cards

These cards offer cash back, points, or airline miles as purchase rewards. The standard reward is often around 1% of the amount charged, though some cards now offer 2% as standard. Some cards offer even more, but on a limited range of categories (for example, restaurants, grocery stores, or gas stations).

Reward cards typically offer the best deals for those with good to excellent credit. Otherwise, interest rates may be higher than competing cards, and annual fees may apply.

These cards can incentivize spending more to earn more rewards, which could be a problem if not part of your financial plan. And remember that the interest charge on a single month's balance (or a single late payment fee) could easily cost more than the rewards you'd earn all year. Some rewards may also have restrictions, particularly those tied to travel benefits, so be informed before applying.

Co-Branded Credit Cards

These cards are partnerships between credit card issuers and specific brands or retailers. They often offer enhanced rewards or benefits when used with the co-branded company. For example, an airline co-branded card might offer free checked bags or priority boarding. In contrast, a retailer co-branded card might offer extra discounts or early access to sales.

Elite Cards

These cards may be called Gold, Platinum, or something completely different, but they all have one thing in common – they're reserved for those with the best credit.

Elite cards may include a rewards program, private services for frequent travelers, and credit limits of $10,000 or more. Many have no annual fee, but others do and are designed for high-spenders or business travelers. Some are even issued on an invitation-only basis.

Many "elite" cards are essentially reward cards with higher credit limits. Still, others make sense only for certain people – an annual fee of hundreds of dollars makes little sense for those who wouldn't use specific travel benefits and charge tens of thousands per year, for example. But for those with excellent credit, elite cards allow you to maximize the benefits you want based on your spending.

Balance Transfer Cards

Many cards offer a low interest rate on balances transferred from other cards, but others are specifically designed for those with large balances that will take months (or years) to repay. Interest rates on balance transfers may be 0% for a year or more, and the interest rates may be lower than those of other cards.

These cards offer the best deals to those with excellent credit. If your credit is anything less, they may charge an annual fee, a balance transfer fee, or reduce the time any introductory rates on transfers are offered. And remember, the low introductory interest rates may be canceled if you miss a payment or two.

Like any credit, these cards have benefits and risks. If you have a plan for reducing debt (and you can stick to it), then there's no reason to pay higher interest rates when you could pay less. On the other hand, you'll have access to more credit – making it easier to add even more debt. If you're concerned about your debt level, it's best to seek the advice of a non-profit credit counselor or other financial professional.

Retail Store Cards

Some large merchants offer their own credit cards, often marketing them at checkout with a question like "Would you like to save $50 on today's purchase?" Many store credit cards also offer other benefits, like rebates on purchases from that merchant.

So, how do these cards compare? Typically, interest rates are higher, and the rewards program is more limited than that of other cards available to people with similar credit scores.

It's one thing to make an impulse purchase now and then, but there may be better uses of your credit than signing up for a new credit card to save a few bucks on a single purchase.

Student Credit Cards

These cards are designed specifically for college students who are just starting to build their credit history. They often have lower credit limits and may offer rewards tailored to student spending habits, such as extra cashback on textbooks or restaurant purchases. Some also offer incentives for good grades. While these can be a good way for students to start building credit, using them responsibly is crucial to avoid unplanned debt.

Secured Credit Cards

A secured credit card can be an excellent option if you have poor credit or no credit history. These cards require a cash deposit that typically becomes your credit limit. This deposit acts as collateral, reducing the risk for the card issuer and making it easier for people with poor or no credit to qualify.

Secured cards are actual credit cards; your payment history is reported to the credit bureaus. So, if you plan to build or rebuild your credit, a secured card can play an important role. As you demonstrate responsible use over time, you may qualify to transition to an unsecured card and get your deposit back.

Credit Utilization and Its Impact

Regardless of the type of credit card you choose, it's important to understand the concept of credit utilization. This refers to the percentage of available credit you use at any given time. For example, if you have a credit limit of $1,000 and a balance of $300, your credit utilization is 30%.

Credit utilization is a significant factor in your credit score. Generally, it's recommended to keep your utilization below 30% across all your credit cards. High utilization can negatively impact your credit score, even if you make all your payments on time.

Remember, the best credit card for you depends on your financial situation, spending habits, and credit history. Always read the terms and conditions carefully before applying for any credit card, and consider how it fits into your overall financial plan.

