September 29, 2004

Plastic versus Cash

Experts say the use of debit, credit and prepaid cards has eclipsed cash for the first time in history, and they expect the trend to continue. Americans are using their plastic for big ticket items as well as small purchases like gas or a cup of coffee.

Plastic takes charge over cash
"With cards, we no longer have to worry about lost, stolen, counterfeit, returned ... or fraudulent checks."
By Dan Thanh Dang
Sun Staff
Originally published September 29, 2004
Janice Simmons hates cash.

The 45-year-old Elkridge mother of two teenage sons rarely carries money in her purse anymore - cash is too easy to lose, get stolen and last, but not least, spend.

"Cash has legs," Simmons says. "It just wants to go everywhere but in your pocket. I just don't like to have it on me."

In fact, Simmons, who also forgoes writing checks by paying her bills online, could go entirely paperless if not for those few remaining souls who don't take plastic: "There are times when you do need cash - like when my boys ask me for $5."

Thanks to consumers like Simmons, plastic recently outpaced paper as the preferred mode of payment at the nation's checkout lines for the first time ever, and experts say it will soon be commonplace to pay for nearly everything from Big Macs to mortgages with a card rather than cash or checks.

Paper steadily has been losing out to the various forms of plastic - credit, debit or prepaid cards - and last year, the balance tipped: Cards were used for 53 percent of store purchases, while cash or checks were handed over for 47 percent of them, according to the most recent Study of Consumer Payment Preferences.

It used to be that consumers had only three payment options: cash, check or credit card. But these days, companies are heavily promoting the use of the newer debit and prepaid cards, which look like credit cards but act like cash in that users don't incur debt or interest charges.

Television ads have long featured comedian Jerry Seinfeld demonstrating the benefits of using his American Express at gas stations and supermarkets, but lately he's been joined by George Steinbrenner, allegedly preserving his sore check-writing hand by instead using a Visa check card to pay the stadium utility bill and players' salaries.

Card companies are aggressively soliciting industries that have traditionally accepted only cash or checks - such as parking garages, insurance companies and fast food restaurants - to start taking their cards.

Different uses

As a result, consumers, who once reserved their cards for big ticket items like kitchen appliances and summer vacation trips, now use them for things big, small and in-between.

Planning to see the new martial arts epic Hero? Go online and purchase advance tickets with your bank card. Time to pay your monthly rent? Forget the mail and bill it to your credit card. Need a quick fix of caffeine? Just whip out your prepaid Starbucks card.

Simmons uses her Visa debit card to pay for gas at the Exxon station and the occasional lunch at Panera Bread. Just recently, she used the card at Giant to buy seafood and salad fixings for dinner and at McDonald's to buy her sons a quick meal.

"It's so much easier," she says.

Card companies love people like Simmons. They're hoping she and others like her will lead the way toward a cashless society someday. While that's still far in the future, the average American household owns from 7 to 13 payment cards, including credit, debit and store cards.

By 2007, the majority of payments - not just for in-store goods and services, but also bills like mortgages, medical fees and car payments - will be made with a card rather than cash or checks, speculates The Nilson Report, the leading publication covering consumer payments systems worldwide.

Consumers increasingly are comfortable using cards, and the companies that issue them have been working with businesses and government agencies to create new ways of transferring money via plastic rather than paper.

Use at schools

For example, students at the University of San Diego and Northwestern University who used to hit up their parents for a check can now use their student identification badges to tap into an account set up to pay for books, snacks and other incidentals. Tax filers, instead of waiting for a check, can receive their refunds on prepaid cards.

Businesses like U-Haul and Stanley Steemer have converted employee paychecks into electronic cards that can be re-loaded each pay date. Government agencies similarly have transferred child support and unemployment payments to cards. Maryland began using reloadable electronic cards for child support payments about two years ago.

The cards help save businesses and government hundreds of thousands of dollars in postage and check costs.

Each year, 4 million paychecks are damaged, lost or stolen each year and reissuing them costs U.S. businesses $48 million, according to the American Payroll Association.

Avoiding those costs has lured many companies and states toward using electronic payment cards.

"Electronic delivery is much more reliable," says Craig R. Goellner, director of Colorado's child support enforcement agency, which began offering electronic cards to clients three years ago. "There's a lot of overhead costs associated with checks. With cards, we no longer have to worry about lost, stolen, counterfeit, returned, undeliverable or fraudulent checks."

