Tuesday, November 13, 2007

Understanding Debit Cards

Janet uses her bank debit card for almost all her monthly purchases. Asked why she doesn't just pay with cash, she says that she prefers the convenience of a debit card. "It's safer than carrying cash. And you don't have a huge bill to pay at the end of the month."

"I like the pay-as-you-go concept where you only spend what you have rather than borrowing" as you would with a credit card, she adds. And of course, if you don't pay off your credit card completely each month, "there are the hefty credit charges." They can run 9 percent to 20 percent.

If you want the convenience of a credit card, but don't want interest payments or a large bill to pay off monthly, then a debit card may be the answer for you, too. Debit cards work like cash or a personal check. The money you "charge" is automatically deducted from your bank account.

Yet, debit cards don't have the same protections from unauthorized use as credit cards.

Debit Card or Credit Card?

What's the difference between a debit card and a credit card?

While a debit card looks like a credit card, it works more like cash or a personal check. You "pay now." With a credit card, you "pay later."

Debit means "subtract." When you use a debit card, you subtract money from your own checking or savings account. As with credit cards, you use it in stores for purchases. At check-out, the card reader electronically contacts your bank and subtracts the amount from your account. The money you have in your bank account limits how much you can spend. However, if you are not careful in watching your daily account balance, you can over withdraw your account. Some systems will allow you to use your debit card when you don't have enough money in your account to cover the purchase. This can result in hefty overdraft fees.

Using a credit card is somewhat like taking out a loan from a bank or other financial institution. You have to pay back the credit you used each month. If you pay back less than the full amount you owe each month, you pay interest on the amount you don't pay back. The credit card company sets the total amount you can charge based on your credit history, income, debts and ability to pay.

Some cards are dual-purpose credit/debit cards. Before you swipe the card through the reader, you select a "credit" or "debit" button on the reader. If you select "debit," you then enter your Personal Identification Number (PIN).

If you select "credit," you are given a credit receipt to sign. "Credit" charges will appear on your next charge account bill.

What are the advantages of a debit card?

  • It is often easier to get than a credit card.
  • You don't have to get your check approved or show identification at stores.
  • You don't have to carry cash, a checkbook or traveler's checks.
  • Debit cards are more readily accepted than checks, especially when you are traveling.
  • You don't pay interest charges.

Because checkout lines move faster, storeowners like debit cards. They don't worry about bounced checks or need to take checks or cash to the bank. Debit card processing fees for the merchant are generally lower than credit card fees.

What are the disadvantages of a debit card?

  • You need enough money in your bank account to cover each purchase.
  • Since you paid for the purchase at checkout and the money is out of your account, you have less protection if something goes wrong with the purchase. Your bank won't put money back into your account for items that are never delivered, don't work or were misrepresented.
  • You may have bank fees—such as monthly service charges, per-transaction costs or penalties—for dropping below your required minimum balance. Check with your bank to find out those extra costs.
  • You have less protection if your debit card is lost or misused than with a credit card.

Protecting Your Debit Card

A debit card is like a blank check, so you need to guard the card and the account number carefully against loss or misuse. A thief can clear out your bank account before you even know your card is missing.

If your debit card is lost or stolen, or if you think someone is using it fraudulently, call your bank immediately. Follow the phone call with a letter.

Thieves don't even need your card. As long as they have your name and card number, they can order goods by mail or over the telephone. They can wipe out your bank account before you know the card is missing, or even when you still have the card in your pocket. Protect your debit card by holding on to your debit card receipts and check them against your bank statement each month.

Memorize your PIN but don't keep it with your card. Don't choose one that a smart thief could figure out, like your phone number, address, birthday or part of your Social Security number. Never give your PIN to anyone.

What if your debit card is lost, stolen or misused?

You must act quickly. The most you can lose is $50 if you report to the bank or credit union that your card is lost or stolen within two days of when you discover the loss. However, your liability increases to a maximum of $500 if you report within 60 days after you receive your bank statement.

If you don't to notify your bank within 60 days after you receive your bank statement, your liability is unlimited. You could lose all the money in your account. Check your bank statements carefully and promptly for charges you didn't make.

Some major debit card issuers provide more protection. Some state laws cap your total loss at $50.

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