Prepaid cards, or stored value cards, are a popular way to pay (and even get paid) without using cash. If you've ever used a gift card, you've used a prepaid card.

There are three main types of prepaid cards:

• Payroll cards and government disbursement cards. Employers and government agencies use these cards to pay wages and other benefits instead of issuing checks. They are often considered a safer, more efficient way to distribute benefits since the money is available right away without needing to cash a check.

• General-purpose reloadable cards. Available for purchase from many retailers and online, these cards can be used like a typical MasterCard or Visa. They come with a set dollar amount assigned to the card and allow you to add money to the card later. These cards offer more flexibility and can be a useful budgeting tool.

• Gift cards. These cards are purchased in fixed amounts and can only be redeemed for purchases from the particular business that issued them.

Benefits of Prepaid Cards

A significant benefit of prepaid cards is that they allow you to make purchases without cash. And since there's no credit involved, it's impossible to go into debt or incur over-the-limit fees. If you try to spend more than the balance, the purchase is simply declined.

For those without bank or credit union accounts, getting paid with these cards avoids expensive check cashing charges. Some people also use prepaid cards as a budgeting tool, loading a set monthly amount for discretionary spending.

Further, many prepaid cards can now be linked to mobile payment apps like Apple Pay, Google Pay, or Samsung Pay. This integration allows even more convenient use of prepaid funds, enabling contactless payments and easy balance checks through smartphone apps.

Potential Disadvantages of Prepaid Cards

Despite the benefits and increased protections, prepaid cards still have some disadvantages compared with credit and debit cards:

• Fees - Unless you're receiving money with a prepaid card, the fees you'll pay can add up quickly. There could be card purchase fees, fees for adding money, checking your balance, or withdrawing cash at an ATM, and even a monthly fee whether or not the card is used. Over a month, the fees on a $100 balance could take a significant percentage of the card balance.

• Limited Consumer Protections - While the CFPB rules have improved consumer protections, prepaid cards may still not offer the same level of consumer protection as credit and debit cards, which are required by law. For example, if you have a dispute with a merchant about an item that wasn't received or wasn't as advertised, you may have limited recourse.

• No Credit Building - Prepaid cards don't allow you to build (or rebuild) your credit history since no credit is involved. If you've had credit problems, a secured credit card may help you reach your long-term financial goals faster and be a better option for day-to-day spending.

• Potential for Loss - Some prepaid cards can be like cash in more ways than one. For example, if you lose your card, you may not be able to cancel it and be refunded the balance (capabilities vary from card to card). However, any credit or debit card can be canceled with a phone call.

Using Prepaid Cards for Budgeting

Despite these potential disadvantages, prepaid cards can be an effective budgeting tool for some people. By loading a set amount onto a prepaid card each month for discretionary spending, you can easily track and limit your spending in specific categories. This can be particularly useful for those trying to stick to a strict budget or curb overspending in certain areas.

Consumer Financial Protection Bureau (CFPB) Prepaid Card Rules

In 2019, the CFPB implemented new rules to provide additional protections for consumers using prepaid cards. These rules include:

• Free and easy access to account information.
• Error resolution rights.
• Fraud and lost-card protection.
• Upfront fee disclosures.
• Limits on overdraft fees and features.

These protections have made prepaid cards a safer and more transparent payment option for consumers.

Choosing the Right Prepaid Card

If a prepaid card is the best option for you, understand your rights under the card agreement and the CFPB rules. It's also best to use a prepaid card that:

• Requires a PIN to make purchases.
• Allows you to sign up for an online account to check your balance.
• Offers mobile app integration for easy management and mobile payments.
• Has clear fee disclosures and minimal fees.
• Provides FDIC insurance on your funds.

These features will provide increased security and convenience - and will likely allow you to cancel the card if it's lost or stolen.

Overall, prepaid cards make sense for specific situations, but a debit or ATM card is safer and less expensive for everyday spending. Always consider your financial situation and needs when choosing any financial product.

Most credit cards work in the same way – you borrow money and repay it according to the terms of the card agreement. Beyond that, significant differences in card terms, costs, and benefits may be important depending on your unique financial needs. There's no such thing as the "best" credit card, but you can find the best card for you.

When looking for the best card for you, it's essential to understand the difference between soft and hard credit inquiries. A soft inquiry happens when lenders screen you for preapproved offers and doesn't affect your credit score. When you apply for credit, that's a hard inquiry and affects your credit, typically to a small degree.

