FOOL ON THE HILL
Cash Cards Cost You

The success of the Starbucks cash card is sure to spin off imitators. But the cards can wind up costing you plenty if you aren't careful. Their convenience is debatable, they amount to an interest-free loan to the company, and there are several ways to lose the entire value of the card. In short, they're good for the company, but usually bad for you.

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By Rex Moore (TMF Orangeblood)
April 15, 2002

A pretty piece of plastic sits on my desk next to the keyboard as I write this story: a "Starbucks Card," with yellow flowers and green grass and orange and blue coffee cups. This card, and millions like it, is a big reason Starbucks (Nasdaq: SBUX) had an outstanding quarter last time around. As Tom Jacobs explained in a recent Rule Breaker report, consumers have purchased 2.3 million of the cards both for themselves and as gifts since they were introduced in November. Because of their success, you'll likely see more and more businesses issuing such cards in the near future.

And, for the most part, consumers are cheating themselves when they buy these things.

Let's back up and explain just what the Starbucks Card is. It's a very simple concept: You can purchase a card and load it up anywhere from $10 to $500 in value. Then, when you buy anything at your local Starbucks, you hand over the card and the cashier will swipe it, subtracting the value of your purchase. When your card is running low on value, you can "reload" it, either at the store or online with a credit card.

The benefit to the consumer, allegedly, is one of convenience. No more fumbling for change or running to the ATM when you need a cup of joe. Just present the cash card, and presto! You're on your way.

The convenience of this whole thing is debatable, however. In my view, there's nothing more convenient than cash, which is accepted everywhere. (Except for the Department of Motor Vehicles. And the only reason I can come up with for that is it's in keeping with the DMV's mission statement: "To inconvenience the customer at every possible turn.")

But convenient or not, there is one good reason not to use a cash card: It winds up costing you more. Let's look at the Starbucks Card in a little more detail. First, you receive nothing in return for using their card. No discounts for your coffee. No discounts for any merchandise purchased at any of their 39 gazillion locations.

In fact, the company is ready to take money away from you if it can. Right on the back of my pretty card, it tells me if I don't use it for 12 months, Starbucks will begin taking $2 off the value every month "until depleted." Also, if you lose the card, you lose the remaining balance, even if you know the card number. Unlike a credit card, the company apparently won't cancel a lost or stolen card. Heck, according to the back of my card, if my dog chews it up and I bring in the remains, I'm out of luck. (Actually, the back of my card does not mention my dog, but it does say the value won't be replaced if it is "destroyed.")

Lost, stolen, or destroyed cards are just one way you can lose in this deal. Another is the tendency of some people to let a low balance go unused. Reloading solves this problem, but many may simply leave the card with the $1.13 balance at home, and buy a new one at the store.

Those who have trouble with credit card debt will find still more disadvantages with a cash card. It seems easy to add another $50 in value over the Internet, but if you carry credit card debt, you're being charged interest on that $50. How much better off would you be paying an extra $50 on the CC debt, and just using cash at Starbucks? (I know, this is my column and I should be answering that. More later.)

There is a final, subtle way you are cheating yourself with this system. How much easier is it to make one or two extra coffee runs if you only have to hand over that card, rather than cash? For most of us, it's probably at least a little more likely we'll spend more with the card than with the cash.

So, at best, you can do no better for yourself by using a cash card instead of cash. At worst, you could actually be losing a significant amount each year. And even for those of you who never accidentally flush your card down the toilet and never leave any cards lying around with unused balances and never spend any more than you would have without the cards, there's a reason you are at a disadvantage also.

As stated in the previously mentioned Rule Breaker article, you are giving Starbucks an interest-free loan every time you buy or reload a card. You reload for a hundred bucks, and the company slowly repays you in coffee. There are better things you can do with your money than giving it to a large corporation well before it delivers goods or services to you. This is generally the exact opposite of the way you want things to work.

As mentioned before, adding a bit extra to your credit card payments is a great idea. If you're carrying an $8,000 balance, it will take you three years to pay it off -- assuming $300 in monthly payments, an interest rate of 18%, and an annual fee of $35. If you can manage to throw in an extra $50 a month, however, you'll pay off the balance seven months earlier and save yourself $650 in interest payments.

That's a lot of dough! Taken to that extreme (and I'll admit, that's pretty extreme), you can see how each cup of Grande Triple Soy Chai Latte costs you a lot more than $4 when you use that cash card.

Lest I come across as having my priorities upside down, let me state that carrying around a $10 Starbucks Card is hardly the worst thing you can do to your financial health. But I hope I've given you some things to think about as we'll soon begin to see more and more companies attempting to copy Starbucks' success with cards of their own. Remember, nothing is more convenient than real cash, and you don't need to be giving corporations interest-free loans. (In fact, better for you to earn interest off your money with the help of our Short-Term Savings Center.) The cash cards make nice gifts, but that's about it. Keep asking yourself if there are better things you can do with your money.

Rex Moore recognizes the value of cash cards as gifts and will gladly accept such. He owns no companies mentioned in this report. The Motley Fool is investors writing for investors.