Why Your Debit Card Is A Stupid Way To Pay
Think it's a smart idea to use your debit card when it's time to pay up
? A lot of people would agree with you. But they could be dead wrong. While debit transactions come right out of your checking account and don't put you in danger of building debt, they can still end up costing you more than you think. It's all thanks to new rules in the banking industry.The 2010 Federal Reserve Payment Study revealed that for the first time in history, debit card transactions surpassed checks as the most used type of payment. One third of all non-cash payments were made with debit cards. Both checks and credit cards saw declines in usage between 2006 and 2009, but debit card use continues to grow.
Reasons to avoid using your debit card include concerns over privacy and fraud as well as fees.
Both the Privacy Rights Clearinghouse and advocates with the Consumer Federation of America have stated that debit cards are not necessarily recommended as a secure way to pay.
While most banks will offer customers with debit cards "zero liability protection" with their debit cards, there are limitations to those protections. According to Javelin Strategy and research, the average debit card fraud totaled more than $3,600 and most went undetected for more than month.
Plus, it typically takes longer to resolve fraud involving debit cards than credit cards.
When you want to dispute a charge on your credit card, you take your complaint to the credit card company and let them investigate. However, if you have a problem with your debit card, it's your responsibility to dispute the charge with the merchant.
With a debit card, the burden of proof falls on you. It's your job to prove to your financial institution that the fraudulent charges were made by someone other than you. Not to mention the fact that - unlike a credit card - it's actually your money being spent if your debit card is lost or stolen. You'll lose access to those funds until the issue is resolved.
Debit cards can end up costing you money even if they never fall into the wrong hands. That's because new rules in 2010 forced financial institutions to look for new ways to make a profit.
First let's discuss new restrictions involving overdraft fees and protection. Banking industry analysts say revenue generated from overdraft fees nearly doubled between 2000 and 2009. However, banks and credit unions are now required to ask customers if they want to opt in or opt out of overdraft protection on everyday debit card and ATM transactions. The overdraft rules did not apply to personal checks.
In the past, if you made a purchase with your debit card and had insufficient funds in your bank account, your bank's overdraft protection would kick in and cover the cost for you. But you'd also be charged an overdraft fee. Those fees totaled more than $37 billion in 2009.
Because banks are losing massive amounts of money due to consumers opting out of overdraft protection, they are looking for other sources of revenue. This will lead to new fees, fewer and fewer free checking accounts, as well as checking accounts that do not include the use of personal checks.
Rewards connected to debit cards could also go away. Certain cash-back debit cards give you 1% or more back on purchases - but perks like that will likely be scaled back before eventually becoming a thing of the past.
The latest change in the banking industry involving debit cards concerns interchange fees. That's what banks charge merchants every time a customer uses a debit card at the point of purchase. During 2009, merchants paid $48 billion in interchange fees to the banks.
In December of 2010, the Federal Reserve agreed to cap interchange fees at 12 cents. The new rule, which will slash debit card fees by 70 to 90 percent, is scheduled to be implemented in the summer of 2011.
The upside to this for consumers like you is that since merchants have to pay less to the bank to process debit transactions, they'll likely be lowering their prices as well.
But that's not the end of the story. Since banks will obviously be losing billions of dollars, it's another reason for them to look for other methods and products to generate revenue.
The 2010 Federal Reserve Payment Study indicates that electronic payments now make up 75% off all transactions. So you'll most likely have to use some sort of plastic payment. If you can use a credit card and can manage your spending so that you're able to pay it off each month - that may be a better option. The Fed's study shows prepaid cards are the fastest growing type of non-cash payment, but this method often has just as many fees as debit cards.
Personal checks are another payment option. Checks saw a rather sharp decline in usage between 2006 and 2009, and they do have limitations as well as their own specific security concerns. But many people still use them in certain cases, and studies show that consumers who use checks regularly have a better grasp on their personal finances.
Whatever method you use to pay, it is important that you are aware of the risks and fees attached to that payment method. A little research can go a long way. So ask questions, read the fine print and shop around for the best payment method for you.
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