Articles & Pamphlets

Debit Cards: Check the Fine Print!

You've seen the come-ons: "Just like using cash!" "No hassles with check-approvals!" "No late payment fees!"

Banks are pushing debit cards -- also known as check cards or cash cards -- but they don't always tell you what's hidden in the fine print. Debit cards look like credit cards, but they're altogether different animals.

First, the way they work. Credit cards allow you to make purchases by setting up a little loan transaction. The merchant takes the credit sales slip you sign and deposits it in the bank. The bank gives cash or credit to the merchant in the amount of the sales slip, minus a small percentage for handling the transaction, and then forwards the sales slip to the bank that issued your credit card. That bank then bills you at the end of the month for your purchases and waits for your payment. When you pay your monthly bill the loan transaction is complete.

Debit cards short circuit that process completely. When the merchant takes your debit card and you sign the sales slip, the amount of the purchase is automatically zapped from your bank account and credited to the merchant's account. Instantly. No one has to wait for you to pay your bill.

Banks like debit cards for obvious reasons. None of their money is at risk. If you don't have enough in your account, the transaction doesn't go through. The bank doesn't have to wait to see if and when you'll pay your bill. And since consumers with debit cards want to make sure they can use them, they tend to keep higher balances in their accounts, which gives the bank more money to use profitably.

Debit cards are convenient for consumers too, but they do have some drawbacks. Unlike using credit cards, there's no 25-day "free ride" period before you pay your bill, so with a debit card you can't buy today and cover the purchase by paying the bill from future paychecks. And there's no right to withhold payment for a disputed item on your monthly statement, like the law allows for credit cards. (There is, however, an after-the-fact billing error resolution process discussed below.)

While it's true that the hassle of writing checks, getting them approved, and later balancing the checkbook is eliminated with debit cards, that comes at a price too. Writing a check gives you a built-in paper trail. You can always prove you made a payment, by producing the canceled check. The Federal Electronic Fund Transfer Act attempts to overcome this lack for debit cards by requiring paper documentation of each transfer of funds into or out of a consumer's account, but it may not be as easy as plucking your own check out of the file.

Check-writing is slower, but sometimes that works to the consumer's advantage. By issuing a stop-payment order, for example, a consumer can tell the bank not to pay a particular check in a deal that has gone sour. There's no such thing as a stop-payment order when you use a debit card; as soon as you complete the transaction, WHOOSH, the money flies out of your account.

But the biggest drawback of all -- potentially a financial disaster -- is the law on unauthorized use of a debit card. The most that a consumer can lose if his or her credit card is used without permission is $50, and not even that amount is lost if the bank is first notified that the card has been lost or stolen. By contrast, liability for unauthorized use of a debit card is much greater, extending, under some circumstances, to all the money in the consumer's account.

Essentially, federal law applicable to debit cards limits liability to $50 only if the consumer notifies the bank within two business days after learning of the loss or theft of his or her debit card; after two days the limit of liability jumps to $500. And if the consumer does not report an unauthorized use that appears on a monthly statement within 60 days, the total amount of that debit is unrecoverable by the consumer, even if it wipes out the entire balance in the account plus any overdraft line of credit!

There are some qualifications to this right of debit card banks to empty the consumer's account without authorization. The bank can only recover the amount of loss beyond $50 that it can establish would not have occurred but for the failure of the consumer to give timely notice. In other words, the bank must be able to show that if it had received notice of the lost or stolen debit card within two days, it could have stopped access to the account and prevented subsequent losses.

Also, if a delay in notifying the bank was due to extenuating circumstances, such as extended travel or hospitalization, the specified time periods are extended to a "reasonable time."

All is not lost, however, if your monthly statement reveals an unauthorized transfer of funds from your debit card account. It is too late to stop payment, but the law provides a billing error resolution process similar to that available for credit card accounts. This process may not necessarily resolve all disputes to your satisfaction, but the bank is required to investigate the matter and get back to you with an explanation. If the bank takes more than 10 business days (it can take up to 45 days) to do this, it must provisionally recredit your account with the amount of the disputed item so you have the use of this money until the matter is settled.

All these rules about debit cards are spelled out in your debit card agreement and on the back of your monthly statement. But they don't always appear in the flyers and advertisements touting debit cards as the best thing since sliced bread. So the moral of the story is, as always, read the fine print!