Dear Liz: You recently suggested people consider putting their charitable donations on automatic. While I have automatic deductions for savings because I do not want to constantly remind myself to do it, I want to remind myself of all other expenses. For me, prudent money management requires attention to all expenses. Your thoughts?
Answer: Many people find that automatic payments make their lives easier. They’re able to meet their obligations (and avoid late fees, in the case of bill payments) while minimizing time spent in repetitive tasks each month.
But none of your expenses should be “out of sight, out of mind.” Automatic payments don’t eliminate the need to carefully review your credit card and bank transactions each month. Reviewing your bills periodically, and making adjustments as necessary, is an important part of responsible money management regardless of whether you take advantage of automatic transfers.
Dear Liz: I’m in my early 30s and never carry cash. I charge everything on my debit card. This seems to be a topic of discussion in my office. My co-worker keeps getting his identity stolen and says that using debit cards to pay for everything wreaks havoc on your finances. He says I should use my credit card instead. I just finished paying off all the expenses that creep up when buying a house and really don’t want to start using credit cards again. I don’t think I’d be as good as keeping track of where my money goes when it’s not coming automatically out of my account. But I don’t want to end up losing it all now that identity theft is running rampant. What’s the best solution here?
Answer: What you like most about your debit card — that the charges come directly out of your checking account — is also its greatest flaw. A bad guy who gets access to your account can drain it, and you’re left fighting to get your money back.
Contrast that with fraud on a credit card: You’re not required to pay the disputed charges while the credit card issuer investigates.
That doesn’t mean you should never use a debit card, but you should avoid using it in higher-risk situations. Using a debit card for online purchases isn’t smart, because your computer could be compromised with malware and because merchants often store purchase information in less-than-secure databases.
You also shouldn’t hand your debit card to anyone who could take it out of your sight, such as a waiter at a restaurant, since that person can swipe it through a device called a skimmer to steal the card’s relevant information before handing it back to you. Gas stations and outdoor ATMs can be risky as well, since criminals can more easily install devices to swipe your information than at more protected, better supervised locations.
Even at trusted merchants, though, things can go wrong. Tampered debit card terminals at Michaels craft stores allowed thieves to access customers’ bank accounts.
Using a credit card clearly has advantages, and doesn’t have to be an invitation to debt. Most issuers allow you to set up text and email alerts that let you know when balances exceed limits you set. Apps on your smartphone can help you keep track of charges as well.
Vigilance is the key to limiting the damage caused by identity theft. You should review transactions regularly on all your credit and bank accounts, regardless of what method you choose to pay.
Finally, keep in mind that debit cards do nothing to improve your credit scores, since debit cards are not attached to credit accounts. Light but regular use of credit cards can help achieve good scores, which in turn will save you money on mortgages, auto loans, utility deposits and, in most states, insurance premiums. You don’t need to carry a balance to have good scores, so exercising a little discipline in tracking your balances and paying them in full each month can save you money.
Dear Liz: My son is 12 and receives a regular monthly allowance that I’ve been giving to him in cash. I think it might be time for a checking account. I would like to teach him about using a debit card and not overdrawing his account. All the banks that I have called will not open an account for a minor, even a joint account. I’ve heard about prepaid cards being used for allowances, but I’m concerned about the fees.
Answer: You’re right to be concerned. You wouldn’t be teaching financial responsibility — the whole point of an allowance — if you gave him a prepaid card larded with fees to access his own money.
Prepaid cards, also known as prepaid debit or reloadable cards, typically aren’t linked to a checking account as regular debit cards would be. Instead, you can “load” them with cash in a variety of ways and then use the card to spend that money wherever regular debit cards are accepted. Many prepaid cards also can be used to withdraw cash at ATMs.
Unfortunately, many issuers charge fees to open, use and close their cards. Monthly “maintenance” fees and fees to replace cards or talk to customer service are common. Some of the most expensive cards are the ones endorsed by celebrities. Those marketing expenses have to be recouped somehow, and fat endorsement contracts often seem to be paid for with higher-than-average fees.
The Chase Liquid card doesn’t charge most of the usual fees. There’s no fee for activating a card, closing an account, getting paper statements or paying bills. The card can be loaded with money for free at a Chase bank branch or Chase ATM. Withdrawing cash at a Chase branch or Chase ATM is also free. The monthly fee is $4.95, but it’s still one of the cheapest cards available, she said.
The Bluebird doesn’t charge a monthly fee, and activating the card is free if you apply online. The card allows free ATM withdrawals within the MoneyPass network if the cardholder is enrolled in direct deposit; other withdrawals incur a $2 fee. The card can be loaded for free from a bank account or by using cash or a debit card at a Wal-Mart. Loading with a debit card costs $2.
You’ll still face age limits, but there’s a work-around. Most cards have to be opened by someone 18 or older. A child must typically be 15 or older just to have his name on the account as a joint user. (With the Bluebird the age limit is 13.) So you would have to open the card in your own name and then give it to your son to use.
Another option may be to simply wait a year. Some national banks, including Wells Fargo and Chase, offer teen checking accounts for those 13 and older, although the accounts may not be available in all areas.
Dear Liz: A few years ago I finished paying off my debt and now am in the very low-risk credit category. I have savings equal to about three months’ worth of bills and am working to get that to six months’ worth. I’m wondering, though, about an emergency that may require me to pay in cash (such as a major power outage that disables debit or credit card systems, or the more likely event that I forget the ATM or credit card at home). How much cash should a person have on hand? Is there a magic number?
