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Debit Dilemna

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Many people are unaware that their debit card can be 'blocked' for a waiter's tip Many people are unaware that their debit card can be 'blocked' for a waiter's tip

The dark side of debit cards: from ten thousand-percent 'loans' to unlimited liability

“Credit or debit?” That’s rapidly becoming the phrase most heard at checkout counters today, surpassed only by “paper or plastic?”  The prevalence of plastic money belies the reality that it was just 20 years ago that debit cards were introduced to the banking public—today, the use of plastic is rapidly replacing the use of money. “We have crossed a cultural as well as an economic threshold when plastic and money are synonyms...” wrote Robert Samuelson in A Quiet Revolution in Money.

A survey undertaken by Visa in 2006 shows that 60 percent of 18- to 25-year-olds rarely even carry cash anymore. They call this group of youngsters “Generation P;” the ‘P’ stands for plastic.

Even Parker Bros. has gotten in on the ‘game,’ replacing Monopoly money with plastic.

And that usage is reflected in currency circulation. Despite a $13 trillion economy in 2006, less than $400 billion in cash currency was circulating in the U.S.

Debit cards are a large part of that transformation. While consumers have to qualify to obtain a credit card, just about anyone who deposits money in a bank account today can get a debit card to use in accessing that cash. In 2006, consumer use of debit cards surpassed usage of credit cards; electronic transactions had surpassed both cash and checks by 2002.

And banks are benefitting. Although the profits to banks from customers using debit cards are less than for credit cards, they’re exponentially more than the zero amount they make when you use cash for purchases. In addition, banks are working actively to raise those profits, as you would expect from any business that runs on the return on investment. If you don’t want to be “fee’d to death” by your debit card, you must pay attention and be an informed consumer.

Courtesy Overdrafts

The most questionable bank practice regarding debit cards is the overdraft protection that many banks offer, which in practice can turn out to be an unsolicited loan charging more than 10,000 percent interest.

At one time a bank would deny a debit purchase if a customer didn’t have sufficient money in their account to cover it. Now 14 of the 15 largest banks approve those charges, for an average fee of $34. Some banks go even further, and charge $2 to $5 per day for each day your account is overdrafted. The average overdraft amount?—$16.

Is that such a bad deal? Banks don’t think so—in fact, they routinely tout such overdraft protection as a ‘courtesy’ they provide to their customers, who then avoid the embarrassment of a transaction that fails to go through. But as the Center for Responsible Lending discovered, banks not only routinely enroll customers in these programs, they do so without the customer’s knowledge. By doing so, banks gained $17.5 billion in fees in return for $15.8 billion in overdrafts—short term loans they had made, on average, for less than five days.

Even worse, the bank is not required to let you know that you’ve overdrafted from a debit purchase—if you only check your balances once a month when your statement arrives in the mail, you may find yourself in overdraft status for a substantial amount of time.

Even checking your balance online or via the telephone may not protect you from a mistake as some banks routinely include the amount of overdraft protection they provide in the available balance they report.

Is this truly a courtesy? “Banks have the technology to warn customers or merchants at the time of a debit card POS purchase or ATM withdrawal that the customer’s account has insufficient funds—but most do not,” reported CRL. “They can also decline the transaction and save the customer the overdraft fee—but most do not.”

WHAT YOU CAN DO: Check with your bank to find out their specific policies regarding your debit card. Request that they do not allow your card to courtesy overdraft. If needed, tie your account to a savings account, credit card or line of credit to provide overdraft protection. Keep track of your balance in a register just as you would for a checking account, and make sure you enter all transactions you make. Check your statement carefully each month for bank or merchant errors, such as processing a $4.30 charge for $43.

Credit or debit?

Major banks now offer as the default option a Visa/MasterCard debit card that can be run like a credit card at businesses that accept credit. Choose the debit option (where you enter a PIN number) and the bank charges that business a set fee (and increasingly, charges you a fee as well). But run it as a credit transaction, where you sign a receipt, and the bank charges the business based on a percentage of sales.

Because of these fees, and because of a growing tendency to use debit cards for small purchases, some businesses are posting signage regarding minimum purchases for using a debit card. By law, they cannot do this—any merchant who accepts debit cards with the Visa or MasterCard logo are prohibited by their agreement with the company from setting minimum limits for purchases.

WHAT YOU CAN DO: Although banks are more frequently charging customers a fee for Point of Sale transactions, if yours does not, consider saving the business you patronize some money and running your card as a debit. You might also take into account their continued importance to you as a business, and consider making small purchases with cash.

Card Blocking

Unknown to many debit card users is a practice called card blocking, where your account is charged an estimated amount of money for a transaction that may not hit your bank account for several days. You’ll run into this practice most often with gas stations, though it’s also common for hotels and car rental companies.

“Here’s how it works: Suppose you use a credit or debit card when you check into a $100-a-night hotel for five nights. At least $500 would likely be blocked. In addition, hotels and rental car companies often add anticipated charges for “incidentals” like food, beverages, or gasoline to the blocked amount. These incidental amounts can vary widely among merchants,” explains the Federal Trade Commission.

“If you pay your bill with the same card you used when you checked in, the final charge on your credit card, or final amount on your debit card, probably will replace the block in a day or two. However, if you pay your bill with a different card, or with cash or a check, the company that issued the card you used at check-in might hold the block for up to 15 days after you’ve checked out. That’s because they weren’t notified of the final payment and didn’t know you paid another way.”

More frequently, restaurants are now blocking out charges when you have a large party and pay by debit. They do this to cover whatever amount you might write on the tip line.

WHAT YOU CAN DO: This practice varies with different banks, so make sure you know the policies your bank follows regarding who they allow to place blocks on cards, how much can be blocked, and how long the block can hold. Also make sure you know how your bank handles overdrafts caused by a block on your account—some banks will not charge an overdraft fee triggered by a block, but many will.

Safety

A debit card is not a credit card and does not automatically offer the same types of protection you get when purchasing on credit. Even if your bank advertises a “zero liability” debit card, that doesn’t mean you’re protected from fraudulent purchases, as most bank protection plans are limited to signature purchases—if someone uses your PIN number with your card, the assumption is that you gave it to them and the charge might stand.

Should someone manage to rip you off using your debit card, that money disappears from your account and doesn’t come back into it until the dispute is resolved. This can result in your bouncing checks you’ve already written.

According to the Federal Reserve, “... your liability for an unauthorized withdrawal can vary: Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.

“But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of loss or theft. If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit, if any.”

WHAT YOU CAN DO: Only use your debit card with institutions you trust. Only use a credit card for online purchases. Keep your PIN number in a safe place.  Check your bank statement every month.

Signing your card

Many people believe they can protect themselves by writing “see ID” or “ask for ID” on the back of their debit (and credit) cards, thus preventing a thief from using their card. Unfortunately, this not only doesn’t help, it abrogates your agreement with the issuing company in two ways.

First, your MasterCard/Visa is not valid unless it’s signed (and the same goes for a debit card with those logos). By agreement, a merchant is not allowed to complete a transaction with a card that’s not signed. If the merchant accepts a card that’s not signed, then they assume financial liability for fraudulent charges.

Merchants are instructed, when given an unsigned card, to have you sign it on the spot and then check your ID for a matching signature.

The second part also refers to the agreement between card companies and the merchant—specifically, the agreement that a merchant can not legally ask you to produce ID when you use a signed credit card. If they honor your request to check ID, then they violate their agreement with the credit card company not to do so.

 

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Landon Otis

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finance, money, debit cards, courtesy overdrafts, card blocking

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