Paper or Plastic
Your decisions aren’t over when you make up your mind to buy a product or service. Next comes figuring out your best way to pay. Here’s a guide to the potential risks and rewards of using cash, checks, credit cards or debit cards.
You’re browsing at a local store and you see the lamp you’ve been searching for, the last one left, drastically reduced to $100. You know you can’t live without it, but you also know you want to be able to return it if you find out the lamp doesn’t work after you get it home. How should you pay to best protect yourself? Give cash and get a receipt? Write a check? Pull out a credit card? Or use your debit card to deduct the payment from your bank account electronically?
If you’re like many people who’ve been in situations like this, chances are you made a quick decision about the payment without paying much attention to the potential costs, consumer protections, or other factors. In our example, your best move probably would be to put that lamp on your credit card before you put it on your end table. Why? Because under the Fair Credit Billing Act, if you happen to charge a defective item that’s more than $50 from a merchant in your home state or within 100 miles of your home, "you have a right to return it to the merchant and get the charges reversed, unless you clearly accepted the item in an ‘as is’ condition or in a transaction where all sales are final," says Robert Patrick, an FDIC consumer law attorney based in Washington.
Every payment method has its virtues and shortcomings, and much depends on your personal preferences and the specific situation. Still, you need to know enough about your payment options to make informed decisions. "Consumers are not stupid about banking issues, but they often are ignorant about the most efficient choices for themselves," says E. Thomas Garman, a professor at Virginia Polytechnic Institute and State University in Blacksburg, VA, and director of Virginia Tech’s National Institute for Personal Finance Employee Education.
We want to help you understand your rights and the potential risks and benefits when it comes to the most common ways to pay for things. We’ve compiled information we hope can save you time, money, and hassles when you make purchases, over the phone, on the Internet, or through the mail. We want you to be smarter and safer the next time someone asks that familiar question, "And how would you like to pay for that?"
How It Works
You pay the merchant (or other provider of goods or services) in U.S. bills or coins. The merchant can immediately use the money for new transactions or deposit the cash at the bank.
Cash is familiar and easy to get and use. Automated teller machines (ATMs) now make cash available 24 hours a day, seven days a week. And the basic consumer payment in cash is simple, involving no fees, cards, machines, security numbers, ID checks, or other time-consuming steps.
"Cash usually is the cheapest way to go—no fees, no service charges, no interest payments," says Kathleen Nagle of the FDIC’s Division of Compliance and Consumer Affairs in Washington. One possible exception: If you use ATMs a lot, you may find yourself running up significant fees, especially if you’re not using your own institution’s machines.
What else makes cash so popular? It’s accepted by other consumers as well as by all merchants, including businesses that won’t always take your check, credit card or debit card. You can’t get in debt using cash because it’s money you already have. And, if privacy is a concern, cash allows you to pay for something anonymously.
Cash doesn’t provide the solid consumer protections that exist for other forms of payment. (See next section.) If you don’t keep good records and receipts, you won’t have a paper trail to help resolve disputes or help you track your spending for money management purposes. Bills and coins also can easily be lost or stolen.
With cash, there are no specific state, federal or industry protections if you pay for a product or service that turns out to be a dud. However, you may be protected by general laws in your state governing business and trade, according to FDIC attorney Patrick. "The fact that you paid in cash wouldn’t negate the applicability of laws against unfair trade practices," he says. Example: If you paid cash for a bad product and you’ve got a receipt, you might have a case under state law that there was a breach of contract or a breach of warranty. But even so, Patrick adds, "if you can’t resolve this on your own you might have to go to court," which can be costly, time-consuming and frustrating.
You can’t stop payment (as with a check) or dispute payment (as with a credit card) if you run into a problem with the person or company that sold you the goods. That’s especially a problem with big-ticket items.
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Always get and keep receipts, written warranties and other documentation. Without them, it’s your word against the merchant’s in a dispute, and those battles can be hard to win.
Don’t depend on the merchant to get you the right backup records if there’s a question about a payment. "Under state law, if there’s a dispute between a buyer and a seller over a payment, the burden of proof is on the buyer, and not the other way around," says FDIC attorney Patrick.
Don’t carry too much cash or leave it in your home or office, even if you find a nice hiding place for it. If you need more cash, you should be able to get it from a nearby ATM.
The Most Popular Payment Award Goes To...
What's the #1 payment of choice for American consumers—cash, check, credit card or debit card?
The answer: Cash, by far. A recent article by economist Stuart E. Weiner of the Federal Reserve Bank of Kansas City says that an estimated 50 percent or more of the total number of transactions in the U.S. involve cash.
