It’s one of the most common questions uttered by retailers these days: Credit or debit? Either choice can net consumers certain benefits, as well as certain drawbacks. But consumer groups warn that fees, limits and security issues could catch shoppers off guard, and recommend not always relying on swiping to make transactions.
Like millions of Americans, Khyra Barbary uses her debit card for one simple reason.
“It’s easier than carrying cash, especially this time of year,” the Rockford resident said. “I don’t like to walk around with a lot of money.”
Debit purchases are expected to reach $1.2 trillion in 2008, a 13 percent increase, according to industry newsletter The Nilson Report.
Debit use will be particularly popular for holiday shopping. But make sure you know the policies set by financial institutions and retailers to get the best bang for your virtual buck.
‘Credit or debit?’
You’ll get asked this question even if you don’t own a credit card. That’s because there are two basic ways debit card transactions are processed by retailers: a PIN or a signature. Each takes money out of your checking account, but there are some key differences.
PIN transactions are what the retailer usually means by a “debit” transaction. Like using an ATM, you enter your personal identification number on a keypad to complete the transaction. With PIN transactions, you can get cash back (great if you’re not near your financial institution’s ATM) and you can avoid “holds” on your money at gas stations.
Signature-based transactions are often mistakenly called “credit” transactions because they use the same system as credit card payments, even though the money comes from your checking account. You sign a receipt instead of entering a PIN (although with small transactions you might not have to sign anything). Signature-based transactions provide more protection from fraud than PIN transactions, and you avoid possible fees and monthly limits on PIN transactions.
Fees, rewards and discounts
Another factor in your choice of transaction type is the benefits offered by financial institutions or retailers.
Financial institutions make more money from retailers and incur lower costs with signature-based transactions, so some offer rewards similar to credit card offerings. You can’t get those with PIN transactions.
At Riverside Community Bank, debit-card users can qualify for rewards if they use a certain number of signature-based transactions a month, among other requirements.
“It generates additional income to the bank, which we then turn around and share with the customer,” Vice President Marsha Abramson said.
Financial institutions also can limit PIN transactions through fees. National studies have shown per-transaction fees ranging from a few cents to $1, although a March 2007 survey by Bankrate.com found those fees becoming rarer. More often, financial institutions may limit PIN transactions to a few a month, charging for additional ones.
But retailers, who are hit with higher fees on signature-based transactions, may encourage customers to use PIN transactions. Some local gas stations have offered discounts when customers use PIN transactions; discounts when using cash are even more common. Other retailers, such as Woodman’s Food Market and Aldi, only allow PIN transactions to keep costs down.
Check your financial institution’s policy on fees and limits when deciding.
Customers also need to be aware of overdraft fees, which can be easier to incur with the convenience of a debit card. Financial institutions might have denied purchases for insufficient funds, but now they’ll generally cover the purchase and charge a hefty fee. Abramson likened it to bounced-check fees, which have been around a lot longer than debit cards.
Keep it safe
Debit cards provide many of the same protections as credit cards, but ...
Under federal law, if your credit card is lost or stolen, you’re only liable for up to $50.
If your debit card is lost or stolen, the $50 limit is only applicable if you report it within two days of realizing the loss. If you don’t report until between two and 60 days later, you could be liable for up to $500. If you wait even longer, you might be liable for the whole amount lost.
“Even worse, when they use your debit card, they’re stealing your money right out of your bank account, and you have to fight to get it back. With a credit card, it’s the bank’s money,” said Brian Imus, director of the Illinois Public Interest Research Group. “The law is on your side if you’re using a credit card. You only have promises and fine print from your bank when you use a debit card.”
Financial institutions, though, generally have more consumer-friendly debit-fraud policies than the legal requirements. If their cards have Visa or MasterCard logos, they have to follow those companies’ “zero-liability” policies on signature-based transactions. Those generally save personal cardholders from any fraudulent purchases as long as they meet certain requirements.
If financial institutions don’t comply, they risk losing their affiliation with the credit card companies. Moreover, industry officials say, they would lose their standing with customers.
“I don’t think there’s a distinction between whether it’s the customer’s money or the bank’s money. You have to protect the security of the card,” said Tom Foss, ATM network sales manager for AMCORE Bank. His company offers additional protections; for example, there’s $3,500 daily limit in signature-based debit transactions.
The case of the gas hold
Some local debit card holders have reported surprise at $50 to $75 holds on their accounts when they buy gasoline. Those can sometimes stay on the account for days after the purchase, and if you’re not careful, they can cost you an overdraft fee.
These holds have long been in place, but they increased in recent years as the price of gasoline skyrocketed, said Jeff Lenard, spokesman for the National Association of Convenience Stores. They’re in place to protect the retailer and the card company from theft.
The holds happen on credit card transactions and signature-based debit card transactions. Basically, the system is setting aside enough money for the maximum conceivable gas purchase (think a thirsty SUV and $4-a-gallon gas), and the hold clears once the transaction is reconciled with your bank account.
With a PIN-based transaction, the process is instantaneous, so there’s no visible hold. The same applies when you prepay a set amount.
Gas stations typically set the size of the hold, while their processing companies and the financial institution involved set the length of the hold, Lenard said.
“There really is no benefit for a retailer when someone overdrafts because of a debit hold because it locks up the consumer’s money,” he said. “The retailer gets nothing from it except for the anger when the consumer comes in and yells at them.”
The best way to avoid an overdraft fee is to stick with a PIN transaction or make sure you have at least $75 — plus the cost of gas — in your checking account.
Thomas V. Bona can be reached at (815) 987-1343 or email@example.com.
What you can do
Industry officials recommend several steps for safeguarding your debit card:
- Check your bank statements regularly, making sure all purchases are legitimate.
- Keep all your receipts until you can cross-reference with your account.
- Shred any receipts that have your account number on them.
- Don’t put your PIN on your card.
- Be aware of how much is in your account and don’t cut it close, risking an overdraft fee.
- Limit use of PIN transactions in public locations, where there’s a chance that someone could see or use electronic devices to steal your number. This doesn’t apply to ATMs, which have more security features.
The Illinois Public Interest Research Group discourages the use of debit cards, saying credit cards are safer. If you use a debit card, consider some additional safeguards:
- Don’t allow someone else to swipe your debit card for you. If at a restaurant, give a credit card or cash to the waiter.
- Don’t use a debit card for online purchases.
- To reduce potential for fraud, keep your debit card linked to a checking account that has a small amount of money in it.
— Thomas V. Bona