What's in Your Wallet?

By staff March 1, 2007

Do you own a debit card? If you answered “no” without checking your wallet, you may be in for a surprise. Check now. Many banks are now automatically replacing ATM cards with debit cards without notifying consumers. The two cards may look and feel the same, but there’s a world of difference between them in cost, convenience and safety—including the fallback available when something with a purchase goes awry.

On a recent trip to Germany, for example, I purchased gas at a self-service station in Munich. I had difficulty getting the pump to accept my card and had to insert it several times. When I returned home, I found a charge for $179 for a gasoline purchase in Hamburg. I have never been to Hamburg, which is across the country from Munich. Since I had used a Visa credit card, I disputed the charge with Visa and it was removed from my bill.  Visa investigated and found that someone had made a duplicate of my card.

One of the hotels that I had chosen for the trip required full payment in advance. I reserved a non-smoking, air-conditioned room with a king-size bed and charged the room on my American Express card. When my wife and I arrived, our room reeked of smoke. The air conditioning consisted of an open window; the bedding and carpeting were badly stained; and the hot water was not working. We moved out as quickly as we had checked in; the hotel refused to refund our money. When we arrived home, I disputed the charge, and Amex removed it from my bill.

Had I used a debit card instead of a credit card the outcome may have been different. Credit cards, as the name implies, allow you to buy now and pay later. Debit cards allow you to buy now and pay instantly through an immediate deduction from your bank account.

A credit card purchase actually results in a loan to you from the card issuer, who then pays the vendor for your purchase. If you repay the loan within the grace period, usually about 20 days, the loan is interest-free. You have had the use of the lender’s money without cost. If you fail to pay on time, finance charges accrue. Credit cards usually have a limit on the total you can charge. On debit cards, the only limit is the amount of money you have on deposit at the bank.

Debit cards rarely have finance charges, since there is no loan. The money comes right out of your bank account. This is where the potential for problems arises, as debit cards lack many of the protections you may have with a credit card.

The biggest danger comes if a thief gets his hands on your debit card, or even your debit card number, since devices to make new cards are readily available. He can go to the nearest ATM and clean out your bank account. To remedy the theft, you must first discover it, then prove to the bank that you did not withdraw the money, and then wait for the bank to replace the funds, which can take from 10 days to never. In the meantime, any outstanding checks you’ve written will bounce, scheduled payments will not be made, and you may end up with late fees, finance charges, default notices and bad credit reports.

If you make a purchase on a credit card and are dissatisfied, you can complain to the credit card company, which usually has a procedure to resolve such disputes before the vendor is paid. If you are dissatisfied with a debit card purchase, the vendor already has your money, putting you in a much weaker position.

Your liability for charges on a lost or stolen credit card is governed by the Fair Credit Billing Act. Debit cards are covered by the Electronic Funds Transfer Act, a different law with substantially different protections. Under the latter, you have the right to dispute an error on your bank statement but no rights against a vendor. Your liability for false charges is limited to $50 if you notify the bank within two days of discovering the error, $500 if you wait more than two days, and there’s no limit to your liability after 60 days. And here again, it is up to you to prove when you discovered the error.

Using a debit card can cause other problems. Some car rental agencies will not accept debit cards because the final charges cannot be determined at the time of rental; other rental companies will block out a sum substantially higher than the probable end charges. This sum is either removed from your checking account immediately, or your account is frozen for that amount. This can result in the depletion of your checking account when you would normally still have funds available.

That’s not to say there are no benefits to debit cards. They can be a valuable tool for consumers who lack the willpower to control their credit, since credit cards allow you to buy things you might not really be able to afford. Debit card holders usually cannot exceed the amount of cash they have on hand and therefore will not go into debt for purchases. That makes them a viable option for your college-age kids.

When I was practicing law, I had a client who found a fabulous trip to Mexico for a great price. He didn’t have the money to pay for the trip and was not likely to get it. Still, he felt he couldn’t miss out on this great opportunity, so he charged it on his credit card. He enjoyed the trip. Unfortunately, the cost of that trip was added to his other unmanageable outstanding debt and helped force him into personal bankruptcy. He should have had a debit card.

Debit card transactions are substantially cheaper for banks to handle than credit card transactions. If you pay your credit card bill in full and on time, the bank ends up giving you an interest-free loan from one billing period to the next. You can actually earn interest on the bank’s money between billing periods. This is why banks are pushing debit cards on prompt payment customers.

My advice: Unless you need the discipline that a debit card imposes, you should leave your debit card at home or tell your bank to exchange it for an ATM card. Credit cards have many more benefits and far fewer risks.

Before retiring to Sarasota, Howard Tisch provided legal services to New York’s attorney general for the Bureau of Consumer Fraud and Protection and served as Deputy Commissioner of Consumer Affairs for New York City.

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