All About Credit Cards

There are some questions concerning the use of debit cards. An Arcadia man said he used a debit card to purchase an item he never received and was looking for help in getting his money back.

Whether it’s at the gas pump, grocery store or online, more and more, consumers are being asked the same question: credit or debit? The decision you make can have long-lasting ramifications, so you had better think twice.

While the plastic cards may look similar, there are major differences between credit and debit cards, and sometimes even more between issuers.

Basically with a credit card, you’re borrowing money from a financial institution. Don’t pay it all back in a timely manner and you’ll be hit with interest rates sometimes higher than 20 percent. A debit card is an electronic check that takes money directly out of your checking account.

Consumer Reports notes that debit transactions now outnumber those on credit cards by more than $2 billion, accounting for over $1 trillion in 2006. Bank of America’s “Keep the Change” program actually rounds up a debit transaction amount to the next dollar and deposits the “change” into your savings account.

Since you’re using your own money, debit cards are easier to obtain than credit cards and can be a simple, pay-as-you-go money management tool for those that don’t want to get into credit trouble. But there’s no government help in resolving merchant disputes, only errors involving electronic fund transfers. Some banks may voluntarily help, but since the merchant has all your money, you have little leverage. Even if successful, you might be stuck with a store credit.

Under the Electronic Fund Transfer Act, if your debit card is lost or stolen, you’ve got just two days to notify your bank to limit your liability to $50. Wait, and that figure jumps to as much as $500. After 60 days, you’re liable for everything. If your checking account has overdraft protection, you could be wiped out. While some banks have voluntarily reduced these liability limits, you need to check with your institution. Consider opening up a separate small account associated with a debit card to limit any potential fraud losses.

With credit cards, you’re using someone else’s money and there’s no access to your bank accounts. Furthermore, credit card purchases are protected under the FTC’s Fair Credit Billing Act that gives consumers the right to withhold payment on disputed merchant charges. There’s no liability until the dispute is resolved. And if a credit card is lost or stolen, there’s usually no more than $50 liability for unauthorized use.

So credit or debit?

If you think of that debit card as cash, use it for smaller point-of-purchase items like fast food, groceries or gas, where you don’t need merchant dispute protection. If you’re travelling out of the country, foreign transaction fees might be lower by using a debit card. Bank of America, for example, charges 1 percent on debit transactions compared to 3 percent on credit cards.

Make sure you know what fees — if any — your bank charges using its debit card, and know your account balance. Just like a bounced check, you could get hit with big overdraft charges. Also ask a merchant if it runs a separate “hold” or “block” charge on your checking account that guarantees payment. It’s usually cancelled within 48 hours, but those funds remain unavailable.

Use your credit card for larger purchases or those being made online or over the phone. Also, charging a product on certain credit cards may provide an extended warranty that can double the coverage of the original manufacturer’s warranty, for up to one year. But check with the issuer of your card to verify specific terms.

To avoid becoming a victim of debit or credit card fraud, monitor your accounts and transactions through online banking or telephone in between getting monthly statements.

By David Morris

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