Answer: There’s no magic number. You’ll have to weigh the likelihood you’ll need the green, and the consequences of not having it when you need it, against the risk of loss or theft.
Many people find it’s a good idea to tuck a spare $20 into their wallet for emergencies, and perhaps another $20 in their cars if they’re in the habit of forgetting their wallets or their plastic.
Cash for a disaster is another matter. Power could go out for a week or more, or you may need to evacuate and pay for transportation and shelter at a time when card processing systems are disabled. A few hundred bucks in cash probably would be the minimum prudent reserve you’d want to keep in a secure place in your home. You may decide that you need more.
Dear Liz: I’m wondering how long we really need to keep bank statements, since banks now offer paperless options. My son doesn’t even open the statements anymore; he just views his account information online.
Answer: There’s nothing magical about paper bank statements. If your son doesn’t open them, he probably shouldn’t even get them. He can ask his bank to switch him to its paperless option and save some trees.
The IRS accepts electronic documents, and banks keep account records at least six years. Your highest risk for an audit is the three years after a tax return is filed, so you should be able to download statements if you need them in an audit. There might be fees involved to get these statements, however, so you’ll have to weigh the potential cost against the hassle of storing all that paper. Some people get the paper statements, scan them and shred the originals; others download the statements as they go and store them electronically.
If you don’t need bank records for tax purposes, there’s even less reason for getting paper statements. Eschewing them can reduce bank fees and will certainly save a few trees.
Dear Liz: Twelve years ago I hired a moving company. I must have overpaid them, because in January 2001 I received a refund check for $235. I misplaced the check and didn’t find it until 2003. Ever since then I have made a number of phone calls asking for a replacement. All my calls were to no avail. Can you help?
Answer: No. You typically have six months to cash a check. If you miss that time frame, you can ask the issuer for a new check, but it is usually under no obligation to accommodate you. Trying to deposit an old check can often result in a “returned check” fee from your bank when the check is stopped or returned unpaid.
Dear Liz: I have all my money (less than $150,000) in one small bank. I love my bank, but Bankrate.com’s Safe and Sound report shows the bank having only a single star. I asked someone at the bank about it, and this person said the rating wasn’t important. Is it?
Answer: Of course it is. Your deposits are under the $250,000 limit protected by the FDIC, but a weak bank can fail, which can be disruptive to depositors. The bank that takes over typically doesn’t have to abide by the policies or interest rates promised by the failed bank. If regulators can’t find another bank willing to take over, you may have limited access to your money for a few days until your deposits are refunded to you.
A bank with “very questionable asset quality, well below standard capitalization and lower than normal liquidity” — phrases Bankrate.com uses to describe your institution — probably isn’t the best place to have your money.
Dear Liz: Please warn people to be careful when they use ATMs. Some jerk posted an out-of-order sign on the outside ATM at my bank to get people to use the inside ATM, which had a skimmer installed on it. The crooks managed to get $500 out of my account, but the bank was on the ball and called me. I denied the transaction and the bank returned the money to my account.
People need to be aware of anything funny-looking about the ATM or the door lock. If there’s a piece of plastic sticking above or below the door lock, don’t use it. Personally, I don’t use the ATM anymore. I go inside to a teller to get cash.
Answer: People can be remarkably trusting when it comes to using ATMs. Stand-alone ATMs may be phonies, designed just to take your bank card information and PINs. Even ATMs attached to banks can be compromised, as your experience shows.
Some security experts advise avoiding stand-alone ATMs, and all advise being cautious about using any cash-dispensing machine. Before sticking your card into one, you should grab the slot where your card goes in and see if you can move it. If you can, don’t use the machine. If you enter your card and PIN into an ATM and get any kind of error message, alert your bank immediately, as that can be a sign of a compromised machine.
You don’t have to avoid using ATMs, but they should be used with caution.
Dear Liz: My bank unexpectedly charged me a $25 annual fee for overdraft protection, which ironically caused two checks to bounce because I no longer had sufficient funds to cover them. I was then charged overdraft fees of $27.50 for each check, as I was already maxed out on my overdraft protection. I don’t remember the bank charging this fee before and it didn’t mail anything to me warning that this charge was coming. It was so disheartening as I knew I had enough money in the account to cover the checks I had out. Had I known I would have found a way to deposit more money to cover the transactions. I actually feel my banker watches my account looking for ways to rob me.
Answer: Your bank isn’t the real problem here. Yes, banks can charge sneaky fees, and sometimes their disclosure leaves a lot to be desired. But you’re severely mismanaging your money if a $25 fee can cause this big a problem.
You should keep at least a $100 pad in your checking and keep an eagle eye on your balance to try to prevent overdrafts in the first place. If overdrafts occur despite your best efforts, then your priority should be repaying those — not writing more checks.
If you can’t manage that, then you should turn off your ability to overdraft. If you have true overdraft protection — your checking account is linked to a line of credit or credit card — ask your bank to discontinue that. You also should decline the bank’s “bounce protection,” which allows overdrafts on ATM and debit card transactions in exchange for a fee. Recurring transactions and checks can continue to trigger overdraft charges, however, so your best bet is to switch to your debit card and cash until you have a better handle on your cash flow.