Providence-based consumer-rights attorney John Longo is urging shoppers to leave their cash and debit cards at home, and pay with a credit card. Really? We asked Longo five questions about that, and about the differences between use of credit and debit and cash.
PBN: So you believe it’s better for consumers to shop with a credit card, as opposed to a debit card or cash?
LONGO: My advice is to use your credit card and set aside enough money to pay the bill in full at the end of the month.
Shopping with cash or a debit card sounds like a good idea because it’s hard to overspend with them. But using a credit card gives you the benefit of several federal consumer protection laws if something goes wrong after the sale. The major law on the subject, the federal Fair Credit Billing Act, requires credit card issuers to mediate disputes between merchants and consumers and, if the consumer wins the dispute, to reverse the charge and return any money the consumer paid. The act also requires credit card issuers to reverse charges for goods or services that the merchant does not deliver. Banks that issue debit cards are not obligated to do either.
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PBN: Do you believe it ever makes sense to use a debit card or cash?
LONGO: Credit cards usually charge big fees for cash advances so you are better off using your debit card if you need cash. You should also use cash or a debit card to pay for small items, like [a coffee] in the morning, and for living expenses like groceries.
PBN: Explain the differences between credit and debit cards.
LONGO: Banks used to just issue you an ATM card so you could withdraw cash from teller machines. Now they are issuing you a debit card so you can both withdraw cash and pay for things using a single card. Like an ATM card, a debit card is tied directly to your bank account. When you shop with it, your bank immediately takes money out of your account and sends it to the merchant. Even though it may carry the Visa or MasterCard logo, it is not a credit card.
A credit card, on the other hand, is not tied to your bank account. Someone else pays the merchant then sends you a bill at the end of the month for everything you charged. If you do not pay the bill in full, they charge you interest.
The laws and regulations that govern each type of card are different and the ones that cover credit cards are much more beneficial to consumers.
PBN: The downsides of using a debit card?
LONGO:Sometimes your bank will let you use your debit card even if there is not enough money in your account. In fact, they like it when you do that because they typically charge you a $35 “convenience” fee each time they let you overdraw your account. For example, if you use your debit card to buy $500 worth of office supplies at Staples, but you only have $499 in your account, your bank sends the store $500 then charges your account that amount plus the $35 “convenience” fee because you were $1 short. That is like paying 350 percent interest on a $1 loan. No credit card charges you that much interest.
PBN: Is there a difference to the merchants which card a consumer uses?
LONGO:It has to do with how the store processes your purchase. If you say “credit,” the store uses one payment processing system and you may have to sign your name. If you say “debit,” the store uses a different system and you may have to punch in your [personal identification number]. Both systems charge the store a small fee. The fee is lower for the “debit” system, so most stores prefer to use that one.
In 2009, there were 38 billion debit card transactions in the U.S., and the National Retail Federation has been pressing the government to force banks to lower the processing fees merchants have to pay for each one. In early December, the Federal Reserve recently proposed doing just that. It remains to be seen whether lower processing fees will translate into lower prices for consumers.
