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Last month, a representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. It many ways, I find debit cards to be inferior to credit cards, but Visa claims the cards linked directly to bank accounts have some redeeming qualities. Here are three additional questions I asked Visa and the company’s responses.

What are your thoughts regarding Visa’s “defense” of debit cards?

Question 4: When using debit cards, do consumers generally spend more than they would
with cash?

Response: Debit cards offer a convenient, secure way to access funds that are already available in your checking account – which means you’re spending the money you have. You also get a record of all purchases so you know where the money went.

Paying with a debit card can actually a great way to manage your spending. Just last year we conducted a consumer survey and found that cash expenditures can be harder to keep track of than those on cards. We asked more than 2,000 U.S. adults about their cash spending habits and almost half of respondents admitted they suffered from “mystery spending” or cash they spend but have no idea where it went.

The results also showed that 48 percent of Americans surveyed who use cash say they can’t account for almost one-third of it, spending an average of $120 in a typical week, but losing track of $45. In fact, more than half (59 percent) of respondents who say their mystery spending is out of control feel it would be worse without using a debit card. Among debit cardholders we surveyed, the majority (64 percent) believe their debit card helps keep mystery spending to a minimum and four out of five say a debit card helps them track their spending. This feedback supports that debit cards can definitely be used as a money saving tool.

My comments: Keep in mind that this research cited by Visa compares using debit cards with using cash for payments. Also note that the survey asks about what consumers believe about their spending patterns, were they to opt with cash rather than debit cards, but doesn’t measure actual behavior. Many studies have shown that people spend more with plastic than they do with cash, even if cash expenses are often “mystery.” The company did a good job of not really addressing the issue raised in the question.

In November, I conducted a experiment to compare my spending with a credit card with my cash-only spending. Even though some of my cash transactions were not tracked to the cent, I spent a significant amount less than I did when I was using a credit card. I continued the experiment into December, and although I now I’ve ended the experiment and use my credit card, I am much more conscientious about my excess spending.

Question 5: One popular feature of credit cards is the availability of rewards, such as cash back bonuses, airline miles, etc. I have seen very few similar offers for debit cards. Are issuers interested in offering rewards to debit card customers?

Response: About 85 percent of U.S. households participate in at least one rewards program. Increasingly, consumers are looking for rewards and value for the transactions they make every day, like paying bills, buying groceries, or filling up their gas tank. As consumers turn to debit cards for these types of purchases, instead of cash and checks, more financial institutions are introducing debit rewards programs.

Often, issuers will pair up with a partner like an airline or hotel to give you the ability to earn points on a debit card toward rewards you care about. Some financial institutions also offer the ability to earn points for qualified purchases that can be redeemed through an online catalog, for items like gift cards, airline vouchers and hotel accommodations.

Many financial institutions also reward their debit cardholders for other relationships they have with the institution like a car loan, savings account, mortgage, etc., giving those customers the ability to earn additional points or other benefits.

It’s important to understand how you can earn points toward rewards: what purchases qualify, whether you earn points when you enter a PIN or sign for your purchases, etc. Make sure you ask these questions of your financial
institution, as policies may vary.

My comments: Reward programs are becoming more rare among credit cards, and even more so among debit cards. This is due to the state of the banking industry. I expect that once we definite signs of an economic recovery, and banks are concerned with making huge profits rather than avoiding bankruptcy, we’ll start to see more debit card reward programs. Until then, consider yourself lucky if you have a rewards program that you use to its fullest extent. Remember, banks that offer rewards programs do so to foster loyalty and above average use.

Question 6: To what type of consumer would you recommend debit cards over cash?

Response: Really, debit cards are a great tool for every one with a bank account. Some
of the benefits of debit over cash include:

  • Money Management and Control. Debit transactions are deducted directly from a checking account and recorded in one place on a monthly statement. This allows cardholders to easily track where every penny is going and better spend within their means.
  • Security. Debit cards offer better protections than cash or checks, and Zero Liability means consumers pay nothing for fraudulent purchases.
  • Acceptance. Debit cards can be used at millions of locations worldwide, and can be used over the phone and on the Internet.
  • Convenience. Debit card transactions are quick and simple, getting you out of the store faster; automatic bill pay via debit eliminates worries about missed payments.
  • Rewards. More debit cards are also offering rewards so purchases earn points toward travel, merchandise or even cash.

