WASHINGTON Dec 7 Scott Schuh is a Federal
Reserve Bank economist who spends his days studying the myriad
ways consumers pay for their purchases. After a recent review
of his research, he did something surprising - he gave up his
rewards credit cards, and now pays for everything with a debit
Why? Chalk it up to a highly developed social
consciousness. Schuh says rewards credit cards generate a
"reverse Robin Hood effect" in which shoppers who don't qualify
for the premier cards subsidize the usually well-heeled folks
who do. That subsidy occurs when merchants charge everyone
higher prices to cover their costs of accepting rewards cards.
Schuh gives up those rewards, usually in the neighborhood
of 1 percent or more, to feel better about his transactions and
how they contribute to the greater good.
That adds a whole other level of analysis and introspection
to the already confusing issue of how we pay for the goods and
services we buy. Schuh says it has gotten way more complex than
it used to be, with the number of available payment instruments
doubling in the last 20 years.
With the addition of mobile phone payments, consumers now
have 10 different ways to pay at their disposal, including
credit cards, checks, bank transfers, debit cards, prepaid
cards, online payment intermediaries, online bill pay and -
lest we forget - cash. It's no wonder that more and more
shoppers are simply using cash.
Cash is the most rapidly growing method of payment,
according to Schuh's research: In 2010, 29 percent of all
payments were in cash.
The way we pay is rapidly changing, with new payment
mechanisms launched almost daily. Retailers are expected to
start offering discounts to shoppers who use less expensive
payment methods; by next year we may be seeing cash prices as
well as credit prices for many items. Phones are becoming
wallets, holding codes that link directly into checking
accounts and credit card numbers. Credit card rewards may
disappear altogether, some observers suggest, once users have
to pay for them directly.
But for this holiday shopping season, decisions have to be
made every time to click "place order" or carry an item to the
register. Here's how to pay now.
-- Charge it. Qualms about systemic fairness aside, a
rewards credit card is still the best way to pay for purchases,
says Ed Mierzwinski of the National Association of State Public
Interest Research Groups. You'll get cash (or miles) back on
everything you buy, and - more importantly - all the guarantees
and consumer protections that come with a credit card. In
addition, you'll get 25 days or so before the bill arrives.
If, like Schuh, you're bothered by the unfairness of
rewards cards, just use a regular, non-reward card, says
Mierzwinski. And, if you have a troubled credit history and can
only get a secured card? Use that. Because it won't allow you
to spend more than you have on deposit, it will help you stick
to an affordable budget, while you rebuild your credit
-- Use a prepaid card. These run the gamut from Starbucks
gift cards to Visa and MasterCard issued cards that look like
credit cards, work like cash, and carry extra fees. They are
safer than carrying cash; if you register your prepaid card and
lose it, you may be able to protect its value. You can actually
get most of your holiday gifts at a discount if you spend gift
cards bought at a discount through an exchange like the one run
by Card Hub ().
Do compare prepaid cards before choosing one. Some are
reasonably priced and convenient; others have fees that are
"outrageous," says Mierzwinski.
-- Leave the debit card at home. Debit cards are scary; so
much so that Mierzwinski refuses to use one. The main
difference between the debit card and the credit card is this:
If bad charges show up on your debit card, the money comes out
of your checking account first, and you have the burden of
proving somebody (like your bank) should put it back. That's a
-- Don't bother with the special online cards. You can use
your regular credit card online, says Mierzwinski. "I don't
bother getting unique virtual credit card numbers and that
other rigmarole," says Mierzwinski. If your card number gets
stolen online, you have the same protections you would if the
plastic gets lifted out of your pocket: You won't be
responsible for fraudulent charges. You can get extra deals on
many holiday gifts by buying them online through the shopping
portal run by your credit card issuer.
-- Mobile payments? Still not ready for prime time.
Although CNBC is reporting that 16 percent of shoppers have
used their phones to pay for purchases this shopping season,
some experts think there are still many unanswered questions
about paying by phone. "It's still rated the least secure way
to pay," Schuh says. Mobile phone payments aren't really wholly
new ways to pay: If you use your phone, you're still basically
authorizing a withdrawal from your checking account or an
advance on a line of credit. If you want the convenience of
paying by phone, choose a credit-linked mechanism and not one
that hits your checking account.
(The Personal Finance column appears weekly, and at additional
times as warranted. Linda Stern can be reached at