However, applying for many credit cards in a short period can significantly impact your credit score. Each hard inquiry can potentially lower your score by a few points, and multiple inquiries in a short time frame may signal to lenders that you're a higher-risk borrower. Therefore, it's best to narrow your choices to a card or two before applying.

Pre-Qualification for Credit Cards

Many credit card issuers offer pre-qualification tools on their websites. Pre-qualification uses a soft inquiry to show you whether you're likely to be approved for a card and what terms you might receive without affecting your credit score. While pre-qualification doesn't guarantee approval, it can help you focus your search on cards you're more likely to get.

Factors to Consider When Choosing a Card

Since fees, interest rates, penalties, and perks can vary widely between cards, here are some factors to consider when looking for the best deal:

Your Credit Score

Knowing your credit score will ensure you apply for the best card possible. As your score increases, costs decrease, and you get more card options like points that can be redeemed for cash or credit towards other services. And for those with poor credit, secured cards can help you rebuild credit, even though no borrowing is involved.

If you don't know your credit score, you have a few options – a free credit score service and a paid service. Websites that offer free scores, like Credit Karma and Credit Sesame, use your personal information to market products to you and don't require a credit card. Other sites, like the credit reporting bureaus, offer "free" scores as part of a credit monitoring service for a monthly fee (after a free trial month). If you don't cancel, you'll get charged. On the other hand, you can pay for your score from myFICO.com for $20 with no recurring charges.

Once you know your score, here's what it means:

• 750-850 Excellent
• 690-749 Good
• 630-689 Fair
• 300-629 Poor

When you search for a card, most offer some description of the expected credit score range. If your credit rating is under the required range, save a hard credit inquiry for other cards with a higher chance of approval.

Your Spending Behavior and Reward Options

Suppose you already have a high credit card balance and tend to carry a balance from month to month. In that case, you'll likely focus on cards with lower interest rates and balance transfer deals.

If you consistently pay your balance in full, you'll want to focus on the perks that matter most to you, from cash back to travel points.

When exploring card options, the cards with the lowest fees and most generous benefits are restricted to those with good to excellent credit. Still, there can be significant differences between cards – no matter your credit score. Some cards may offer extended purchase warranties, trip cancellation coverage, lowest price protection, and more. Not taking advantage of your eligible benefits is like leaving money on the table.

Annual Fees

Another consideration, especially when exploring cards that offer generous benefits, is whether or not the card charges an annual fee. It's crucial to understand whether the benefits provided by the card justify the cost - sometimes several hundred dollars per year. For example, someone who travels often may find airport lounge access worth the fee. But if a fee-based card offers more cash-back than a no-fee card, whether or not it's worth it depends on your annual spending.

Understanding Card Terms and Conditions

Federal law requires that you receive a Federal Truth in Lending Disclosure Statement from any credit card company before you open a credit card account. The statement must include specific account fees, why penalty rates may be applied, and terms applicable when the account is opened. It also tells you all the rules and fees associated with your credit card account.

The Schumer Box

Named after the senator from New York, the Schumer Box is a table that discloses key facts about a credit card, including interest rates, fees, terms, and conditions. It includes:

• The interest rates for purchases, balance transfers, and cash advances
• Any grace period before interest is charged
• How to avoid paying interest
• Minimum charges
• Annual fee
• Transaction fees
• Penalty fees

This box will help you compare cards when shopping for one. It is critical to understand how interest is charged and when penalty fees and interest rate increases are triggered. For cards with similar costs, compare the benefits described in their marketing materials.

While the Schumer Box provides a standardized summary of key terms, it is crucial to read the full terms and conditions of any card you're considering. This document will provide more detailed information about how the card works, your rights and responsibilities as a cardholder, and any additional features or restrictions that may not be covered in the Schumer Box.

Finding and Comparing Credit Cards

There are dozens or even hundreds of credit card comparison websites on the internet, and virtually all of them have one thing in common – they're paid when you sign up for a card they promoted. A credit card may not be listed if it doesn't pay a referral fee. So comparison sites could best be described as "comparing cards for which we're paid a referral fee."

Card comparison sites may offer many options, but what if the best card for you isn't on those websites?

One strategy is to use comparison sites to understand the options available for people with similar credit scores. Then, do something the comparison sites wouldn't expect: contact your bank or credit union. Financial institutions continually compete with one another, so a competitive card offer could be closer than you expect.

