Debit Cards 2010

In 2009, for the first time, the volume of purchases made by debit cards exceeded that of purchases made by credit cards. Today, only 78% of consumers carry a credit card, while 80% have a debit card. Dave Ramsey should be happy. He does not believe in the use of credit cards. He considers the temptation to run up a balance too great to risk using a credit card; sort of like giving a two year old a loaded hand gun. There are two reasons for this change in American behavior. The first is the credit card reform act that took effect earlier this year. 15 Million Americans with questionable credit scores lost their credit cards as a result of this act. The second is a major change in consumer attitudes. After a 20 year credit binge, Americans have awakened with a nasty debt hangover. In the last two years the total debt carried on credit cards is dropping, “The lowest percentage of shoppers in the 27-year-history of a national survey said they used credit cards over the Thanksgiving weekend, while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion.” (New York Times). America is moving from credit to cash or debit cards. However, there are risks associated with the use of debit cards. I believe these risks are so serious that I would rather use a credit card. If the balance on a credit card is paid off every month without exception, it is a better tool than a debit card. If it is misused, it is truly a significant danger to your financial wellbeing.

In spite of what the banks would have you believe, credit cards offer more fraud and theft protection than debit cards. The latest numbers (2008) indicate losses from debit cards totaled $788 Million. Even if debit and credit cards are issued by the same bank, they are covered by different laws. Credit cards are covered by the Fair Credit Billing Act. This limits the card holder’s liability to $50.00 period the end. If the theft is reported before the card is used, the consumer pays nothing-nada. The same protection covers the illegal use of the credit card number by means of phone or Internet purchases.

Debit cards are covered by the Electronic Fund Transfer Act. If a card holder reports the loss of a card within two days, liability is limited to $50. After two days, the liability jumps to $500. A card holder who fails to report the loss within 60 days could be responsible for the entire amount. The EFTA also allows the bank to freeze your losses for up to 10 days while they conduct their investigation. Not having access to your money for 10 days could be a real problem if you needed to pay your rent or your car payment in that time frame.

Banks advertize zero liability debit cards, assuring customers that 100% of stolen funds will be restored, usually within 24 hours. However, PIN transactions (those transactions that do not require a signature) are not covered by zero liability policies, but are subject to the individual policies of the particular institution that issued the card. This would include fraudulent ATM withdrawals. Debit card holders can also be held responsible for losses due to “reckless behavior.” The definition of reckless behavior is pretty much left up to the bank. It can include card holders who report two or more unauthorized transactions in any 12 month period. If it is discovered that the cardholder wrote down his PIN or shared it with someone else, this can be considered reckless behavior.

In short, consider a debit card cash. If you are carrying a checking account balance of $5,000 that is how much cash you have in your wallet. Check that balance every day. Keep track of all your purchases and record them, again on a daily basis.

There are other dangers associated with debit cards. Last year I heard a discussion of debit card overdraft protection. Someone I have known for many years currently has a daughter in college. He was attempting to straighten out her checking account. It seems she has a debit card that she uses constantly for everything. She frequently forgets to enter these debits into her check register, spends more money than she has, and incurs overdraft protection fees. These fees typically run $30.00 per charge. In this particular case, the girl ran up over $150.00 in fees.

“If you overdraw your account with the typical fee and you pay it back in two weeks, you're paying over 500% interest," said consumer advocate Jeane Anne Fox. Tony Soprano would be ashamed to charge such interest rates but banks think it just fine. They generate $38,000,000,000 a year in pure profit by providing their customers with such a wonderful service.

Another person participating in this conversation told a story from his college days. Of course he didn’t have much money and like most of his generation he was quick to use a debit card instead of cash for small everyday purchases, like coffee, lunch, and miscellaneous school supplies. Then, every evening, he would check his checking account balance on line. On one particular day, he incurred 7 overdraft protection fees totaling $210! He called the bank and threw a screaming fit. He demanded they remove overdraft protection from his account and withdraw the fees. The bank withdrew the fees but encouraged him to keep the overdraft protection, telling him that it would protect him from the embarrassment of attempting to pay for something when his account was empty. This individual was having none of it and informed the bank he could tolerate a lot of embarrassment for $210.

It gets worse. If a series of checks or fees will throw your account into overdraft protection, the bank will process the largest charges first so they can hit you with more fees. If you use a debit card to rent a car or a hotel room, the vendor will put a hold on your account that is significantly larger than the expected charges. Sometimes the vendor will then forget to inform you of this little fact. Let’s say a total car rental bill is expected to be in the neighborhood of $135. The car rental company might put a $500 hold on your account as a form of self protection. If you don’t know this, you could easily rack up a lot of fees, thinking you had access to that $500 when the bank considers it already spent when calculating such fees.

Whether you choose to use a debit card and avoid the risk of reckless credit purchases or you choose to use a credit card, understanding the dangers associated with, fees and usurious interest rates;

Please, let’s be careful out there.