The cards also help offer new options for people, who don't have a bank to turn to.

Maria Smith of Taneytown can attest to that.

Every time her daughter's father makes a child support payment, the money is automatically loaded onto Smith's CashPay card, which she can use much like a credit or debit card. Smith does not have a bank account.

CashPay Visa to shop

Smith uses her CashPay Visa card to shop at the local Wal-Mart, order dinner, buy groceries or purchase gas. Recently, she used the card as collateral to rent a car during a family trip in Tennessee.

"It's my only card so I wouldn't have been able to rent a car without it," says Smith, who works at a medical center in Frederick. "Not having a bank account was really difficult. I had to pay a fee to cash my checks. ... This card has made my life so much easier. I can use it anywhere."

The CashPay program also allows clients like Smith to load their own paychecks and tax refunds onto card as well, says the cash-averse Simmons, who manages the program.

Industry experts are predicting that most local, state and federal agencies will eventually convert to electronic payment cards over the next few years. And retailers are increasingly happy to accept them.

The powerhouse McDonald's joined the movement recently when it started encouraging customers in television ads to use their cards in its stores.

Other fast food restaurantsare accepting cards these days, as well as many utilities, some insurance companies and even vending machines.

Businesses that start accepting cards quickly learn something that studies have shown: "When people use credit, they spend more than they do when they use checks or cash," says Paul M. Dottle, senior vice president of retail and emerging industries at American Express.

And that is exactly what worries some consumer credit watchdogs - those who spend beyond their means now will find it easier to do so. Consumer debt topped $2 trillion this year, according to the Federal Reserve Board.

Credit card 'worry'

"Debit cards don't concern us as much because you're spending money like cash," says Howell Edwards, vice president of InCharge Institute of America, a national nonprofit organization devoted to personal finance education and credit counseling. "It's the credit cards that we worry about. Charging used to be restricted to big ticket items.

"Now you see people in the line at McDonald's, and they're buying $4 worth of food, and they're charging it," Edwards says. "When you start using credit for everything, it can be very easy for things to go out of control."

The problem, he says, is that $4 worth of food could end up costing you $8 in the long run.

If you use your card without paying it off every month, the debt you carry can easily snowball.

For example, if you have an outstanding balance of $2,000, with an 18.5 percent interest rate and you make low minimum monthly payments, it would take over 11 years to pay off the debt. It will also cost you an additional $1,934 for interest, almost doubling the cost of your original purchase.

Still, credit card companies continue to sweeten the deal by offering rewards - a rebate point for every dollar charged, frequent flier miles - to encourage heavy usage.

The key, says one consumer, is card discipline.

Racking up rewards

Eren Koont, a Silver Spring resident, has earned cookware, DVDs and gift certificates from, The Gap and Crate & Barrel for using his credit cards. But he makes sure those gifts are really free by paying off his monthly bills to avoid interest and late fees.

"I'd say, 80 percent of the time, I use a card," says Koont, a product manager for Texas Instruments and part-time graduate student at University of Maryland. "I use my Amazon card to pay for groceries, eating out and my tuition. That's about $7,500 a semester."

Consumers like Koont delight in finding new ways to rack up rewards with their credit cards. A favorite: to charge your rent, as upscale apartment buildings like the Munsey and the Standard in downtown Baltimore allow.

But don't count out the greenbacks just yet. There are some things that paper money will always buy.

"People like anonymity," says David Robertson, publisher of the Nilson Report. "You can get that with a cash transaction when you're settling a wager between friends, taking part in the office pool, or it could be for something unsavory.

"There will always be a need for currency."
The way of plastic

When did plastic become so complicated? The old charge card has mutated into several variants. Although they look identical, they work quite differently. Here's how:

Credit cards: With these, purchases and cash advances are made against a line of credit, for which you are billed at the end of a monthly cycle. If you don't pay off the balance, you're charged interest on outstanding debt and a late fee if you don't pay off the monthly minimum.

Debit cards: Often called ATM or check cards, these allow you to withdraw money from your bank account as cash from the automated teller machine or to pay for store purchases.

Prepaid cards: These are loaded with a specific amount of money that you draw from with each purchase or cash withdrawal until you hit zero. - Plastic takes charge over cash

Posted by Craig at September 29, 2004 04:43 PM