Credit Card Debt Management

Bank of America, with its Visa partnership, was one of the pioneers. Discover and MasterCard debuted theirs in 2002 and 2003, though those products appear to be defunct now. It’s the keyring credit card, a miniaturized version that consumers have the option to receive in addition to their regular credit card. A Boston Globe article tells the tale of one suburban mom who loves the keyring card for its convenience, allowing her to leave her purse and wallet in the car.

The article also tells the tale of Bank of America’s estimates on the profit increases linked to keyring credit card use. Of course, consumer studies have shown that shoppers tend to spend more when swiping plastic instead of using cash. Amazingly, according to the Globe article, further studies have shown that consumers with the miniature plastic will spend 2 to 3 percent more than regular credit card users.

But, customer convenience and increased corporate profits aside, is this really a good idea? Hello, identity theft? Anyone? Call me crazy, but am I the only one thinking this could be a problem? The miniature credit card has apparently given way to the Speedpass, a miniature keyring device that works with the radio frequency-enabled system allowing consumers to pay with a mere swipe of their card in front of a card reader.

A lot of people already considered the RFID-enabled credit card unsafe. Despite the card’s very low frequency, some feared the emissions could be picked up any nearby identity thief with an RFID card reading device. Nevertheless, many credit card companies are making their new or replacement cards RFID-enabled, whether the cardholder knows it or not. And now that little RFID device can be on your keyring, too. According to MSNBC columnist Gary Krakow, Mobil and Exxon gas stations are on this miniature Speedpass bandwagon, and McDonald’s will also soon join in.

Remember those needlepoint keychains that said “Jesus” in a sort of puzzle form that looked like Oriental writing at first glance? They were everywhere in the 1980’s — at least in the Bible Belt, where I was raised. I’m going to go make one of those for my keychain, only it’s going to feature my social security number and birthdate in neon green. It will be safe and undecipherable because it’s a puzzle, an illusion, trickery of the eye. Probably nobody will figure it out. After all, these identity thieves aren’t too smart, you know.

If your credit has taken a hit, or you haven’t established any credit at all, a secured credit card may be a good solution for rebuilding your good name. It’s a card with a credit limit determined by the amount of your own cash that you load onto it, and the credit limit could possibly eventually be raised by the card issuer by a certain percentage. But carefully consider your options before choosing a secure credit card to ensure you get the right deal for your situation.

Is there an application fee?

You should not have to pay a fee just for applying for the card. However, chances are good that you will have to pay an annual fee, as is standard with secured credit cards. So make sure your card’s annual fee will be reasonable. It truly pays to read the fine print so your card balance isn’t eaten up by fees before you can ever even use it.

Is an insurance policy required?

Just like you shouldn’t have to pay an application fee, you shouldn’t have to purchase payment insurance. Also known as a payment protection plan, this feature covers your payments in the event of death or injury. It’s supposed to be optional, not mandatory, so look for a secured credit card with as few strings attached as possible.

Which credit bureaus does the company report to?

The point of a secured credit card is obviously to build a good credit rating. The only way that can happen is if the credit bureaus are attuned to your progress and how you manage your payments and spending. Make sure your secured credit card issuer will be reporting your payment history to all three credit bureaus, Equifax, TransUnion and Experian. This is important because you never know which credit bureau a lender will use to determine your loan eligibility. Then, the ball is in your court. Buy a few items and pay off the balance in full each month. This will reflect well on your self-control and fiscal responsibility, and enable you to move on to unsecured credit cards with lower interest rates and no annual fee.

Payment protection plans are offered by many loan providers. They are also referred to as payment protection insurance, loan insurance, etc. Regardless, for an extra monthly fee, the basic point is to provide a safety net for loan payments in the event of death or injury.

But do you really need it? A payment protection plan is typically very easy to sign up for. Unlike life insurance, there is very little paperwork and background questioning involved. The monthly fee, which varies by provider, is often tagged onto the monthly loan amount. Unfortunately, in the case of credit cards, this means it can accumulate interest when tagged onto the monthly credit card balance (if, of course, the full card balance is unpayable at the end of each month).

Costs can vary greatly. As an example, my credit card issuer offers a plan for 89 cents per $100 on the card balance each month. Over the course of a year, this can come out more expensive than term life insurance premiums, depending on the amount of the credit card balance. The FDIC’s web site points out the relatively high cost as another drawback, and suggests the money might be put to better use:

Let’s say you buy credit insurance or debt cancellation/suspension coverage to pay off a credit card debt if you become sick or die, and you consistently carry a card balance of $4,000. Various sources indicate that you’d likely pay between $150 and $350 a year for credit protection. For that money, you might be able to buy a much larger term life insurance policy or add to your emergency savings, both of which could be used to pay off any obligations, not just the credit card debt.

This is certainly not to say that payment protection plans should be ruled out in every case. Just weigh your individual situation carefully and consider all the pros and cons before committing. Remember that it is voluntary and you don’t have to sign up for it and also remember to read all the fine print.

Sometimes the terms and conditions of payment protection plans can be quite prohibitive, but without a careful review, you may not discover this fact until it’s too late. For instance, the FDIC points out that some credit cards might cut off available funds and prohibit card use for cardholders who need to start using their payment protection plan. I suppose this makes sense from the credit card company’s perspective, but then again, if you’re injured and unable to work, isn’t that the time when you might need the credit card most? At any rate, in most cases, well-stocked emergency funds and other insurance like disability and adequate life insurance should fit the bill just fine.