Check, Credit Card or Debit Card? Choosing a Payment Method for Security and Convenience

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September 2007

How do you pay for everyday purchases or bills? Cash? Check? Credit Card? Debit Card? If you are like most people, you use a combination of these methods—and more. The advent and growth of electronic banking has encouraged many people to move more and more from paper (cash, checks) to plastic (credit cards, debit cards). All these payment methods have roles to play in personal financial management today.

All have their advantages and drawbacks. All can be used securely with proper precautions. All have consumer protections should fraud or theft occur, but those protections may vary depending on what the issuing institution offers you. This report offers a brief overview of the facts you need to make wise choices for your circumstances.

Debit Cards

Recently, debit cards became the most popular payment method in the U.S. for purchases made in person at the point of sale or service. Our use of personal checks, however, has continued to decline. A debit card, also called a check card, links directly to a checking account and typically has a Visa^® or MasterCard^® logo on it. It usually serves as your ATM card for all your accounts at the issuing institution. When you use a debit card to make a purchase, the money is electronically deducted directly from your checking account.

There are two ways to make purchases with most debit cards. The first way, often called "signature debit" clears through the Visa or MasterCard system. This typically, but not always, requires your signature. You usually need to indicate the transaction is a "credit" transaction at many retailers, terminals, and gas pumps. Signature debit gives you many of the same rights in a merchant dispute that you have with a credit card.

The second way, often called "PIN debit" or "Point-of-Sale (POS)," clears through ATM networks. You'll need to input your ATM PIN (Personal Identification Number) after swiping your card. As a result, transactions clear your account immediately.

Benefits

• Convenience. Debit cards easily replace the need for cash for daily purchases, ranging from morning coffee stops to evening supermarket runs. They also save time over personal checks at the cash register and for many online or mail purchases.
• Debt management. Because debit transactions withdraw money directly from a checking account, users aren't adding to a credit card balance.
• Record keeping. Monthly statements provide a record of all expenditures made with a debit card.

Cautions

• Risk of card theft or compromise of account information. If your debit card or account number and expiration date is stolen, the thieves will be taking money directly from your checking account. Theft of both debit and credit card account information is a continuing problem. For example, thieves have hacked the databases of major retailers obtaining account numbers. Also, theft by "skimming" has increased where numbers are stolen off card swipe machines using various methods. In very rare cases, thieves in retail outlets have stolen the information of the magnetic stripe while observing the PIN key strokes of the consumer.
• Lack of access to your funds during investigation. If you have reported an erroneous or fraudulent debit card withdrawal, the financial institution does not have to credit the disputed funds to your account for at least 10 business days while it investigates. During that time, you may not have the money you need to pay other bills or outstanding checks or debits could bounce.
• Less consumer protections than credit cards. The consumer protections on a debit card are not as strong as on credit cards. The federal Electronic Fund Transfer Act limits your liability for unauthorized or fraudulent withdrawals using your debit card to $50 if you report the loss of the debit card or discovery of the erroneous withdrawal within 2 business days of your discovery of the problem. If you take longer than 2 days but less than 60 days, your liability rises to $500. If you take longer or in certain other circumstances, you could be liable for the total loss (which could be as much as your total balance plus maximum overdraft protection you have). Federal regulations for debit cards offer no protection against a dispute with the retailer over the quality or status of the goods or services — the same as with cash or checks.
• Possibility of overdrawing your account. If you don't keep track of your debit card purchases in your account register, it's easy to overdraw your account, incurring fees for "bounced" charges or possibly for overdraft protection.

Credit Cards

Unlike debit cards which provide access to your own money, credit cards access loans from the card issuers. When you use a credit card to make a purchase, the merchant or service provider is paid for your purchase by the card issuer, and then you pay back the card issuer when you pay your monthly statement. If you don't pay off your entire balance each month, you'll pay interest on the unpaid balance. If you pay late, you will incur late fees.

Benefits

• Convenience. Credit cards are widely accepted for a variety of purchases. They, too, can lessen the need to carry large sums of cash.
• Flexibility. Because they are loans, credit cards offer a way to manage your cash flow if used wisely. For example, you might need to make a large purchase which you cannot cover out of checking until your next paycheck. Using a credit card allows you to purchase the item today and pay it off when your next credit card statement arrives or over the next several months.
• Good consumer protection. The Fair Credit Billing Act provides several consumer protections. First, your maximum liability for fraudulent or unauthorized use of your card or account numbers is zero if you report the card lost or stolen before it is used and $50 if you report the loss after an unauthorized use has occurred. If your account number only is stolen (you have the card secure), your liability is zero. Many card issuers offer zero liability for all fraudulent use. Second, the law offers protection if you have a dispute with a merchant over a billing error, such as an overcharge or charge for goods, that were not delivered and you follow the rules for reporting it. Third, the credit card regulations allow you to stop payment under certain circumstances. All these protections can be exercised without your paying any money from your funds.
• Emergency access to cash. While it is prudent to save ahead, you many not have the savings to pay for a major car repair or replace a dead washing machine, for example. A credit card allows you to spread the cost of the unexpected into more affordable, monthly bite-sized pieces.
• Record keeping. Monthly statements provide a record of all expenditures made with a credit card.

