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What Debit Card Companies Don't Tell You

A Debit Card Boom

by David Bach


My last column, "What Credit Card companies Don't Want You to Know," received an overwhelmingly positive response, with close to 4,000 comments posted in a matter of hours. It's exciting to see so many Yahoo! Finance readers taking an active role by posting feedback and suggestions.

One reader named Carol wrote, "I do not use credit cards because like a lot of others I got into a lot of trouble using them. After digging myself out, I cut them up and now I only use cash or my debit (bank account) card with a MasterCard logo."

A Debit Card Boom

I can relate. I also switched to a debit card after getting myself deep into credit card debt when I was in college. By using only my debit card, I became more disciplined about spending.

Carol and I aren't alone: Debit card use today is at an all-time high. You may be surprised to know that consumers are actually using debit cards more often than credit cards now. In fact, according to market research firm Mintel, debit card use surpassed a trillion dollars last year.

The Benefits of Debit Cards

Using a debit card for purchases is convenient, and it keeps you out of debt. After all, you can't spend what you don't have in your account. There's also no bill to worry about -- which means no interest, no late fee, no over-the-limit fee, no annual fee, and so on. Make a purchase and the money comes directly out of your bank account. What could be simpler?

But the same things that make a debit card so simple to use is also what makes it so risky. When your debit card information is compromised, thieves have direct access to your bank account.

Seven Tips for Debit Card Use

Obviously, it's important to understand the risks of debit card use, and how to protect yourself from those risks. Here are seven tips you need to keep in mind about debit cards:

1. Know your debit card's liability policy.
Many banks advertise that they offer "zero liability" debit cards. This means that if an unauthorized charge is made on your card and the transaction is signed for, you are not liable for the fraudulent purchase -- much like if you were to use a credit card.
However, it's really important to understand that in most cases, this zero-liability policy only applies to signature-based transactions when you're using a debit card with the Visa or MasterCard logo.
This means that if an unauthorized purchase is made using your debit card with your personal identification number (PIN), in most cases the zero-liability policy won't apply. What's more, the zero-liability policy for debit cards is just that -- a policy, not a federal law.
Ultimately, then, liability for fraudulent transactions are subject to review by the bank that issued the card. That said, it's possible that your bank offers a zero-liability policy even on PIN transactions, although very few do. Check with your bank.

2. Lose your PIN, lose your money.
Because PIN-based debit card transactions (regulated by the Electronic Funds Transfer Act) generally don't carry the same protection as signature-based debit card transactions (regulated by the Truth in Lending Act), you want to do everything possible to safeguard that PIN. If your debit card information is stolen along with your PIN and you don't notify your bank right away, your entire bank account could potentially be wiped out.
According to the law that governs electronic fund transfers, in order to limit your liability you must report suspicious debit card use for PIN-based transactions to your bank within two business days -- which will only put you on the hook for $50. Losses reported after two days will increase your liability to $500.
That's not all -- if you report unauthorized use of your debit card after 60 days from the time you received your statement, the bank doesn't have to reimburse you at all. In fact, you might even be liable for the maximum overdraft line of credit they extended to you. It's possible that your bank could have a greater protection policy than what the law requires; check to make sure you know what yours is.

3. It's easier than you think to have your debit card information stolen.
Your physical debit card doesn't need to be stolen out of your wallet or lost in the mall parking lot in order for your information to be compromised. This month, the Wall Street Journal ran an article on an increasingly common debit card scam.
In this scam, criminals attach "skimmers" to the card-swiping devices at grocery stores, gas stations, and even banks. Undetected by consumers, these skimmers copy debit card numbers -- including PINs -- that are entered. Once the skimmer is retrieved by the criminal, the information is sold or used to create fake debit cards. (Actually, this scam applies to both credit and debit cards. However, thieves prefer to steal debit card information since credit cards are monitored more closely by banks.)
So be on the look out for physical tampering at your ATM or checkout line, which could indicate that a skimming device is present. Don't use unbranded ATMs, either -- the kind you find in convenience stores or gas stations.
Also be aware of people lurking too closely at ATMs, or even for hidden cameras when you're entering your PIN. Use your hand to shield the numbers you're entering on the keypad.

4. Check your bank statement online every day.
Does that sound extreme? Trust me, it's not. While you're online checking email every day, take two minutes to log on to your bank's web site (from a secure computer, of course) and pull up your current statement.
Glance over your recent transactions and make sure they're all legitimate. If you see anything suspicious, call your bank immediately. Don't wait for your paper statement in the mail. By then it might be too late.

5. Don't let your debit card out of your sight.
Make sure all your debit transactions are handled without the card being taken out of your line of sight. Once you take your eye off the card, anyone who handles it has the opportunity to steal the card information.

6. Check your credit report regularly.
If you suspect that your debit card information has been compromised, report it to the credit bureaus right away. Order a copy of your credit report and monitor it regularly.
For a (genuinely) free credit report, go to They offer a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies, in accordance with the Fair and Accurate Credit Transactions Act.

