CH 4 – Paper or Plastic

Chapter 4 – Paper or Plastic  (AKA Credit or Debit or Paypal)

People often use the various methods of paying for products and services interchangeably, but there are differences and it is useful to understand these differences so you can make an informed decision.

The first option is credit.  With credit, you are using someone else’s money – namely the credit or charge card company’s – and you have an agreement to pay them.  When you use a credit card, you are protected by federal law from fraudulent charges (the fair credit billing act) and the maximum liability you have is $50, which many credit card companies waive completely.  The most well known credit or charge card companies (the difference between those two terms is that with a credit card you are not required to pay the monthly balance in full, and with a charge card, you are required to pay the balance in full when you get the bill) are Visa, Mastercard and American Express, but there are thousands of companies that offer credit cards.

If you use a credit card and you don’t receive the merchandise, the merchandise is damaged, the merchandise is significantly different from what you ordered or the charge amount is not what you agreed it would be, you have to dispute the charge, IN WRITING, within 60 DAYS of getting the flawed bill.  If you do all that, you are protected under federal law.  A good example of this is if you buy an airline ticket and the airline goes out of business or files for bankruptcy, if you pay with anything other than a credit card, you are an unsecured creditor and you need to wait in line to try and get your money back.   If you pay with a credit card, you notify your credit card company within 60 days of getting the bill (and this is important – if you bought the ticket 6 months ago, this won’t work), then the credit card company will credit your account.

What is even more important, the money has not yet been taken out of your bank account – you are arguing over a debt that you owe, not trying to recover money that has already been taken out of your bank account.

Credit card companies have very good – but definitely not perfect – security to reduce the odds of someone using your account fraudulently, because it is, ultimately, their money to lose.  You have an agreement to pay them back, but if you get into a dispute, it likely is their money to lose.

The second option is debit.  Debit actually has two sub-options – PIN or Credit.  When you use a debit card and that debit card has a Visa or Mastercard logo on it, as far as the rules are concerned, it operates just like the credit option above and your liability is limited to $50, except that the money comes out of your account within a day or two (and is usually removed from your available funds right away).

In both of these cases, if your card is compromised, the bank cancels your card and issues you a new one and in a couple of days you can go back to spending to your heart’s content (and your wallet’s ability!).

If you use your debit card with a PIN, the rules are different and the laws that protect you are different as well. First of all, your risk is higher.  If someone, like with the Target breach last year, gets your debit card PIN, along with your card number, they can go to any ATM on the planet and empty out ALL BANK ACCOUNTS that are attached to that card.  It is important to understand that banks will often set a daily limit for the amount of cash that you can withdraw from the sum total of all ATMs within a 24 hour period (weekends usually count as one day for this purpose).  I have seen limits as low as $300 and has high as $10,000.  You should ask your bank to set your limit at an amount that will allow you to get the cash you need but minimize your risk.  Even if you set a low limit, you can always go into a bank branch and withdraw additional funds, assuming the money is in the account and the branch is open.  What is important to remember is that part about all “linked’ accounts.  I have one card that used to be connected to 12 bank accounts.  If that card and PIN were compromised, I would have had a problem!

If you used that same debit card as a Visa card in the case of the Target breach, the hacker could not use your card at an ATM.

While the rules under the Electronic Funds Transfer Act are similar to the rules for credit cards, the time period is much shorter for the $50 liability limit (two business days of discovering the loss).  Also, if you gave a friend or family member the card and PIN to do one thing and they later did something else, you may have to convince the bank that the transaction is fraudulent.

And, since the money is out of your account, if you have other charges that cause you to overdraw your account, you will need to convince your bank to refund those charges as well and explain what happened to the other people who’s checks bounced.  And, technically, bouncing a check, even if you didn’t mean to, is illegal and you could, possibly, be prosecuted.

Many banks will provide a provisional credit within a day or two while they are investigating your claim, but you should ask for that.

