As the pennies pile up on your dresser, or you search for quarters to feed the parking meter or the vending machine, you may decide that all the talk about moving toward a cashless society is completely unrealistic. But think again. How often do you pay with plastic of one kind or another?
In the age of direct deposit and electronic bill payment, you’re probably handling lots of financial transactions by swiping, dipping, or waving a card at a machine that can read it. Sometimes the card in question is a credit card, but it’s increasingly likely to be a bank card or debit card.
There’s one quick way to tell a plain vanilla bank card from a debit or multi-purpose card. Bank cards carry your bank’s logo, and debit cards carry both a MasterCard, VISA, or Discover logo and a PIN network logo like STAR or NYCE.
IT STARTED WITH THE ATM
The first bank card — also known as an ATM card — was introduced in 1969 to simplify withdrawing money from your bank account.
As it turns out, cash withdrawals were only the tip of the iceberg. You can use your bank card to handle almost all your banking business, from making a deposit to paying your credit card bill. And you can use the card, or its newer sibling, the debit card, to make purchases at stores and restaurants, online, or by phone.
To make an in-person point of sale (POS) purchase with a bank card, you swipe the card and type your personal identification number (PIN) into a PIN pad. You often have to sign your name, and you get a receipt for your records.
You can use debit cards the same way you use bank cards — and other ways. That’s where things can get a little murky. Sometimes you authorize a debit card transaction with your PIN, but sometimes you don’t. When you don’t use a PIN, you sign a receipt just as you would if you were charging the purchase to your credit card. In fact, when you hand your card to the sales person, you’ll probably be asked if its a credit or debit transaction. These are known as signature purchases.
Purchases you make online or by phone are known as card-not-present transactions, for obvious reasons. In addition to providing your name and your card number, you may be asked for a security number that appears on the back of your card.
HOW DEBIT CARDS WORK
When you use a bank or debit card plus your PIN, the amount of your purchase is debited, or subtracted, immediately from your account and transferred electronically to the seller’s account. There are usually no limits on the number of transactions you can make in the course of a day, though banks may impose a daily dollar limit on withdrawals.
The amount you can spend per day is often the same amount that you can withdraw as cash, though they’re counted separately. For example, if your withdrawal limit is $500 a day, your debit limit may also be $500. That means you could deplete your account by $1,000 a day — if you had that much money available. At other banks, one daily limit applies to both withdrawals and purchases.
If you make a signature transaction, it may take up to two days, or sometimes more, for the money to be debited from your account.
One benefit of debit cards, in comparison with their credit cousins, is that you’re not borrowing when you use your card. That means there’s no balance due each month, and no finance charge if you don’t pay in full. But using a debit card doesn’t mean you don’t risk overspending or paying the price for it.
If you have overdraft protection on your checking account, you can debit up to the limit of your overdraft line of credit with your card. But remember, you owe interest on the amount that the bank transfers to your checking account to cover your debt. And the rate you pay for overdraft loans may be higher than you’d pay on a credit card. What’s even more costly is that your bank may charge you a fee each time you tap into your line of credit. So you could end up paying $37 for a cup of coffee: $2 for the coffee and a $35 overdraft fee.
Banks must get your permission to allow purchases that exceed your bank balance. If you don’t grant it, your card may be rejected from time to time. But you’ll be in better shape financially. There are also limits on what banks can charge when you do overdraw and control the order in which they can debit purchases.
There’s no substitute, though, for keeping track of your PIN, signature, and online purchases so you know what your balance is at all times.
THE POPULARITY POLL
Banks love debit cards. It’s much less expensive to process electronic debits than it is to process checks. And banks collect fees from retailers based on the amount of your debit purchases, just as they do when you use a credit card.
Retailers accept debit cards despite the fees they may have to pay — typically a percentage of the transaction — since people tend to buy more when it’s easy to pay. And retailers do have the right to add a transaction fee to your bill if they choose. Further, debit cards reduce or eliminate the need to accept checks, which are often harder to get approved than cards and always carry the risk that they may bounce or that payment may be stopped.
So where does that leave you? There’s no question that debit cards are handy. You don’t need cash to go to the grocery store or the coffee shop. You may also be able to get cash when you shop in addition to the amount of the sale when you use your PIN. That eliminates a trip to a bank ATM, and, if there’s a fee for accessing cash, it’s usually less than the ATM fee at a bank other than your own.
But you do want to be sure to protect your card and yourself. If you lose it or it’s stolen, your bank balance and your overdraft line-of-credit could be at risk. While the illegal user might not know your PIN, he or she could use the card to make signature purchases or buy online. If you report a card missing within two days of discovering that you don’t have it, the most you can lose is $50. But if you delay longer than 60 days after a bank statement that reports misuse, you’re vulnerable to losing everything.