The Changing Future of Debit Cards

Wikipedia: "A not credit worthy consumer who may find it impossible to obtain a credit card, can more easily obtain a debit card, allowing him/her to make plastic transactions."

Debit or Credit Cards maybe obsolete with personal Phone Scanners

Debit Cards have become a way of life for many of us, a fact I am reminded of every time I slide a card at a check out counter when the clerk asks: Debit or Credit? Today card transactions are 60% debit and 40% credit. A new swipe charge that will go into effect on October 1, may however hold some surprises in store.

I’m particularly offended by the opening sentence in Wikipedia where it explains the advantages of using debit cards as it states a gross assumption: “A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a debit card, allowing him/her to make plastic transactions.”

After cutting up my credit cards (8) exactly 25 years ago this month, entirely directed by reasons of philosophical economic doctrine, I went totally cash for awhile, which admittedly was quite easy down in the Caribbean Islands since many establishments had cash only policies. Plane tickets for travel were bought at the local airline counter with a check or cash and only renting a car in faraway destinations could be a problem without a credit card. But not enough of a problem to make me want to have one again as Traveler Checks accomplished the same result. But then the Worldwide Web came along with online payment systems, shopping online and reservation systems that required some form of financial guarantee, the use of debit cards rose manifold in just a short number of years.

My first debit card was the EuroCard, attached to a Dutch bank account and it worked well on the island of St.Martin and obviously in Europe. Even though the first debit cards saw daylight in Seattle Washington in 1978, it took another 20 years before debit card use outnumbered check usage around the world.

My preference for debit cards comes from the fact that I find debiting money directly from my checking account(s) not only keeps me living within my preset budgets, having several debit cards to several accounts, gives me most of the benefits of credit cards without the hassle every month of verifying and administering the use versus the time it takes to pay 8 or more different credit cards. My monthly statement provides a good snapshot of how much I spend per month and where it’s going.

So why are people still using credit cards? Well three main reasons: You can spend more than you have — and you typically get better rewards and better protection than you do with debit cards. The first reason is part of why we are now living in a credit crunch economy. The second reason is at best an incentive financed by the fact that credit card use is highly profitable and to encourage the use, financial institutions gift reward programs. Bu the third reason is what bothers me: credit cards get a much better protection than debit cards, mainly because you’re using someone else’s money to purchase a desired lifestyle. And as we know financial institutions have a special place in Washington’s heart as Federal law protects you if you need to dispute charges on a credit card, but not if you use a debit card.

A Dying Tradition?

Over the years I’ve come across debit card traps that can hurt you financially if you’re not aware or on the alert. Here’s what I’ve learned about protection and when to use my Debit Cards as Credit Cards.

Identity theft
When your debit card number is stolen, unlike credit cards, debit cards hit you with fraudulent payments and fees immediately. To protect yourself from this debit card trap, make sure your bank will not only dispute the fraudulent charges and carry an investigation on your behalf, but that your checking account will be credited the amounts immediately. Bear in mind that this credit will be provisional, pending the outcome of the investigation. Rule of thumb is if lost or stolen debit cards are reported within 48 hours, cardholders are not responsible for more than $50 of fraudulent use. If reported two to 60 days afterward, cardholders could be held accountable for up to $500 of fraudulent charges. After 60 days, though, consumers face unlimited loss.

Credit cards, by contrast, face a $50 maximum liability, regardless of when reported. Research indicates that credit cards are nearly twice as likely to fall prey to card fraud.

Overdraft Fees
As of August 15, 2010, the Federal Reserve has prohibited banks from charging overdraft fees on debit card purchases with insufficient funds in the account. Instead, the charge will be rejected. You may opt-in to your bank’s overdraft protection, which will either extend you a line of credit or tie your checking account to your savings account. This said, you may still find yourself trapped into paying bank charges every time you overdraw your account under the Protection Plan your bank includes in your debit card agreement. Avoid this debit card trap by keeping a close eye on your checking account through online banking or don’t fall for the trap of overdraft fees by simply instructing your bank to not pay for a transaction if the money is not in the account.

Pre-Paid Debit Cards
Debit cards with preloaded amounts are becoming more and more popular, especially with parents who prefer to give their teens or college students a pre-set amount instead of a credit card with a large credit line. However, pre-paid debit cards carry monthly fees, activation fees, transaction fees and even a re-activation fee after a year has elapsed. At times, pre-paid debit cards may become overdrawn when the fees continue to apply on an empty card. Avoid this debit card trap by setting up a checking account without overdraft protection, to prevent purchases when the account has insufficient funds.

Free Offers with Strings Attached

Don’t use a debit card for free giveaways. Many magazines offer one free issue, but you must respond within 15/30 days to cancel the future membership tied to the promotion. This is true of free books and CD giveaways, free gym memberships, free samples and any giveaways that require you to provide your debit card number, while the vendor assures you that you will not be charged for the freebie. To avoid having your bank account hit with unexpected charges, use your debit card as a credit card in such cases or forgo the promotion altogether.

Recurring Payments
If you sign up for a membership at a shopping club, gym, or any other club that collects monthly, by-yearly or yearly dues, your debit card will be kept on record for recurring membership payments or any other fees, which you may not be fully aware of. This may cause your checking account to be hit “unexpectedly”. Even after you cancel your membership, your checking account may be debited for one or two months, often due to clerical errors. You can avoid this by paying with a personal check and providing a credit card for future payments.

Utility Auto Billing
Experience has taught me to forego the convenience of using my debit card to set up auto billing with my utility companies. For one thing, monthly charges may go up unexpectedly due to increased consumption or the expiration of a promotional rate. In addition, erroneous charges for canceled services will not be credited until the next billing cycle, and even then the credit will apply to the utility account, not my checking account. To avoid this debit card trap, make the payments online, after verifying that you have sufficient funds to cover the charge.

Future Concerns
In the first half of this year, every time you used your debit card the merchant was charged a fee of $0.44 to $0.47, even if you only bought a pack of gum. After 7 months of back and forth where The Federal Reserve initially proposed capping this fee at $0.12, the regulation imposed last June ended up being a total of $0.26 with financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards being exempt. As banks like JPMorgan, Bank of America and other lenders already indicated their intention to supplement this loss of revenue by adding new checking account fees, this issue is far from over which may make using your debit card more expensive in future.
When the Fed’s first announcement on Debit Card Fees came out on December 17, 2010, swipe fees were proposed at $0.07 per swipe and the headline said:
“Fed Proposal Would Cut Debit Card Fees by 70%!”
There were no headlines when the actual fees that will go into effect on October 1 were cut by”only” 40%.

Consumer Impact Warning

Although less likely under the current cap of $0.26 than under the previous proposal of $0.12, it’s still very possible that some issuers and merchants will:
• start charging debit card fees
• favor one payment method over another
• limit free checking accounts in favor of fee based accounts
• issue prepaid cards as their way to deal
• make rewards programs a dead issue
• put pressure on the Feds to set a minimum payment amount such as $10 for credit card purchases.

In any case, nothing in this entire exchange of opinions, is benefiting the consumer and once again displays how Washington and Wall Street play ping pong (tit for tat?) with your money. In any case, technology is going so fast that soon all sorts of cards and wallets are obsolete and replaced by personal smartphone scanners with security keyed account protections. We’re living in interesting times.

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