Additionally, consider using independent financial websites or tools that don't receive compensation for card recommendations. These can provide more unbiased comparisons and information about different card options.

Remember, the best credit card for you aligns with your spending habits, financial goals, and credit profile. Take the time to research and compare different options, and don't be afraid to ask questions before applying. Your financial health is worth the effort!

If you've ever paid a merchant by holding your smartphone or smartwatch close to the payment terminal, you're not alone – one out of every four adults has used mobile payment systems like Apple Pay, Google Pay, or Samsung Pay. But are these new payment options really a better way to pay?

How it Works

Using your smartphone, you add credit, debit, or prepaid card information to a digital wallet. Your credit or debit card issuer may ask for additional identity verification, like entering a code sent to you via an authorized phone number or email address. After that, your device is authorized to pay using that card. Most banks and credit unions support at least one digital payment option.

When it's time to pay for a purchase, your device uses near-field communication (NFC) that passes payment information between your device and the merchant. Unlike swiping a credit, debit, or prepaid card, NFC payments never reveal your card information to the merchant, and that information is not stored on your device. Instead, your device passes a one-time, single-use "token" that authorizes payment from your account for that specific transaction. In addition, payment also requires authorization that only you can provide – typically a fingerprint or facial recognition. Depending on the merchant, you may be asked to sign or enter a PIN for debit card purchases.

Popular Mobile Payment Systems

While Apple Pay is the most prominent NFC payment option in the United States, there are several other popular mobile payment systems:

• Google Pay - Available on Android devices, it works similarly to Apple Pay and is widely accepted.
• Samsung Pay - Available on Samsung devices only.
• PayPal - While primarily known for online transaction processing, PayPal also offers in-store mobile payments at some retailers.

Each system has unique features, but they all provide the core functionality of secure, contactless payments.

There are typically no fees for using popular payment programs. However, regular fees from your financial institution may apply (for example, if you surpass a limited number of debit card transactions in a specific timeframe).

Security Advantages and Device-Specific Risks

Smartphone payments offer significant security advantages over traditional credit and debit cards. However, they can also introduce potential risks if your device is compromised.

Security Advantages

When you pay with a mobile device, the transaction offers security enhancements over a typical card transaction. First, your card number isn't transmitted when you make a payment. Instead, a unique, one-time code (token) is used. Even if this token is intercepted, it can't be used for further transactions.

Most smartphones require fingerprint or facial recognition to authorize payments, adding a layer of security that traditional cards don't have. Further, payment information is tied to your specific device and can't be used without it.

Device-Specific Risks

While these features make smartphone payments more secure in many ways, if your phone's security is compromised, meaning a thief can unlock it, they could make payments since they could reset security measures such as Face ID. Knowing how to use your device's remote lock or wiping features quickly is crucial. If you have an Apple device, be sure to enable Stolen Device Protection to minimize the risk of your Apple ID password being changed by a thief.

While smartphone payments introduce the risk of concentrating multiple payment methods on one device, the overall security enhancements often outweigh this risk for most users. The key is to treat your smartphone as securely as you would your physical wallet, if not more so.

Rewards and Loyalty Programs?

A digital payment method like Apple Pay or Google Pay should not affect how your rewards card accumulates points, even when purchase rewards depend on merchant categories (like restaurants or gas stations).

In fact, more merchants are linking store loyalty and credit cards to digital payments, making it easier to earn even more rewards. In the same way that some credit cards give you the option of applying loyalty rewards when making a purchase, some mobile payment systems also offer these capabilities.

The Takeaway

Smartphone payments offer a combination of security, convenience, and speed, making them an attractive option for many consumers. However, they're not without limitations and potential risks.

As with any financial tool, it's important to understand how these systems work and use them responsibly. While they may not completely replace traditional payment methods in the near term, mobile payments will likely play an increasingly prevalent role in everyday transactions.

In today's digital age, consumers have a variety of payment options at their fingertips: credit cards, debit cards, and increasingly, smartphone payments. While these methods may seem interchangeable at the point of sale, each comes with its own set of protections and potential risks. Understanding these differences is crucial in choosing the best payment method for different situations and protecting your financial well-being.