Checks are the second most popular form of payment. The article reports that checks totaled 72 percent of the non-cash transactions in the U.S. in 1997, far ahead of credit cards at 18 percent, Automated Clearing House transactions (such as automatic bill payments) at five percent, and debit cards at four percent.
How They Work
You write a check—essentially an order instructing your bank to pay a particular merchant a specified sum of money, using funds in your account at that bank. To collect the money, the merchant probably will deposit the check. It’ll take about one to five business days before the money is transferred out of your account. However, there are new ways for merchants and other vendors to process checks electronically and reduce the time it takes for the funds to be deducted from your account.
Checks are familiar and easy to use or mail. They also are routinely accepted by merchants as well as by utilities, landlords, mortgage lenders, credit card companies, and other major service providers, although sometimes with limits. As with cash, checks also are widely accepted by other individuals.
Paying by check can be a good way to avoid overextending your family finances and to build a good payment history. Checks also are good for people who just aren’t comfortable with newer forms of electronic payment, such as debit cards.
Checks also create a paper trail that can be followed if there’s a dispute over who got paid or how much. If your bank doesn’t routinely return canceled checks but you need some for your records, you have a couple of options, according to Cynthia Bonnette, a bank examination specialist with the FDIC in Washington. "You can make a special request for copies of checks, possibly for a fee," she says. "Or, if you bank at home by personal computer, your checks’ images may be offered as part of that service."
A few types of checking accounts also earn interest. And last but not least, checking accounts, as with any other deposit accounts, are protected up to the $100,000 insurance limit at federally insured institutions (by the FDIC for banks and savings institutions, or the National Credit Union Administration for credit unions).
Some merchants don’t accept personal checks. You can’t take extra time to pay, as with credit cards. Writing and mailing checks also takes time and money. Checks also can easily be lost or stolen.
Most of the consumer protections for checking accounts are covered by state laws under the Uniform Commercial Code (UCC), although these "uniform" laws can vary by state. Payments by check are not covered by the consumer protections in the Fair Credit Billing Act applicable to credit card purchases (More details about the FCBA).
What can you expect under state laws? They may, for example, limit your losses if someone steals your checks and forges your signature. You also have the right under the UCC to stop payment on a check, but you have to act quickly (before your check clears) and be prepared to defend your action when the merchant demands payment.
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Do some comparison-shopping every few years to make sure you’re still getting a good deal on your checking account, in terms of fees, minimum balance requirements, and so on. Many banks offer special deals if you arrange for direct deposit of your paycheck (which also can help prevent bounced checks because the money goes into your account at the earliest possible date).
Use your checking account responsibly. Keep your checkbook balanced so you don’t mistakenly overdraw your account (which can result in fees and a bad mark in your payment history). Monitoring your account also can help you spot errors or unauthorized transactions. And, on the topic of unauthorized transactions, take simple precautions to keep thieves away from your checks. Examples: Don’t carry more checks than you need, and keep extra checks in a secure place.
How They Work
Using a credit card is much like taking out a loan when you buy goods and services. When you present your card to a merchant, the cashier will electronically contact your card issuer (generally a bank or other financial institution) through the card network (Visa or MasterCard, for example) to verify your account number, expiration date and credit availability. If everything checks out, the card network will authorize the transaction. The merchant will collect the money from the card network, which will collect the money from your card issuer, which will bill you for the money in your next statement. There also are charge cards offered by retailers, oil companies and other corporations, primarily limited to purchases you make from them.
Depending on your personal situation or the repayment terms of the card you carry, you’ll either pay your credit card bill in full each month and (usually) be charged no interest, or you’ll carry a balance on the card from one month to the next and pay interest on that debt.
With credit cards, you can buy goods and services now and pay for them later—much later than with a check or debit card. That’s a big plus if you want to buy a big-ticket item (such as furniture or a computer) and you want to pay for it over time, even if it means interest charges.
Credit cards are easy to use and are widely accepted—when buying in other cities and countries, on the Internet, through the mail or over the telephone. (They’re not accepted by individuals and some small businesses, however.) Credit cards also can be especially helpful in an emergency, such as paying for unexpected medical care and expensive auto repairs. In addition, card issuers often throw in freebies for using their card, including cash rebates, bonus points good toward airplane tickets, and even automatic extensions of manufacturer warranties.
Among the other big pluses of credit cards: They offer excellent consumer protections. (See the next column.) You can consolidate multiple purchases into one monthly bill that you can pay with just one check. They’re less bulky and safer to carry than a wad of cash. (If you want more of the green stuff, you can even use your credit card to get a cash advance from a financial institution or an ATM, but this is a loan that also comes with a fee.) Credit cards also are easy to replace if lost or stolen, even if you’re far from home. The same can’t be said for cash or checks.
