We Love Our Debit Cards

by Judy Dahl

Debit card use is taking off. The cards look like credit cards, but when consumers make purchases using debit cards, the dollar amounts are deducted from their checking accounts. It's a pay-as-you-go mechanism; there's no loan balance and no interest to pay.

More people are reaching for their debit cards at the checkout counter, when shopping online, or even when paying bills. In fact, during the first two weeks of September 2004, Visa debit card users spent $270 million in clothing stores alone, say Visa officials.

Consumers cite speed, convenience, and security as the chief debit card attractions, along with rewards card issuers offer for some debit card transactions. Debit's a handy way to pay, but to use the cards most effectively you should know how different debit transactions work and how to avoid unexpected fees.

Debit use exploding

For the first time ever, in 2003 credit and debit card payments in stores outpaced cash and checks, and debit card use surpassed credit. Credit cards accounted for 21% of all in-store payments, and debit cards for 31%, according to a study by Dove Consulting, Boston. Check use fell significantly, accounting for only 15% of in-store purchases.

An Edgar, Dunn & Company, San Francisco, survey reports that nearly 40% of consumers prefer using debit cards for purchases. And debit card use has nearly doubled in the past five years, according to a study by the Raddon Financial Group, Oakbrook Terrace, Ill. "In 1999, 34% of households used a debit card monthly; today 54% use debit monthly," says Raddon senior research analyst Patrick Bator.

Why the rapid rise in debit use? "Financial institutions' education efforts to promote debit as a more efficient payment mechanism have made consumers more willing to try it," says Bator. "Once people try it, they love it."

Why do we love debit?

Convenience--It's quicker to pull out a plastic card at the point-of-sale than to write a check. It's also easier to track spending with cards than with cash--and using plastic eliminates the need to even carry cash. According to a MasterCard survey, consumers rate convenience as debit's primary advantage.
Pay-as-you-go--With debit, you have the convenience of plastic without carrying a loan balance or paying interest.
Balance caps--Because debit cardholders can only spend the money they have in their checking accounts, debit cards help control spending.
Security--Security features built into debit cards help merchants verify that the actual cardholder is the one using the card.
Zero liability--With signature-based MasterCard and Visa transactions, debit card users have zero liability for unauthorized use of their cards in most cases--a fact that many consumers don't realize. If your card is lost or stolen, simply report it promptly and close the account. You don't pay for any transactions you didn't make.

Please note that if your account is not in good standing, or if you are negligent about reporting unauthorized use of your card, your card issuer has the right under federal law to increase your liability for unauthorized use. Check the account agreement your card issuer provided for specifics.

For the first time ever, in 2003 credit and debit card payments in stores outpaced cash and checks, and debit card use surpassed credit.
Cash back--If you use your PIN (personal identification number) for a debit card transaction rather than signing a receipt, you can request cash back at many merchant locations. The merchant will add the cash amount to your transaction total, and you'll have cash in hand without a trip to the credit union, or even to an ATM (automated teller machine).
Wide acceptance--Debit cards are accepted at locations worldwide, while many merchants are reluctant to accept nonlocal checks. Debit also eliminates the need to show identification or give out personal information at the checkout counter.
Rewards--Some card issuers give incentives for debit card use, just as many credit card issuers do. When you use your card, you may receive points redeemable for merchandise or cash rebates, airline travel miles, or an entry to a sweepstakes.

Read your rewards program description carefully, though, because many rewards apply only to signature-based debit card transactions (where you sign a receipt), not PIN-based transactions (where you key your PIN into a terminal at the point-of-sale).

PIN vs. signature

Every time their cardholders use debit or credit cards at a merchant, card issuers charge a fee that gets passed through to the merchant. The amount is lower for PIN-based transactions; that's why some financial institutions offer rewards for signature-based usage only. Some financial institutions (one out of five banks nationwide, according to Dove Consulting) even charge cardholders a fee for each PIN-based transaction.

On the other hand, signature-based transactions cost merchants more than PIN-based purchases, so most merchants encourage people to use their PIN, or even make it confusing and difficult to use a signature.

The card-swipe terminals at checkout counters often display an initial message asking you to key your PIN. If you want to sign for the transaction instead, you may have to press the terminal's "cancel" button, then select "credit" rather than "debit."

When you swipe your debit card, select "credit," and sign for your purchase, you're still making a debit card transaction and the amount will be deducted from your checking account. The transaction just routes differently through electronic networks, and you'll avoid any fees imposed for PIN-based transactions.

Some cardholders have strong preferences for either PIN- or signature-based transactions. Those preferring PINs cite the speed and convenience of this method, according to Dove Consulting. Because the PIN is a security feature, cardholders also appreciate the fact that thieves can't use stolen cards for PIN-based transactions without knowing the PIN. A thief could forge your signature and use a stolen card to make signature-based transactions.

Keep track of your account

Be sure to monitor your monthly statements, and, if you have online access to your account, check it frequently. If there's unauthorized use, you'll know right away and can take steps to close the account. Also, it can be difficult to balance your account if you don't keep receipts. And some financial institutions allow you to overdraw your account at ATMs, which could trigger an overdraft fee.

Watch for hidden fees

It's important to understand the terms and conditions of your debit card account. Read thoroughly the agreement you sign when you open the account, especially the sections that describe fees. Issuers may charge an annual fee for the account, and per-transaction fees for some or all transactions.

Consumers use debit most frequently for grocery shopping, followed by buying gas and department store shopping.

Issuers can change account terms too, if they notify you first, so you should read any notices sent with your account statements. Otherwise, you may not find out about new per-transaction fees until you receive your monthly statement--there's no notification at the point of purchase.

Not all accounts are alike, so if your debit card has fees attached, check with other sources such as your credit union.

Prepaid cards

Prepaid or stored-value cards look just like debit cards. The difference is, instead of being linked to a checking account, they come with a prepaid balance usable anywhere you can use debit cards. Some can be "reloaded" when the balance is spent; others you discard after depleting the prepaid balance.

Payroll cards: Some employers deposit employees' wages to a prepaid card. This is especially useful for consumers without a financial institution relationship.
Gift cards: Companies or individuals can purchase reloadable or one-time use prepaid cards.
Government-issued child support payment cards: Some state governments issue these cards to parents and automatically load child support payment amounts to the cards.

Who's using debit?

Younger consumers, especially those with higher incomes, use debit most often. A study by the Raddon Group shows that 75% of consumers younger than age 34 who earn at least $30,000 a year are active debit users. "This group is driving it," says Raddon Senior Research Analyst Patrick Bator. "They grew up knowing about plastic."

He notes that older consumers tend to use debit less. "They're more likely to use cash; for larger purchases they'll use checks, or sometimes a credit card--they're used to these mechanisms."

Where are we using debit?

According to a recent MasterCard consumer survey, debit cards account for nearly a third of all purchases less than $20, and debit is the most popular payment method for transactions between $20 and $100. For larger purchases, people still choose credit cards most often, although debit use is growing for transactions such as doctor's visits and restaurant dining.

Consumers use debit most frequently for grocery shopping, followed by buying gas and department store shopping. And people increasingly are willing to use debit cards for small purchases such as movie tickets, fast food, and items at quick-stop stores.

More consumers also are using debit for recurring payments, such as subscription fees that automatically bill monthly. MasterCard says 26% of U.S. households now link these payments to debit card accounts.

Related Home & Family Finance Resource Center articles

Published December 13, 2004

Printed Wednesday, January 7, 2009

Educational Employees Credit Union