7. Know when not to use your debit card.
There are certain situations in which it simply makes sense to use your credit card instead of your debit card. If you're making a "sight unseen" purchase over the Internet, for example, you have more recourse with a credit card if the item arrives in poor condition or not at all.
Personally, I never use a debit card for online purchases. It's always much more difficult to have money returned to your bank account than to dispute a charge on your credit card statement.
Finally, if you can avoid it, don't use a debit card when paying for a hotel stay, car rental, or even at the gas pump. When you do, banks put a block on a certain amount of money in your account until the entire transaction is complete and posted -- which could take days. In the meantime, your money is tied up and you won't be able to access it, which could lead to fees being incurred for an overdrawn account.
When using a credit card in these situations, be sure to pay the balance in full as soon as your bill arrives.

Of all the games the credit card companies play that end up costing you thousands of dollars (late fees, over-limit fees, transfer fees, and so on), it's always been the interest rate game that hurt the most -- until now.
There's a new, completely legal game they're playing, and it can literally wipe you out financially if you're not careful.

The Universal Default Clause

If you own a credit card, you know by now that if you're late with a payment the credit card company will charge you a late fee in addition to raising your interest rate. But did you know that they can raise your interest rate if you've made a late payment on any of your other cards, including those issued by other companies?
Not only that, but your interest rates can skyrocket to 30 percent or more if you make a late payment on your car loan, mortgage, or even your phone bill!
"How can that be legal?" you may ask. The answer is found in the fine print of your credit card agreement, and it's called a universal default clause. According to the Institute of Consumer Financial Education, currently almost 40 percent of credit card issuers apply this policy to their customers.

A Late Payment 'Trigger'

Generally, a universal default clause states that a creditor reserves the right to penalize you with an increased interest rate if you're late -- that is, in default -- of a payment to any other creditor. They justify this practice because, in theory, if you pay any of your creditors late, you pose a greater credit risk and are less likely to pay your debt.
Your creditors also have the right to routinely monitor your credit file. So a creditor with a universal default clause will be watching -- and waiting.
Let's say your Visa card has a universal default clause. Any late payment -- whether it's on your utility bill, home equity loan, or Macy's credit card -- acts as a "default trigger" allowing the bank that issued the Visa card to double or even triple your interest rate overnight. Your all-important credit score will be hurt as well.
According to a study by the nonprofit advocacy and education group Consumer Action, the top three default triggers that cause your interest rates to spike are a decline in credit score, paying your mortgage late, and paying your car loan late.

Other Triggers to Worry About

Under the universal default clause, your interest rates can be increased for several other reasons, including exceeding your credit limit, bouncing a check, having too much debt, having too much credit, getting a new credit card, applying for a car loan, and applying for a mortgage loan.
How does this affect your financial future? Take a look at the numbers. Let's say you're an average American household, with $8,000 of credit card debt. Assuming you make no additional purchases on your card, you have a 9 percent interest rate, and you make the minimum monthly payment, it'll take you 218 months (18 years) to pay off your debt and you'll end up paying $3,334 in interest.
Now let's assume that for whatever reason you were late one month with your car payment. This late payment triggers the universal default clause with your credit card issuer, and now your penalty rate gets increased to 24 percent (the average default rate in 2005). It'll now take you 679 months (56 years) to pay off your credit card debt, and get this -- you'll pay $30,813 in interest.

Staying Ahead of the Clause

Here are six ways to protect yourself from interest rate hike triggers:

1. Stay away from credit cards with a universal default clause.
If you're looking to open a new credit card account, be sure to choose one without a universal default clause. This means you have to truly read the fine print. If you're confused by the fine print (as many are), call the credit card company and ask what specific circumstances will affect your interest rate.
I read recently that Capital One cards don't have a universal default clause (although you should double-check before applying), and Citi has dropped its universal default policy as well. In addition, sites like,, and let you compare credit card offers, so visit them before you apply.

2. Know your current obligations.

Check your current statements and credit card agreements to find out your current interest rates, and to identify which cards have a universal default clause that you weren't aware of until now. Again, if you're uncertain after reading the fine print, call your credit card company.
Consider transferring your balance from a card that has the universal default clause to one of your cards that doesn't. But don't rush to cancel the card altogether, because it could have a negative effect on your credit score.

3. Run your credit report.

Not only do you need to know exactly what your current interest rates are, you also need to know exactly what's on your credit report. Visit or myFICO to order your credit report and credit score today.

4. Pay your bills on time.

According to the American Bankers Association, late payments for most types of consumer loans were on the rise during the third quarter of 2006. If you're having trouble with your credit card payments, at the very least strive to make your minimum payment on time.

5. Be proactive -- call your lender for relief.

If you're struggling to make monthly payments on your other bills, like utilities, car payments, or mortgage payments, call your lender to see what options they might be able to offer you. They might be able to adjust your monthly payments so that they're more manageable.
Your goal is to protect your credit report and credit score with a consistent record of on-time payments.

6. Fight back for your money -- write your local legislator.

Right now, there are amendments to the Truth in Lending Act that, if passed, would prohibit many unfair practices within the credit card industry -- including the universal default clause.
As a consumer, you can take action by letting Congress know that you want laws to protect your rights. For more information on how you can be heard, visit Consumer Action's web site.
As I write this, Congress is holding hearings to discuss the abusive and deceptive practices of the credit card industry. Read more about it here.

A Good Night's Sleep

Obviously, what you don't know really can hurt you. Check today and see if you have the universal default clause on your credit cards.
If you do, be careful to stay on top of your debt. Better yet, find a credit card that doesn't have the clause -- you'll sleep better at night.




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