Cautions

• Running up debt. Credit cards make it easy to buy items we want but can't really afford. Too often, our "buy now, pay later" mentalities foster impulse purchases. If you have control of your expenses, plan your purchases, and know how you will repay your loans, you will have no problems with credit cards. However, if you make too many of those impulse purchases, you could easily build up more debt than you can afford.
• Interest and fees. Credit card purchases are loans on which you pay interest if you carry a balance. The average purchase interest rate was 14.53% in the 2007 Credit Card Survey conducted by consumer-action.org. But many cards have higher rates, particularly if your credit history is not good. If you pay a bill late, you will typically incur a late fee; the average is $28 and often higher. And paying your bill late, even one day late, may trigger a higher interest rate. And there are other possible fees. It is vitally important to pay all your bills on or ahead of time to avoid fees and maintain or achieve good credit ratings.
• Risk of card theft or compromise of account information. Theft of credit card account information is a continuing problem and often used in identity theft scams. Contrary to what many believe, online fraud is actually rarer than card numbers stolen by retail store and restaurant employees. Credit cards and their account numbers should be protected as carefully as any form of payment.

Checks

A check typically is a paper document signed by you, making it a "negotiable instrument" that authorizes a withdrawal from your checking account. Americans are using fewer and fewer checks to pay for purchases and bills. In addition, recent check regulations (Check 21) allow merchants and financial institutions to process checks as electronic transfers, speeding up the transfer of funds and eliminating the paper check in mid process. If you authorize a direct withdrawal from your checking account over the phone or on an Internet website, you are allowing the merchant or vendor to create a form of check known as a "demand draft" that doesn't require your signature.

Benefits

• Paper trail. Even though many customers don't get their cancelled checks back, most financial institutions provide a digital image of the front and back of the checks. Many people find this useful for their record keeping.
• Some security issues. Although crooks have been passing counterfeit checks since checks were invented, many merchants check identity and signature when accepting personal checks, which customers often feel adds a layer of protection. Lost or stolen checks typically cannot be used as easily or quickly in retail outlets as a debit card or even a credit card. High tech crooks have found ways to print fraudulent checks or alter stolen ones.
• Comfort. People who grew up using checks and who have some mistrust of online security for many merchants and services may simply prefer to use checks for some payments.

Cautions

• Security issues. A check, like a debit card, provides all the information a thief needs to access your checking account. Leaving checks in envelopes in residential mailboxes for pickup, as many individuals do, is a security risk. Giving checks or checking account information to people or businesses you don't know are reliable is also a risk.
• Postage costs. Individuals who pay bills by mailing checks incur costs for postage. The majority of financial institutions provide online bill paying free to account holders.
• Possibility of overdrawing your account. If you don't keep track of your checks and balance in your account register, it's easy to overdraw your account, incurring fees for "bounced" charges or possibly for overdraft protection.

Cash

What's the role for good, old-fashioned cash? Depending on your individual circumstances, you may find that cash still offers the best option for many everyday purchases. For example, I travel so much to so many places, that I prefer to manage my money using credit and debit cards appropriately. However, I know many good money managers who use cash for everyday purchases that are not tax deductible such as coffee breaks, groceries, dry cleaning and the like and save plastic for tax deductible or larger purchases.

What's more, cash in your hand is not working for you. Keeping money in your savings account until you absolutely need it allows your money to grow.

Tips for Using All Payment Methods Wisely

Protect all payment forms. Lost debit cards, credit cards, and checks—or account information from them—all give thieves data they can use to steal from you.

Keep PINs secret. Never write down the PIN (personal identification number) for an ATM, debit, or credit card on the card itself or anyplace where it may be seen, such as a piece of paper in your wallet or on a deposit slip or envelope. Don't choose numbers such as your Social Security number, street address, birthday, or phone number as a PIN. Memorize your PINs. Keep a list of PINs for your cards or accounts in a safe place at home.

Make online purchases with credit cards. Because credit cards offer stronger consumer protection and don't directly expose your money to theft, they are safer options for making purchases online than debit cards or direct drafts on your checking account. The size and anonymity of the Web, unfortunately, offers unscrupulous merchants and scam artists great opportunity to take advantage of consumers. Only shop online merchants you trust.

Don't expose account numbers. If you are mailing a payment, for example, don't put the account number on the outside of the envelope even if the merchant's instructions suggest this.

Don't put mail with checks or credit card numbers in your own mailbox. Take them to the post office or use a public mailbox.

Read statements promptly and check accounts frequently. The best way to guard against fraud or mistakes in any of your accounts is to review those accounts regularly and report problems immediately. I like online banking particularly because I can keep a close eye on my accounts as I travel. At a minimum, check your monthly statements as soon as they arrive.

Selecting a payment method for flexibility and security

The great benefit to having so many choices of payment method is that you can choose the method that fits your financial needs, offers convenience, and best protects the security of your money in each transaction.

For More Information

Credit, ATM, and Debit Cards: What to do if They're Lost or Stolen from the FTC offers an overview of how to protect your cards and how to report loss or theft.

Paper or Plastic: What Have You Got to Lose? is a report from the Privacy Rights Clearinghouse that provides more extensive discussion of the issues raised in this review and links to additional resources.

Consumer Guide to Check 21 and Substitute Checks from the Federal Reserve Board examines what the changes in how paper checks are being processed under the Check 21 regulations mean for consumers.

Prepared for Corning Credit Union by Remar Sutton & Associates, September 2007. All rights reserved.