My comments: Visa is clearly focusing on the benefits of debit cards over cash, but the true showdown for those who use plastic is between debit cards and credit cards. The set of above reasons for choosing debit cards is a subset of the reasons for choosing credit cards over cash — and credit cards offer more protection, tougher security, broader acceptance, and more attractive rewards.

“Zero Liability” is a good policy, but if your debit card is stolen and used, your bank account can be overdrawn at a moment when you most need your balance to be there, like when your mortgage or rent check is cashed. Then you’re dealing with overdraft fees or bounced check fees and possibly other penalties. This is a deal breaker for me. I use debit cards occasionally, but I will avoid using a debit card as my main payment method.

I appreciate the representative from Visa taking the time to answer these questions. Are you convinced? What do you think about debit cards?

Photo credit: DeclanTM

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A representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. I’ve written previously about five reasons to avoid debit cards, preferring credit cards for plastic payment. Here are three questions I asked Visa and the company’s responses. I have three more questions to post in the future as well.

What are your thoughts?

Question 1: With credit cards, the user has a chance to dispute fraudulent charges before their bank account is affected (through their payment of the credit card bill). With debit cards, any purchase made immediately affects a customer’s balance, and a fraudulent charge reduces the user’s available balance and increases the likelihood of an overdraft when it may not otherwise occur. How does Visa help protect the customer against this situation?

Response: If your account is compromised, Visa is committed to setting things right without further aggravation or inconvenience to you. Visa’s cardholder protection policy requires all financial institutions issuing Visa products to extend provisional credit for losses from unauthorized card use within 5 business days of notification of the loss. Many institutions will provide replacement funds even faster, sometimes within 24 to 48 hours.

My comments: The requirement of provisional credit within 5 business days is a benefit, but the delay can cause major headaches for people who keep their checking account balance high enough to cover expected expenses only. A provision credit can also be removed if the issue is not resolved within a certain amount of time.

Question 2: What other types of consumer protections does Visa offer to debit card holders?

Response: The Visa Check card offers better security protections than cash or checks. All Visa cardholders (debit, credit, or prepaid) are protected by Visa’s Zero Liability policy, which means you pay nothing if unauthorized purchases are made on your Visa Check cards or credit cards when you choose to sign for your transactions. While some issuing financial institutions also offer Zero Liability protections for certain PIN debit transactions as well, the best way to ensure you are protected is to sign for your purchase.

My comments: Unlike some credit cards, debit cards do not offer price matching guarantees or automatic extended warranties. Debit cards will never change interest or late fees, and there is a soft limitation to spend only what you have available.

Question 3: How is a debit card transaction that requires a PIN different than a debit card transaction that requires a signature? In some cases, merchants require neither a PIN nor a signature for the card to be accepted. Is one method more secure than the others?

Response: That’s a great question. Many of the benefits and protections Visa cardholders rely on, like Zero Liability protection, fraud monitoring, dispute rights and reward points, may only be available if the transaction is a “Visa” transaction, meaning it was processed over Visa’s network. The best way to ensure that Visa protections apply to the purchase is to sign (choose “credit”). Some PIN transactions are processed over Visa’s network, but merchants may use other payment networks that don’t offer the same protections. Cardholders should check with their issuing financial institution on their specific policies related to PIN debit transactions.

My comments: Be aware of competing priorities. When you’re shopping, cashiers often encourage you to use no-signature options, such as entering your PIN. This merchant pays less for this type of transaction than one that requires a signature. If your debit card has a Visa (or MasterCard) logo, choose a “credit” payment option to ensure you’re covered under the “Zero Liability” protections.

I have three more questions and responses to share. Do you have any reactions or comments about these responses?

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