Why Using Debit Cards Can Be Dangerous

Americans pull out their debit cards for purchases almost as frequently as they take out cash, but hidden fees and security issues could outweigh the convenience.

In 1995, 60 percent of people used cash for purchases, while only 2 percent used debit cards (or check cards) and 8 percent used credit cards, according to a study on consumer preferences by Dove Consulting. By 2003, though, this balance changed significantly, Dove found, with 32 percent using cash, 31 percent using debit cards and 21 percent pulling out credit cards for purchases.

In fact, according to Cardweb.com, more than 52 million purchase transactions on credit and debit cards pass through the Visa and MasterCard networks every day in the United States.

As the use of debit card increases, it is essential for consumers to be on the lookout for their hidden fees and possible security pitfalls. Here are some common questions.

1. Are there different types of debit cards? Debit cards come in two different flavors, deferred and direct. A deferred — or signature-based — debit card is similar to a credit card without the credit. You sign for your purchases and the money is debited from your checking account within two to three days. A direct — or PIN-based — debit card requires you to provide a PIN, or personal identification number, to authorize your purchase and the money is withdrawn from your account immediately. According to Cardweb.com, in 2002, Americans made $180 billion in purchases on debit cards that required using a PIN and $318 billion on those that did not.

2. If given the choice, is it better to use a direct or deferred debit card? Similar to ATM surcharges, direct debit card purchases may come with charges that will show up on your bank statement. Hidden fees, the result of the battle between retailers on one side and banks and credit card issuers on the other, can add up significantly. As a result, to reduce their expenses, many stores encourage PIN-based transactions and some stores no longer accept debit card purchases that require signatures.

When using your PIN to make a purchase, the retailer usually pays a flat fee to the bank, which averages at about 20 cents per purchase. However, if you choose to use your debit card as a credit card, which requires a signature, the retailer generally has to pay a percentage fee based on the amount of your purchase, which can be as high as 2.5 percent. As a result, to reduce their expenses, many stores encourage PIN-based transactions and some stores, such as Wal-Mart, no longer accept debit card purchases that require signatures.

This tactic results in $3.5 billion in lost processing fees for banks. To recoup this revenue, some banks have started to charge consumers a fee, generally between 25 cents and $1.50, for every PIN-based purchase. These fees are subtracted from your checking account along with your purchase.

In New York, for example, a survey by the New York Public Interest Research Group found that 47 percent of 31 New York banks surveyed charged a debit card fee at the point of sale without warning the consumer.

Mellody's Tip: Check your bank statement every month to determine if you are being assessed fees for your debit card transactions. If your bank is charging you, be sure to select the "credit card" option when making purchases with your debit card to avoid entering a PIN and the associated fees.

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