Smartcards

Smartcards

Smartcards

The next kind of plastic the banks want you to keep in your wallet is a smart card. They come in different varieties and most are not yet ready for a mass distribution, but, at this writing, pilot projects are forging ahead. Promoters of smart cards make the assumption that you don’t like to carry cash. You do not like fishing for bills and coins to buy a newspaper or a soda. You would to rather put down plastic instead.

This kind of card has money on it, embedded in a computer chip. A $50 card, for example, will give you $50 in spending power. If you buy a 5o cent newspaper, the seller will put your card in a special terminal and drain off 50 cents. Identification or signature is not required.

You now have a card with $19.25 left on it. After spending $1 on a soda, the value of your card goes down to $18.25. If you forget how much you have, you can check it with a little portable card reader. Some readers might also list the last five things you have bought.

If every merchant, street vendor, cab driver, and bus accepted smart cards, you would not have to have cash on your pocket. To some, that would be a huge convenience; to others, it is a shrug. If some merchants took smart cards and others did not, however, you would have to carry both.

What is in it for the bank? Eventually (although not at first), the bank will charge you for the card. There might be a fee when you accessed the ATM to load it up. The merchant would also pay a fee in return for getting what is presumably a more secure transaction.

What is in it for you? Convenience, maybe. Putting down a card is a tad quicker than pulling out cash. You always have the equivalent of exact change. You would not have to count you change (but you would have to use the card reader to be sure the merchant’s terminal deducted the right amount). You might also use the card to make small purchases over the Internet.

For a while, the smart cards probably would not have any more than $100 on them and the limit might be lower than that. So they are strictly for walking around money. You would still need your credit card, debit card, or checkbook for more serious shopping.

If the card malfunctions say, it registers $14 when you are sure you were carrying $36 the bank can check the balance on the computer chip.

Credit Card

Unauthorized Use: Here is what you have to pay if your credit card is stolen and charges are run up: Nothing if you reported the loss to the bank before a fraudulent charge occurred. Up to $50 for charges run up before the theft was reported to the card issuer and banks often waive even that small fee. Nothing if you still have your card, but your number was used fraudulently, for example, in a mail order transaction or a transaction over the internet. This covers both business and consumer transactions.

Billing Errors; you are fully protected against consumer billing errors. If you have already paid an erroneous bill, you will get money back.

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Pay Cash or Take out a Loan?

Cash or Take out a Loan?

Cash or Take out a Loan?

It is cheaper to pay cash. But many auto dealers (who make money on car loans) have come up with a clever, computerized gimmick to bamboozle customers into thinking that loans are a better deal.

For example, say you have $10,000. You can put it into a certificate of deposit earning 6 percent interest or use it toward buying a new car. The dealer may argue that it is smarter to choose the CD and take out an 8.5 percent auto loan.

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Here is the dealer’s four step “proof”:

  1. If you leave you $10,000 in the bank for 4 years, you will earn $2,712 in interest, pretax.
  2. A 4 year, $10,000 auto loan will cost $1,832 in interest (the interest is less than you think because it is paid on a declining balance).
  3. So by keeping the CD and taking the loan, you are $880 ahead. (You are only $121 ahead after federal taxes in the 28 percent bracket, but the loan may still look good to people who hate to part with savings.)
  4. Furthermore, the dealer croons, debtors do even better when the loan’s term is up. Say the car is worth $5,000 from the trade in. That is all the cash the buyer has in hand. But the borrower supposedly gets an amazing $15,880 adding together $5,000 from the trade in, the $880 gain interest, plus the $10,000 still in the bank.

Before you decide that the road to riches is paved with auto loans, sit back and think a minute. There is something the dealer overlooked. Where does the money come from to repay the loan?

If you take the monthly payments out of your bank account, your savings will be wiped out before the loan is entirely repaid.

If you make the monthly payments out of earnings, you will be giving up $11,832 that you could have saved or invested. Either way, the loan costs you more.

So pay cash. Then take the equivalent of the monthly payment, which you are not spending on the auto loan, and use it to replenish your savings. At the end of the term, you will or have your car and more than $10,000 back.

I would vote for the loan only if your fat savings account was a windfall a gift, an inheritance, a winning lottery ticket that you would never be able to replace.

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