Merchants will try to get you to use the debit option because a debit transaction costs them less than a credit transaction – even with the same card – but gives you more risk.  Many merchants go out of their way to hide the credit option (Walmart, for example) when you slide a Mastercard/Visa logoed debit card through the reader to try not so subtly get you to use it as a debit card.  Typically, you hit the cancel button at that point and the machine will say “just kidding, do you want to use this as a credit card?” or something similar.

If the store that you used your debit card with PIN at is breached, then the hackers have your PIN, so you are trusting the store to protect your PIN.  If history is any indication, that might not be the best place to put your trust.

The Next Option is a check.  While I am amazed that some people still do this, it would be the last banking option I use, especially at a retail store or online merchant that I do not have complete trust in.  In many countries, such as in most of Europe, checks don’t even exist any more.  Some people like paying by check because it USED TO BE that it took a couple of days to hit your bank account.  Today, based on the CHECK 21 law, all the merchant has to do is scan the check to capture the routing number and account number at the bottom of the check along with the amount and electronically present that you your bank.  The check will usually clear THAT NIGHT and it could clear the same day. In fact, the feds are working on new processes right now to clear that check in real time, so when that happens, a check and a debit transaction will look identical, minus the protections that the debit card user has. The days of check “float” are gone.  The reason some merchants like this method is that the cost for for this transaction (called ACH) is even less than the cost of a debit card with PIN transaction.

The problem with using a check is that anyone who handles the check now has your checking account number and can, with minimal effort, create an electronic check to be presented to your bank for payment for the rest of eternity.  The only solution to that is to close your checking account and open a new one.  This means ordering new checks, dealing with outstanding checks that have not been deposited yet and changing any recurring withdrawals and deposits  that you may have set up (like the phone company or electric company or your paycheck).  The rules that protect you are in the Check 21 law – the same law that allows the merchant to electronically tell your bank that they have a check from someone with this routing number, account and amount.  It does offer protections, but only for personal checking accounts and not business checking accounts.  And, closing your checking account and opening a new one is a pain in the rear.

The final option is Paypal.  Paypal is the least favorite option for me.  It is important to understand that Paypal is not a bank and is not regulated like a bank.  When you purchase something with a credit or debit card and Paypal is your vendor’s merchant, the protection rules don’t change, so you are safe.  If you have a problem, you go to your bank and complain to them.  If you link your bank account to your Paypal profile, then Paypal will debit your bank account using an ACH transaction (similar to the check option above) and you do not have the protections provided by the laws covering credit and debit transactions.  Also, since Paypal is not a bank, the rules that govern banks, including the security oversight provided by the Federal Financial Institution Examination Council that audits banks, does not apply.  Your protection is governed by a contract that you agree to when you use Paypal and which changes at the whim of Paypal.  Paypal does have a buyer protection process which I have used and, in my personal experience, the results have been dicey.  Again, it is a legal contract, which becomes a civil matter and not a criminal matter, and your recourse is to take them to court for breaching the contract.

My preference from a security perspective is to work from the top of this article down.

I also recommend that people use the electronic notification options that most banks provide.  If yours does not provide these options, it is time to find a new bank.  Seriously.

All of my banks offer the option of sending me a text message every time a charge is made on my debit or credit card, every time a deposit  is made, whenever the balance goes below a certain amount and a hundred other events.  Sign up for these messages today.  If you use them and READ the messages WHEN THEY COME IN, you will stop a financial thief in his tracks.  Credit, debit, check or paypal, they get one shot at your bank account.  If you get a message that a charge was made on the account that you don’t think you or an authorized user of the account made, RUN, don’t walk to the nearest cell phone and call your bank.  They will reverse the charge, and reissue whatever needs to be replaced.  IF PEOPLE WOULD JUST DO THIS ONE THING, CREDIT CARD FRAUD WOULD GO AWAY BECAUSE IT WOULD NOT BE EFFECTIVE ANY MORE.

Reading material –

On credit card protections: http://www.creditcards.com/credit-card-news/5-key-laws-protect-credit-cardholders-1377.php

On debit card and checking account protections: http://www.creditcards.com/credit-card-news/debit-card-fraud-protection-1282.php

On protecting your checking account: http://www.federalreserveconsumerhelp.gov/learnmore/checking-accounts.cfm

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