Credit Cards: The Gold Standard of Consumer Protection

Credit cards offer the most robust consumer protections, thanks to the Fair Credit Billing Act (FCBA). When you use a credit card, you're spending borrowed money, which paradoxically gives you more leverage if something goes wrong with your purchase.

Under the FCBA, your liability for unauthorized charges is limited to a maximum of $50. Many credit card issuers offer zero liability policies, meaning you won't be on the hook for fraudulent charges. This protection applies whether you're shopping in-store, online, or abroad.

Moreover, credit cards give you the right to dispute charges for goods or services that weren't delivered as agreed or weren't accepted. This capability is particularly valuable for online purchases or when dealing with unfamiliar merchants. If you've made a good faith effort to resolve a dispute with a merchant and are unsuccessful, you can request a chargeback through your credit card issuer.

For purchases over $50, credit cards offer an additional layer of protection for defective goods. If you buy an item that turns out to be faulty, you can withhold payment under certain circumstances while the issue is being resolved.

Many credit cards offer perks beyond these legally mandated protections, such as extended warranties, purchase protection against damage or theft, and travel insurance. These benefits can provide significant value and peace of mind, especially for large purchases or when traveling.

Debit Cards: Direct Access to Your Funds

Debit cards, while convenient, offer fewer protections compared to credit cards. When you use a debit card, you spend your money directly from your checking account. This immediate impact on your available funds is the key difference that affects the level of protection.

Debit cards are protected under the Electronic Fund Transfer Act (EFTA), which provides some safeguards but with more caveats than credit card protections. Your liability for unauthorized charges depends on how quickly you report the loss or theft of your card.

You have zero liability if you report before any unauthorized charges are made. Reporting within two business days caps your liability at $50. However, if you wait over two business days but less than 60 calendar days after your statement is sent, your maximum liability jumps to $500. Beyond 60 days, you could be liable for all unauthorized charges.

Financial institutions must investigate errors reported by consumers and resolve them within a specific timeframe. In many cases, they must provisionally credit your account for the disputed amount while they investigate. However, because the funds come directly from your account, you might find yourself needing more cash while waiting for a dispute to be resolved.

Smartphone Payments: Convenience Meets Security

Smartphone payments, such as Apple Pay, Google Pay, and Samsung Pay, have added a new dimension to the payment landscape. These digital wallets inherit the protections of the underlying payment method linked to them, whether a credit card, debit card, or prepaid card.

When you use a credit card through a smartphone payment system, you generally receive the same robust protections as if you had used the physical credit card. This includes limited liability for unauthorized charges and the ability to dispute transactions.

Using a debit card via a smartphone payment system provides the protections outlined in the EFTA, just as if you had used the physical debit card. However, the same considerations apply: funds are drawn directly from your account, and your liability depends on how quickly you report any issues.

Smartphone payments offer an additional layer of security through tokenization, where your actual card number isn't transmitted during the transaction. Instead, a one-time code is used, making it more difficult for fraudsters to intercept and misuse your payment information.

Most smartphone payment systems also require device-specific authentication, such as a fingerprint or facial recognition, adding another barrier against unauthorized use. However, it's crucial to enable all security features on your smartphone and report a lost or stolen phone immediately to your mobile carrier and payment provider.

Choosing the Right Payment Method

Given these varying levels of protection, how should you decide which payment method to use? Here are some guidelines:

• A credit card (either physical or via smartphone) is often the best choice for large purchases or situations where you might need to dispute a charge. Its strong protections and potential additional benefits make it ideal for big-ticket items, online shopping, or travel expenses.

• For everyday, smaller transactions where budgeting is a priority, a debit card or debit card-linked smartphone payment might be preferable. This method helps control spending by limiting you to the funds actually in your account. However, be aware of the more limited protections and the direct impact on your available cash.

• Smartphone payments offer a good balance of convenience and security for many transactions. When linked to a credit card, they provide strong protections with the added security of tokenization and biometric authentication. But be sure to keep your device secure and know what to do if it's lost or stolen.

The Takeaway

Regardless of the payment method you choose, some best practices apply across the board. Monitor your accounts regularly, set up transaction alerts if available, and report any suspicious activity immediately. Keep your PINs and passwords secure, and for smartphone payments, ensure you've enabled all available security features on your device.

By understanding each payment option's protections and following these best practices, you can make informed decisions that balance convenience, security, and financial management. Remember, the best payment option often depends on your individual financial habits, your specific purchase, and your comfort level with technology.