Banks push plastic, and how! Credit cards, debit cards and cash can all be used to buy things, but they have very different costs and benefits. The more you know, the less money you’ll lose in fees and fraud charges.
CardHub, a website that tracks the credit card industry, released its 2013 Consumer Fraud Liability Study at the end of January. It found that credit cards offer better liability protection for consumers than debit cards, with Discover and American Express offering the most protection. Cardholders don’t need to do anything to put fraud liability protection in place, but they are responsible for reporting fraudulent or suspicious activity to the card issuer if anything happens.
For debit cards, consumers are off the hook for fraud as long as they choose signature-based verification – for example, choosing “credit” instead of “debit” at the checkout pin pad when using their debit card. Banks are allowed to charge higher interchange fees for signature transactions, which may be why they offer more protection. For PIN-based transactions, fraud liability depends on the issuer. Discover offers cardholders 100% liability protection. With Visa, it depends on the network used to process the transaction, and the purchaser has no way of knowing which network is being used. At MasterCard, liability is limited to $50 as long as the fraud is reported within two business days. If the fraud is reported within 60 days, the liability limit is $500.
American Express and Discover cards used at ATMs have full protection from fraud. Visa and MasterCard liability is limited to $50 as long as the fraud is reported within two business days. If the fraud is reported within 60 days, the liability limit is $500. Many issuing banks offer better terms, though. If your check is forged (remember checks?), the bank is almost always 100% liable under state law.
Banks make money on credit cards three ways: annual fees, interest charges and transaction fees paid by the merchant. If you get cash back, the merchant is probably paying for it. For years, most retailers were not allowed to offer discounts for using cash or surcharges for using credit, but that may change as a result of a July 2012 settlement made by MasterCard and Visa in an antitrust suit involving merchants.
With debit cards, banks make money from the merchants; they also make money when customers get careless and overdraw their accounts. In 2011, Bank of America tried charging customers $5 a month to use debit cards; that attempt failed, but banks may well try again if interest rates stay so low.
Be sure not to mix up your debit and credit cards when making an withdrawal; putting a credit card in a cash station can lead to huge cash-advance charges. At one point, my bank’s credit card and debit card had such similar designs that I took a marker and wrote “NO ATM” on the credit card.
Management of credit and debit cards is enough of an issue that the new Consumer Financial Protection Bureau is starting an inquiry into financial products marketed to students. Often, students receive debit cards pre-loaded with student loan or grant funds to be used for books and living expenses. However, the fees and risks involved may put students on the hook for greater costs than if the money were deposited into a bank account. These cards have the same fraud limits as for any debit card — but that’s not as good as limits in place on a credit card or a checking account.
Finally, there’s much to be said for the process of walking a check to the bank for deposit and walking out with cash. It makes you mindful of how much you earned and how much you have to spend. Also, your losses are limited to the cash you have on hand. Losing that cash wouldn’t be fun, but it’s less of a hassle than chasing down identity fraud.
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