Debit cards popular but use includes higher risks

PERSONAL FINANCE

November 27, 2005|By EILEEN AMBROSE

This holiday season, about one-third of shoppers are expected to use a debit card for purchases rather than a credit card in an effort to keep spending in check.

It would mark the second year in a row that debit cards have significantly pulled ahead of credit cards as the payment of preference around the holidays, according to a recent survey by the National Retail Federation. The use of credit cards - the choice of about 28 percent of shoppers - has been dropping and this year is expected to fall behind cash.

Credit counselors often advise budget-conscious consumers to use a debit card to control spending. With a credit card, consumers can spend money they don't have. Debit-card purchases usually come straight out of the customer's checking account, so a spending spree is limited by how much is in the account.

"Another positive: You don't have to pay interest on the purchase that you make with a debit," said Ray Hooper, education and housing director for the Consumer Credit Counseling Service of Greater Dallas.

But some consumer advocates and identity theft specialists are wary of debit cards because they don't carry the same legal protections that credit cards do.

If you can resist overspending with plastic, "your credit card is a much safer way to do business," said Ed Mierzwinski, of U.S. Public Interest Research Group, a consumer advocate. "If you are not confident that you can avoid racking up credit-card interest and debt, then you should go into a debit card with your eyes open that your rights are not the same by law."

Essentially, with a credit card the most you would have to pay if a thief used your card is $50. Card companies typically waive that sum, too. Debit cards come under a different law called the Electronic Fund Transfer Act. With a debit card, your liability depends upon the speed at which you report an unauthorized purchase.

For example, you won't have to pay more than $50 if you alert the financial institution within two business days of discovering the loss or theft of your debit card. Wait longer than two days and you can lose up to $500.

Fail to report a problem within 60 days after your statement is mailed, and you can be liable for fraudulent purchases made with your card after the 60 days, according to the Federal Reserve. So, you can lose all the cash in your account and the amount of any overdraft line of credit.

Once you notify the bank of an error, it generally has up to 45 days to investigate and resolve the matter. When an investigation drags on for longer than 10 business days, the disputed sum generally must be returned to your account. It can be taken out again, though, if the investigation concludes that no error occurred.

But 10 days without your money can be a big inconvenience during the holidays, said Gerri Detweiler, author of Ultimate Credit Handbook.

People should ask the issuer for the rules that apply to their debit card, experts said. Some lenders, for instance, may return disputed sums to customer accounts in one to three days.

Visa USA said consumers using debit cards carrying its logo won't have to pay for any fraudulent purchases when transactions are processed through its network. Signing for debit purchases, rather than using a system that only takes a PIN code, assures the transaction goes through the Visa network, said spokesman Kenny Thomas. MasterCard offers a similar "zero liability" fraud protection.

Credit cards have other advantages usually not extended to debit cards. Basically, you can withhold payment while you dispute a credit-card charge. And, under certain circumstances, the credit-card company "will go to bat for you" in disputes with a merchant, Hooper said.

"When you use a debit card, it immediately comes out of your checking account. You have to hustle to get it back in," he said. And, even if you resolve a problem with a merchant, you might end up with a store credit rather than a cash refund.

Thomas said Visa extends dispute resolution to its debit cards. MasterCard doesn't because debit cards are often used to buy gas, groceries or other small purchases that aren't likely to lead to merchant disputes, said Laura Kelly, a senior vice president.

If you are using a debit card this holiday, take some precautions. For instance, if your debit card uses a PIN code, guard the number. That's a key to your account.

Review statements for suspicious activity. Banking online makes it easy to frequently monitor accounts, Detweiler said.

At some banks, too, customers can ask to be notified by e-mail or cell phone if an unusual purchase is made, Detweiler said. Customers can choose the parameters, such as being told when there's a card purchase of more than $300 or the account falls below $500, she said.

eileen.ambrose@baltsun.com

Choices

Holiday shoppers' payment of choice:

2005* 2004

Debit card 34.3% 34.7%

Cash 28.5% 25.9%

Credit card 28.2% 29.5%

*Estimated

Source: National Retail Federation

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