Approach debit cards with caution

When consumers step up to the cash register to pay for their holiday purchases this year, a large percentage will pay with a debit card.

Debit cards have overtaken credit cards and other noncash methods as the payment of choice among consumers.

Visa, the global payments technology company, said debit cards passed credit cards last December, representing a fundamental shift in consumer behavior.

Gone are the days of cash and checks.

“In general, debit card use has been growing for many years, and we expect that trend to continue for the foreseeable future,” said Bob Whyte, head of consumer debit products, North America, at Visa.

There are several reasons for the trend.

“There’s a perfect alignment of the product with the mood of the consumer today,” Whyte said. “There’s a recognition that debit cards provide a great sense of control,” he said. “There’s also a great appreciation for the safety of the product. It’s safer than carrying cash, which can be lost or stolen.”

Other reasons include:

—Debt-laden consumers are trying to pay off their bills and don’t want to take on more debt.

“A lot of them are using it as a spending-control mechanism,” said Dennis Simmons, president and chief executive of SWACHA, the Dallas-based regional payments association whose members include financial institutions, businesses, government agencies and professionals. “Virtually all debit card transactions are deducted from someone’s checking account immediately.”

In contrast, you typically have some time before you receive your credit card statement and the expenditure hits you in the face.

—Some consumers are using debit cards in a backlash against credit card companies, which have been raising annual percentage rates, slashing credit limits and instituting fees in response to new credit card regulations.

CARD SIMILARITIES

One of the main differences between debit and credit cards is that debit cards are linked directly to your bank account, while credit cards enable you to charge purchases against a preapproved credit limit.

But debit cards and credit cards are becoming more similar.

Many financial institutions are starting to offer rewards on their debit cards, as they do with credit cards, Whyte said.

Another similarity is cardholder liability. Federal regulations require financial institutions to cap your liability at $50 if you notify your financial institution within two business days from the moment you learn that your debit card has been lost or stolen.

And many financial institutions have gone beyond federal regulations and adopted zero cardholder liability policies on unauthorized use of debit cards.

TAKE PRECAUTIONS

Despite the safeguards, debit card users should take certain precautions.

Protect your debit card as you would your credit card.

Pick a PIN or electronic password that can’t be guessed easily. Don’t use your birth date and personal names. Mix numbers and symbols in your PIN.

Memorize your PIN. Never write it on your card or store it with your card, and never let someone else enter your PIN for you.

Don’t disclose information about your card over the telephone.

Check your bank statements immediately to ensure that all payments are yours.

Periodically check your account balance and transactions, either online, by telephone, or by printing interim statements at the ATM.

BEWARE OF OVERDRAFTS

A crucial concern for debit card holders is overdrawing their accounts.

“Most overdrafts today are caused by debit cards,” said Carol Kaplan, spokeswoman for the American Bankers Association.

Overdrafts have been a hot issue.

The Federal Reserve recently imposed rules that will make it harder for banks to slap customers with overdraft fees, which one consumer group — the Center for Responsible Lending — said average $34 per transaction.

The new rules will take effect July 1.

Consumer groups and lawmakers have chastised banks for using “courtesy overdrafts” to pay transactions even though customers don’t have the money in their accounts to cover them. The banks then charge account holders a high overdraft fee, consumer advocates say. Banks say they’re providing a service.

The Fed’s new rules will prohibit banks from charging overdraft fees on automated teller machine and one-time debit card transactions unless the consumer opts in to the overdraft service for those types of transactions.

“This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs,” said Edward Yingling, president of the American Bankers Association.

KEEP A CUSHION

You can avoid overdraft headaches with debit cards simply by keeping track of your transactions and recording them.

Keep a cushion of money in your checking account and link your checking account to a savings account, so it covers you if you overdraw your account.

If you use an overdraft line of credit, repay it as quickly as possible.

Sign up for electronic alerts that automatically notify you when your checking account balance drops below a certain level.

Finally, know your limits. Many financial institutions limit daily withdrawals for your protection.