What's made out of plastic, shaped like a business card, allows you to buy goods and services without carrying cash, and is the most successful product in the history of payment systems? Credit card, you say? Guess again. The correct answer is debit card, those two-by-three-inch pieces of plastic that look like credit cards but work like checks, automatically deducting the cost of anything you buy directly from your bank account. Energetically promoted by banks, the number of debit cards in use has almost tripled since 1995.
But like any love affair, this is a relationship to be entered with your eyes wide open. While debit cards can be a convenient, cost-effective way to pay for a lot of things, they don't make sense for everyone, every time.
Herewith, the dos and don'ts of debit:
WHEN DEBIT IS BETTER
1. DO use a debit card in place of cash and checks. Safer than cash, more convenient than writing a check, debit cards make the most sense as a substitute for either of these methods of payment.
With a debit card, you can eliminate a lot of those annoying trips to the nearest ATM. You don't have to worry about carrying around wads of money and you won't have to produce three different forms of identification to write a check. And as long as you use a debit card with the Visa or MasterCard logo on it, you don't have to worry about merchants refusing to take your payment; both Visa and MasterCard insist that retailers who accept their credit cards must take their debit cards as well— in the United States and abroad.
2. DO use a debit card to help discipline your spending. Unlike credit cards, debit cards force you to think about whether you can truly afford a particular product or service before you whip out the plastic. The money is whisked out of your account on the same day if you use a card that requires a PIN, or within one to three days, if you use a signature-based card. "You can't spend more money than you actually have in your account," says Susan Grant, vice president for public policy at the National Consumers League in Washington, D.C.
3. DO use debit if you want to avoid credit-card expenses. Over half of American cardholders carry a balance, recently averaging $7,564. The price of that charging habit, at the current average interest rate of around 18 percent: nearly $1,400 a year! And over the past few years, credit-card issuers, looking for ways to boost profits, have been socking consumers with nuisance fees for even the smallest payment transgressions.
WHEN A CREDIT CARD IS BETTER
1. DON'T use debit if you're casual about your financial bookkeeping. If you don't faithfully write down every debit-card transaction in your check register, you could end up bouncing checks all over town. You'll also need to hold on to your debit-card receipts (as you would with a credit card) until you're sure that the transaction is listed properly on your monthly bank statement, and that there are no unauthorized debit purchases. "Don't throw the unopened envelope into a pile to deal with later," says Grant. "You have just 60 days to dispute charges on both debit- and credit-card statements."
2. DON'T use debit to pay for phone or online orders or for items you may want to return. If you run into problems with an item you've bought with a debit card — say, the product turns out to be defective or your catalog or Internet purchase never arrives— you have to fight to get your money back, just as you would if you paid for the item in cash. Use a credit card instead and you can simply refuse to pay the disputed portion of your bill until the matter is resolved to your satisfaction. That's why consumer advocates strongly suggest using your credit card to pay for any item that will be delivered in the future and for any purchase you have doubts about. Will you want to return those shoes? Switch that airline reservation? "When you have the option of withholding payment," says Gerri Detweiler, an adviser to Debt Counselors of America, "you have a whole lot more leverage with the merchant."
Your rights as a consumer are stronger in just about every way when you pay with a credit card. If your credit card is lost or stolen, your liability under federal law is capped at $50. But if a thief walks off with your debit card your losses could reach $500 or more. Visa and MasterCard, however, typically extend the same protection on debit cards as on credit cards— and you are liability-free if you report your card missing within 48 hours. But the catch lies in the fact that the money may already be out of your account— and you could conceivably be without access to those funds until the bank investigates and resolves the matter.
3. DON'T use debit if you're looking for perks like frequent-flyer miles, rebate points, and extended warranties. Very few debit cards offer anything in the way of incentives, and the rare ones that do can't compete with the perks offered by their credit-based cousins.
Debit-card issuers may start piling on the perks as the market becomes more competitive. But the real breakthroughs are probably three to five years away, when industry experts anticipate banks will introduce a single card that includes all of today's payment options.
Until then you can carry both, but be smart about which one to pull out at the appropriate time.
