Be Careful How You Pay for Those Gifts

It’s official: Americans are swearing off credit cards.

According to data released by the Federal Reserve Bank earlier this month, credit card transactions fell an estimated 0.2% last year. What’s significant is that, overall, paying for purchases electronically increased by more than 9%, thanks to a huge jump in debit card use. (1)

In fact, more of us are swiping our debit cards than whipping out our checkbooks. While the number of transactions made via debit card rose nearly 15% last year, writing a check is rapidly going the way of top hats and go-go boots. Purchases made via check fell 7.2% per year for three years in a row.

Though more frequent, debit card purchases tend to be smaller amounts. In 2009, there were nearly 38 million transactions made by debit card for a total value $1.9 trillion. In contrast, we wrote more than 24-billion checks totaling $31.6 trillion.

None the less, debit cards are the most popular means of making a non-cash purchase. The trend has the folks at the Fed delighted because, in the words of one official, we are “mov[ing] toward a more efficient electronic clearing system for all types of retail payments.”

Although we’ll have to wait until the post-holiday dust settles, Americans’ preference for debit cards over credit cards seems to be continuing. Certainly, in some cases that’s because individuals saw their credit card accounts cancelled due to default. However, in the wake of the recession and continued slow economy, there seems to be a solid number of folks who are truly committed to not spending more than they have.

Just keep in mind that a debit card is neither a check nor a credit card.

While the trend is good news, there are some drawbacks to debit cards. “Debit cards are fine to use, but federal law gives more protection to credit cards," says Dan Ray, editor-in-chief of the Web site

For instance, if someone steals your credit card and runs up a bunch of unauthorized charges, your liability is limited to $50. That’s etched in stone at the federal level. But the same is not true for debit cards.

According to Ray, because the major issuers of these cards- VISA (NYSE:V), MasterCard (NYSE:MC), & Discover- “want you to adopt debit cards,” they have voluntarily extended fraud protection to their debit card customers. The problem is, this is merely a corporate policy and is not mandated by law; it can be changed or cancelled at any time.

In addition, Ray points out that since a credit card company is on the hook to pay the fraudulent charge, it will “go to bat for you with the merchant” to get the amount cancelled. On the other hand, a debit card issuer has no incentive to do so because you directly paid for the fraudulent charge.

“The money is already out of your bank account,” says Ray. It’s up to the consumer to argue with the merchant and to try to convince the bank to put they money back into the account.

The 2009 CARD Act made sweeping changes to the rates, fees, and penalties that issuers can assess, but most of this law affects credit cards.  It did however outlaw automatic overdraft protection for debit card users. Now, if you want to make a purchase in excess of the amount in your checking account, your bank or issuer must have your written permission to cover the shortfall.

This is something they will happily do. For a fee, of course.

So, if you’ve opted for over-draft protection, you need to keep an eye on your checking account balance as you battle the crowds at the mall.

For instance, say you need some caffeine, so you head to Starbucks (NYSE:SBUX). It’s easier to swipe your debit card than fish through your pocket/purse for cash to pay the $3.75 tab for your mocha/soy/grande-with-a-shot-of- whatever. Earlier this year you signed the form authorizing your bank to provide you with overdraft protection. “You may only have $2.75 in your account,” says Ray, “but the charge will go through.” For a $30 overdraft fee. (Hope you really loved that coffee!)

If you continue to use your debit card, each transaction will trigger an additional $30 fee.


This is why setting and sticking to a budget is so important. Know what you have in your checking account before you start shopping and keep track of how much you’re spending.Oh, and if you prefer to shop from the convenience of your laptop as opposed to facing the crush of the mall, consider paying for your online purchases via an intermediary such as PayPal instead of either a debit or credit card. It reduces the number of times you are giving out your account number. (Identity thieves love the holidays, too.)

Finally, whether shopping on the Internet or at a brick-and-mortar store, Ray says it pays to check for coupons at the Web sites of both retailers you plan to visit as well as your credit/debit card issuers. A number of stores are offering special discounts if you make your purchase using a specific card.

1. The term “electronic payments” includes: ACH transactions, credit cards, debit cards and pre-paid cards.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.