Last week, I tried to explain the Bank of America Debit fee hike that had upset so many Americans. To me, it seemed like BoA was just trying to take advantage of the Dodd Frank in order to jack up their fees to consumers. This was analogous to how the banks reacted to the CARD Act by dramatically raising interest rates. Indeed, other observers have come to the same conclusions, most notably Timothy Noah over at The New Republic.  What’s interesting about Noah’s analysis is that he takes it one step further. To him, BoA might be trying to drive customers away from their debit cards and back to their credit cards. The way he looks at it: “The larger point is that B of A now plans to charge people even more than they did before to spend their own money. Maybe they’ll piss debit customers off so much that they’ll go back to their credit cards. Which would suit B of A just fine.”

The premise of his argument is that banks exist to help people spend money they don’t have, like in the case of credit cards, not money they do have, as with debit cards. Personally, I find this argument fascinating, but a little specious. I think most consumers understand that credit card debt is going to be far more costly than a $5 a month debit card fee. That is not to say that they are willing to pay that fee. I think that disgruntled customers will close their account with BoA altogether rather than just politely switch from a BoA debit card to a BoA credit card. People with bank accounts need debit cards to access their funds, and a credit card is not the answer.

What People Will Do

I think that many of them will switch to smaller banks. These smaller banks and credit unions are still able to charge more fees for debit card transactions. Therefore, there is less of an reason for them to charge monthly fees for debit cards. Personally, I have always done my banking with a small, out of state bank that charges no fees and even returns third party ATM fees.

How The Market Shakes Out

It just doesn’t seem like the business practice of charging for debit cards is very sustainable. Big banks still make money off of the swipe fees, just not quite as much. Furthermore, the exception for small banks and credit unions will force them to be more competitive. I just don’t see people signing up for a debit card with fees when there are so many no-fee products out there.

Credit Cards As An Alternative To Debit Cards

Of course, there is one way to use your credit card and not borrow money. Always pay your balance in full. No, most people don’t use their card that way, but many, like me, do. Doing so allows you to avoid all interest and fees while getting a free loan and even earning rewards. If your bank is imposing a debit card fee, it may be time to switch banks. If you think that you can reliably manage to pay your credit card balance in full and on time, maybe it is time to start using your credit cards as your primary method of payment.

Consumers are reeling from Bank of America’s recent announcement that they would he charging debit card holders $5 a month. Even those who are not even customers of theirs are concerned that these charges will become commonplace. As the New York Times reported:

Bank of America, the nation’s biggest bank, said on Thursday that it planned to start charging customers a $5 monthly fee when they used their debit cards for purchases. It was just one of several new charges expected to hit consumers as new regulations crimp banks’ profits. Wells Fargo and Chase are testing $3 monthly debit card fees. Regions Financial, based in Birmingham, Ala., plans to start charging a $4 fee next month, while SunTrust, another regional powerhouse, is charging a $5 fee.

What’s Going On?

The Times article cites a new Federal rule that will curtail merchant fees that the banks receive from retail transactions. At $5 a month, these cards will be a really poor value to many consumers, who may flee debit cards and go back to other forms of payment. That is rather ironic for several reasons. First, debit cards were originally known as check cards. Their use is far more cost effective for everyone involved, compared to using a paper check. In fact, I can’t think of a less efficient way to pay someone than writing a paper check, having a merchant deposit and a bank claim it against an account in another institution. Nevertheless, consumers will be wise to break out the check book and to avoid their debit cards if their use carries a hefty monthly fee.

Another reason this is rather ironic, and unfortunate, is that there was a growing trend towards the use of debit cards. Even though I write about credit cards here and elsewhere across the Internet, I actually feel that debit card use is more beneficial to many people. Obviously, with a debit card, consumers can’t get into debt. Furthermore, since most credit card users carry a balance, I feel that they would be better off with a debit card. In fact, debit card use had been increasing while credit card use was tapering off. These were positive trends, especially for a country that has just gone through a costly debt crisis. As a side effect and benefit, the weak consumer market for credit cards has probably been responsible for the fantastic sign up bonuses that have been offered this year.

This new rule, and these new fees, threaten to undo much of the progress that has been made. Part of me thinks that this is just another publicity seeking over reaction by the banks in order to generate opposition to this new rule. Banks still make money every time a consumer uses their debit card, just not as much. It is hard for me to believe that they can’t continue to offer these cards for free, let alone charge $5 a month, and still make some profit. Last I checked, banks are still handing out iPods and sports tickets for new customers, so I have a hard time believing that their business teeters so close to unprofitably that they now have to charge debit card users $60 a year. It remains to be seen if the market will sustain these rates.

What This Means For Credit Cards

read more

I am a very jaded traveler. In the airline business, my only loyalty is to the company that is offering the most miles at the least cost. The other side of the equation, the redemption, is where I have the most problems, like everyone else. My standard advice is that frequent flier programs are like an unregulated lottery. That is mostly true, but not always. Typically, what you will read in the travel column of  any major newspaper or magazine is the same old generic advice. Plan your trip in advance. Be flexible with the dates. Consider utilizing an alternative airport. By now these tips are about as useful as a baseball coach that insists that the key to winning is to score more points than the other team.

Jason Scores Thanksgiving

In the world of airlines, Thanksgiving is like the Super Bowl. Sure, Christmas is a busy travel time, but most families enjoy more generous breaks from school or work, allowing them to spread their travel across a few weeks rather than compress it into a single, long weekend. This gives them date flexibility and allows them to consider driving. Don’t forget that Christmas is mostly celebrated by Christians, unlike Thanksgiving which everyone wants to be a part of.

This year, like most, my family had resigned to the fact that it just wasn’t practical to travel to see the rest of the extended family in Atlanta. Sure, Southwest was flying to Atlanta, giving me some hope of using miles on a holiday, but their service only starts up next February. Frankly, I hadn’t bothered to look for frequent flier awards on other airlines as it just seemed impossible. Then something unusual happened yesterday. My wife was confirming someone else’s business class international award flights and was told that first class had opened up on a domestic segment that they were only able to get in economy. On a whim, I checked flights on United between Denver and Atlanta during Thanksgiving weekend. I was stunned to find some availability at the lower redemption levels.  Before long, we had three first class tickets arriving and departing not too far off of the flights I would have booked if I had my first choice.

What is truly mind boggling is that one of the aircraft is a regional jet, equipped with only six first class seats. Like some Saudi prince traveling with his entourage. our family just booked half the first class seats on a single flight!

The Downsides

One could argue that paying 50,000 miles for a 3.5 hour domestic flight is not a very good use of miles. I probably would have joined that argument a year or two ago. Obviously, I came to a separate conclusion this week. Miles are there to be used, not saved for some rainy day. Despite the relatively short flight, this is still a ticket that would have cost about $400 in coach. The fact is that I am somewhat miles rich and time poor, as 2/3ds of our family is currently enrolled in school. This cuts down our family travel time to school breaks and such. Simply put, if I didn’t use these miles for this trip, I really didn’t have any other plans for them.

Conclusions

Spending miles at the lower mileage rates is much harder than earning them. Somehow, my family won the lottery this year, scoring seats on the busiest travel days of  the year. Perhaps there aren’t many business travelers that week expected to purchase first class seats, or maybe other travelers, like me, simply assumed that they would never find award seats on Thanksgiving. Either way, this will be an award long remembered, as each year will probably re-tell the tale of the time that I found three award seats, two months before Thanksgiving.