Plastic’s Perks and Pitfalls

Ed Note: We’re thrilled to welcome Tim Chen, founder and CEO of NerdWallet, an outstanding credit card comparison website known for its unbiased, honest advice. We asked Tim to share his unique expertise on Block Talk and explain some of the hidden costs (and hidden benefits!) of the good ol’ credit card. Enjoy!

Functioning in today’s world of mobile payment systems and online shopping options demands plastic. Cash may be king, but as his beard grows ashy and long, his fingernails and eye whites yellowing with age, the plastic prince, with all his golden epaulettes and shiny medallions and shimmering promises, is bent on usurping the throne. Whether you’re loyal to the wise but withering reigning monarch, or your allegiance lies in the wild-eyed progressivism of this charismatic contender, current economic tides behoove you to know the hidden threats and buried benefits of credit and debit cards alike. Here are a few little-known caveats and tips to consider next time you’re weighing payment options.

Taxable signing bonuses

Credit card issuers often endeavor to entice prospective cardholders by offering jaw-dropping sign-up bonuses, oftentimes valued in excess of $500. But did you know you will be taxed on your bonus if it’s too big? Signing bonuses valued at $600 or more will incur a 1099 tax notice, requiring the recipient to pay income tax on the rewarded sum. (In reality, any amount of income is taxable regardless of size, but you won’t receive a notice unless it exceeds $600.) Before you get suckered in by a too-good-to-be-true signing bonus, determine whether you’ll be taxed on the reward and set aside the money necessary to later pay the amount owed. And don’t worry—this only applies to sign-up bonuses. Ongoing rewards are treated as rebates and won’t be taxed.

Security

Fraudulent charges impact your finances differently depending on whether the stricken account is credit or debit. As long as you report loss or theft within 30 days of the incident, you won’t be responsible for charges made subsequent to notifying your issuer. If someone swipes your credit card and charges two thousand dollars in pony rides and Laffy Taffy before you’re able to report the theft, you’re only liable for up to $50. Report missing credit cards immediately—if you don’t let someone know within 30 days, you could wind up paying for all fraudulent charges.

Debit cards are less forgiving. You won’t be liable if you report the card’s disappearance immediately, but you will be liable for up to $50 if you hesitate and still file the report within 2 days. If you don’t report the loss within 2 days but do it within 60, you can be held responsible for up to $500. If you wait longer than 60 days, you’re out of luck. In short, credit cards tend to have more favorable liability terms, which is important to consider when choosing your primary payment option.

Hidden Visa & MasterCard Benefits

Few people know this, but most credit cards come preloaded with a handful of benefits. Unlike rewards, these benefits are not determined by the bank but by the service provider (Visa, MasterCard, Discover or American Express). These are things like car rental insurance, purchase protections and extended warranties. Because they typically aren’t as exciting as big signing bonuses or cash back rates, they tend to take the backseat in ad campaigns. Take a look at the full list of Visa benefits and MasterCard benefits to see which apply to your card. Visa Signature cards are particularly plentiful in perks—don’t miss out on the free benefits lurking just below the surface!

Cost to Merchants

You may not be entirely inclined to help out the most hated big-box retailer du jour, but what about your neighborhood bakery, that precious independent bookstore, or the charity you’re donating to? Your choice of credit or debit affects the person on the receiving end of the payment, in the form of interchange costs.

Interchange fees are paid by merchants to the merchant’s bank, the customer’s bank and the credit or debit card network (like Visa or American Express). Those fees vary depending on the type of retailer (nationwide, high-volume stores like Target have it the easiest, but independent gas stations and small-ticket merchants pay higher fees) as well as the type of card (rewards credit cards have the highest fees, followed by regular credit cards, then debit cards – usually. But we’ll get to that).

Recently, Visa and MasterCard decided to jack up their fees on small-ticket debit card transactions for many independent merchants – including your local coffee shop whose name includes a clever pun. If you use your Bank of America debit card to pay for a $1 scone, more than 20% of that might be taken out of the merchants’ pockets. As a rule of thumb, here are the interchange rates from lowest to highest:

Small-ticket (<$15) Large-ticket (+$15)
Debit card from small bank Debit card from big bank
Standard credit card Debit card from small bank
Rewards credit card Standard credit card
Debit card from big bank Rewards credit card

 

Now, this doesn’t mean that you should make your payment decision based entirely on the merchant. But if you’re making a $500 online donation with a rewards MasterCard, remember that the charity loses $12 of that. If you pay for a $2 coffee with your Chase debit card, put a little extra in the tip jar. And if you see a sign that says, “No credit cards for purchases under $5,” you’ll know why: the plastic you use makes a lot of difference.

[Image: Andres Rueda via Flickr]

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