Fashionista Finance: Debit Cards, Credit Cards, and Other Money Things That Can Get You in Trouble

It’s no secret, banks have made billions of money off credit card interest and overdraft fees. It’s also no secret that banks are in trouble right now for lending money to those they probably shouldn’t have. So what does this mean to the fashionable legions in the U.S. and abroad? It could mean you’re in a good position to negotiate with the bank who might be fighting to keep your business, but more than likely it means if you carry a balance your interest rate could skyrocket up to 29.99% YIKES!!! But that’s not all they can do. You can see your credit limit drop or have your account closed, all of which can have an effect on your credit score. *cue Pyscho music*

So what do you do?

For one, if you carry balances on your credit cards, stop using them and get yourself on a plan to pay them off. Microsoft Money has a really good Debt Reduction Planner that will tell you the fastest and most cost-effective way to pay off your debt. Keep the accounts open while paying them off–closing accounts can cause a slight drop in your credit score and if you’ve had the accounts for quite some time you want to keep it open to show you’ve had a long credit history.

Consider making your purchases with a bank debit card. You will still need to proceed with caution even with a debit card. Why? Because if you’re not careful, a debit card purchase can wind up costing you an additional $35 in overdraft fees (per item). And rack up enough of those overdraft fees and your bank could give you your walking papers and even put you in a position where barely any other bank is willing to open a new account for you. You have got to be very diligent in tracking every single transaction in your checking account especially if you use a debit card. I’ll breakdown a few scenarios that will cost you money if you’re not careful:

1. When you make a purchase, the amount of the purchase is held in your account as an authorization. Sure, it appears as if the money has been taken out of your account the minute your card is swiped, but these funds are actually on hold. Merchants have a period of time (usually 3 days, but can differ state by state) to send proof of your purchase to your bank. If your bank doesn’t get the proof within that period of time, they release the hold on your account. This is where you need to pay close attention and where writing everything down helps—once this hold is released, it appears as if you have more money than you actually have in your account. If you didn’t account for this purchase, you may think you have enough for another Starbucks latte or those shoes on sale at Steve Madden. So guess what happens? The bank finally gets the proof of your purchase from the merchant so they post the purchase to your account, but then so do the other purchases you made thinking you had more money. The result? Well, if you made 3 purchases after the initial one you just racked up $140 in overdraft fees! And guess who’s NOT giving you back those overdraft fees? The bank. Times are tough and banks are scrambling to make profits so even sweet-talking that cutie at your local bank will do you no good because 10 times out of 10 his manager is closely watching fee rebates. Ouch.

2. Debit or credit? What’s the deal with this question anyway, right? Well, debit means you will need to enter your PIN number to authorize the purchase. Credit means you must give your signature to authorize the transaction. Either way, they both come out of your checking account and both need to be written down in your budget. Should you choose one over the other? Well, you might want to say credit more often than debit. For one, if someone hacks into the merchant’s card processing machine, they could also swipe your PIN. Plus you want to check with your bank’s policy on disputed transactions—sometimes “credit” transactions are covered more for disputes.

3. Some sneaky banks are even charging you overdraft fees on purchases that haven’t even posted to your account yet! This could mean if the waiter accidentally charged you for 3 martinis instead of 2, and you didn’t have enough in your account for the 3, before the bar even sends the bank proof of your purchase, your bank might have already charged you an overdraft fee before you could sort out the error. You’ll have to wait until the bank gets actual proof before you can get the fees back. Check with your bank to see what their policies are.

4. There are also some banks out there that automatically place a feature on your checking account that will “allow” you to overdraw your account by saving you the embarrassment of having a transaction get declined. Well, isn’t that sweet? WRONG. What the rep opening your account may not tell you is that while you save face when whipping out your card, you will also get charged an overdraft fee.

See why it’s important to keep track of your transactions?

Some say paying cash is the way to go for all their purchases, but you’ll need to understand something about paying cash—you don’t get any kind of liability coverage in case you need to dispute the purchase with the merchant. At least with debit or credit cards, your bank will do some if not all of the fighting for you. Check with your bank about this policy.

Bottom line? Whether it’s in your check register, an Excel spreadsheet, an email to yourself on your Blackberry, or good old pen and paper, you need to budget and keep track of every single penny of your money!

P.S. Don’t forget to enter in the Miss Jessie’s Curly Pudding Giveaway!