The Credit-Debit-Prepaid Card Message is Getting Messier – Part I

I was in a meeting last week with colleagues from the financial services arena. Each of them told a story about a family member or friend who recently ran into the nasty overdraft fee business from their financial institutions that are beginning to get some media attention.

During one of the stories, the individual mentioned that the person opened a separate debit card for cash purchases during the week such as gas, coffee, etc. I stopped her and asked whether in fact the person opened a checking account with a debit card attached or was he actually transferring money to a pre-paid account. The answer: it was a checking account and he transfers money each week for these “cash” transactions. He is actually budgeting his money by managing his spending.

The story went on to describe that at one particular convenience store, the store placed a $75 hold on the debit transaction of $3.50 (coffee and a bagel). This hold essentially placed the checking account in an overdraft situation and every small purchase after that racked up a $35 overdraft fee – a total of over $150 in fees!

Should he have used a pre-paid, re-loadable card instead? Maybe, but many of those have a slew of fees as well and they don’t carry the fraud protection of debit & credit cards.

Some of the large banks are now offering the customer the option to opt out of the automatic overdraft feature in order to avoid the fees that are getting so much attention. So in this case, that would mean that after the $75 hold was placed, every subsequent transaction would be rejected at the merchant. Like that one better?

The point is, we have to know more about the rules of plastic more than ever – and we have to help our kids understand the differences. The trouble is – we can’t even use the same semantics! Remember that in telling the story, my colleague said the person opened a “debit card.” I just recently received a $30 rebate from Staples from an item I ordered during the summer. The rebate came in the form of a pre-paid card with the words, “Debit” right on the front of it. And we expect kids to keep it straight?

Here’s a great article from Liz Pulliam on pre-paid cards and their fees.

The Lost Decade

I’ve been hearing a lot lately that his decade will come to be known as the “Lost Decade”. It’s a label being attributed to how we’ve managed our finances during the past 10 years. Here are some stats:

1. The S&P began 2000 at 1,469 and is now 27 percent lower at 1,068. This decade trails only the 1930s as the worst in the modern investing era
2. In 2000, consumer credit outstanding in the U.S. (excluding mortgage loans) was in the vicinity of $1.5 trillion dollars. Now it’s in the neighborhood of $2.6 trillion
3. The Personal Savings Rate at the beginning of the decade was in the 2.5% range and we know that for most of this decade, this measurement was either at zero or was a negative number (except for the past few months when the mattress seemed like a better option).

I guess it’s a little hard to argue that this boom decade we experienced has really put us in a hole. Now with unemployment reaching early the 80’s level of double-digits, tha national debt at numbers our forefathers could never have comprehended, and an economy whose success and health is primarily located on the backs of consumers, maybe we are lost.

Who would have thought that Y2K would take 10 years to boot up?

Here’s a great article from Dave Carpenter, an AP personal finance writer http://www.miamiherald.com/business/breaking-news/v-fullstory/story/1242836.html

Top Ten Financial Myths Held by 14-21 Year-Olds

Last week, the Consumer Federation of America (CFA) released a new survey revealing how parents view their responsibility, competence, and chances for success of financially educating their children. Little more than half (53%) of a representative sample of American parents (with children under 18 at home) surveyed, indicated that they were “very confident” their children will leave home knowing how to manage money.

As stated in their press release, “… only 73% said they were “very capable” of providing this instruction. And little more than half (53%) said they were “very confident” their children will leave home knowing how to manage money, credit, and debt.”

They also released the Top Ten Financial Myths Held by 14-21 Year-Olds

1. I don’t have to worry about credit at my age.
2. Bad credit can’t keep me from getting a job.
3. All loan companies have the same rates.
4. All credit cards are alike.
5. The job of financial advertising is to tell the truth.
6. It’s OK to bounce a few checks.
7. It’s OK to make minimum payments on a credit card.
8. Paying late occasionally can’t hurt my credit.
9. Fine print isn’t important.
10. Young people don’t have credit scores.

To see a video of the “Top Ten Financial Myths”

Discount Tuition

A week or so ago, I was in a meeting with some financial aid administrators from local colleges. We started talking about this year’s admissions and what they were seeing from families and students relative to the current recession.

At one point, one of the gentlemen turned to the other and asked, “Do you guys discount your tuition?” The other fellow replied, “Yeah, we have to – everybody does.” This intrigued me so I asked them for an explanation. Here’s what they told me.

They said that for the past few years, they have “discounted” their tuition by offering larger amounts of scholarships to students in order to attract them to attend their institution. Okay that makes sense. But they went on to say that parents like the “bragging rights” of saying that their kid received a large scholarship to attend the school – implying that the kid is something special and the school really coughed up the money to get the kid to attend.

Not really. What the schools are doing is inflating the tuition cost, “providing” larger scholarships giving the appearance of a good subsidy, and getting families to pay the tuition to attend their school.

My question to them was, “You mean to tell me this is like the MSRP of a new car? ” The answer: “Exactly.”

My next question was, “Why not lower the tuition for everyone and the price to attend is the real price.” The answer: “Then parents wouldn’t feel the pride of their child getting into a “prestigious” school.”

I have to admit this is clever marketing and sales. Don’t ever try to tell me that higher education is not a business. It’s always about the dollars.

We still have a long way to go …..

Now About the Housing Market…..

I know – you’re sick and tired of hearing about the housing market and its impact on our economic revival. I bet you never want to hear the words, “sub-prime lending” or “credit default swaps” or stuff like that ever again.. You probably don’t want to read another blog about it either, but before you take off, here’s a personal story from me.

My Dad passed away in 2008. Like many others in his generation, he only owned one house which was built in 1955. It’s a small four-bedroom (yes, four), 1,300 sq. ft. cape in a central New Hampshire community. It sits on a typical town lot with an additional lot in the back yard. On the same street is an elementary school. Only one family has lived in that house – mine.

As an old banker who has sold plenty of bank-owned properties back in the day, I look at this property that I am now selling and think this is the perfect “starter” home for a young family. Well built, good neighborhood, school nearby, added lot for the children to play, etc. etc. And yet, because of the financial culture we’ve lived in for this decade, here’s what I’ve learned:

• Most young couples want to live in the suburbs – the idea of a property in town is out of the question
  
• 1,300 square feet is simply not enough – “Where would the plasma TV go?”
  
• “The driveway only fits one car!”
  
• And I won’t even mentioned the comments that made my blood boil.

Funny thing is, given the fact that lenders have clamped down on loan qualifications (see this blog post in February), and down payment requirements, most young couples don’t have enough disposable savings to meet the requirement. One couple in their mid-thirties would like to have my Dad’s home but can’t come up with the 10% down payment of $17,000. And even if they could, their debt load is so great that they couldn’t maintain the property even if they got the loan.

So I guess I’m just wondering how the housing market is going to bounce back with this level of unemployment, deteriorating credit histories, tighter credit standards, and a growing list of foreclosed property. And what about buyers' expectations?

I’ll keep you posted on the progress of selling my childhood home.