Interest charges, fees and penalties can add up, especially if you don’t understand how your card works. "Too many consumers think that every bank gives them 20 or 30 days before charging interest, but that’s not the case with many banks today," warns the FDIC’s Nagle. Professor Garman of Virginia Tech adds that consumers who pay interest on credit card purchases forget that they are paying more money than if they used cash or a check. "After adding in the finance charges, which are typically 18 percent, you have the opposite of buying things on sale," he says. "It’s like marking up your purchases an additional 18 percent, if not more." Consumers who make only the minimum payment on their credit card bill also can add significantly to their interest charges.
Credit cards may offer your best legal remedies against billing errors, damaged merchandise and other woes that buyers encounter.
The federal Truth in Lending Act (TILA) limits your losses to a maximum of $50 if your credit card is lost or stolen. The Fair Credit Billing Act (FCBA), part of the TILA, protects you against billing mistakes and unauthorized charges. I t also allows you to withhold payment on defective goods until the problem has been corrected, provided certain conditions are met. (More details about the TILA.) The FCBA is a big reason why most experts advise consumers to use credit cards—not cash, checks or debit cards—when paying for big ticket items or services that you want to know will work as promised.
See Web Site on Fair Credit Billing.
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The credit card is one of the best innovations of the 20th century, but you have to be smart in how you use it.
If at all possible, pay off your credit card balances each month so you can avoid or minimize interest charges. If you expect to carry a balance most months, consider using a card with a low Annual Percentage Rate (APR) and a grace period for new purchases before finance charges are imposed. Do your best to be aware of fees and service charges so you don’t trigger them by accident.
Many people wonder if they should use their credit card to pay for small, everyday living expenses, such as gas or groceries. Here’s one possible approach: If you’re going to pay off your credit card bill each month and you can do so without incurring an interest payment, using your card for small purchases may be a convenient way to consolidate your payments. But if you’re unlikely to pay off your card balance each month, many experts say you’d be better off using cash, checks or debit cards, because those small purchases will cost significantly more once you add in the interest charges.
Remember that there’s always the potential to become "overextended" with debt, from credit cards or any other loans. If you think you’ve got a debt problem, think twice before using your credit card, and find ways to spend less and save more. For more suggestions, see Money Management Tips.
Also, do your part to prevent credit card fraud. Some simple precautions: Keep your card safe, and be sure to sign the back of the card as soon as it arrives.
How They Work
Debit cards look like credit cards but work more like checks because the money is deducted directly from your checking or savings account. The consumer or merchant runs the card through a scanner that enables the bank or bank network to electronically verify that the funds are available and approve the transaction. There are basically two kinds of debit cards, although many cards function as both types:
- An "on-line" card deducts the money from your account almost immediately and, for safety reasons, requires the use of a Personal Identification Number (commonly known as a PIN number). You also can use this type of debit card to withdraw money from an ATM.
- An "off-line" card doesn’t always immediately deduct the money from your account—the funds may not be transferred for a few days—and you sign a receipt instead of using a PIN number. The off-line card also is known as a "check card" because of its similarity to the way a check is signed and paid.
Debit cards also have other features of a checking account, including overdraft protection (for a fee) and a monthly statement listing your use of the card.
Using a debit card is easier and faster than writing a check. It’s also a good way to pay for small or routine purchases without having to pay interest charges.
Debit cards are widely accepted by merchants, including in far-away cities and countries. Even a merchant who won’t accept your check may accept a debit card, because there’s a greater assurance that the payment will go through. Note: Your ability to use a card at any specific store or ATM, though, will depend on the type of debit card and the card "network" your financial institution belongs to.
Consumer protections for debit cards generally aren’t as strong as those for credit cards. (See next section.) Also, because funds are deducted from your account very quickly, don’t expect to have the option to stop payment in a dispute or replenish your account if your balance is low. Debit cards also are not accepted as payment by individuals and some small businesses.
The Electronic Fund Transfer Act (EFTA) offers protections if you believe there’s an accounting error or if a thief uses your debit card or card number. However, in the event of an unauthorized transfer from your account, it’s important to promptly notify your card issuer. If you wait too long, there’s even the potential for unlimited loss on unauthorized transfers made more than 60 days after receiving a bank statement with the first signs of theft. "That means you could lose all the money in your account plus your maximum overdraft line of credit, if you have one," says Jeanne Hogarth of the Federal Reserve Board’s consumer affairs staff in Washington.
One break for consumers, though, came when the banking industry agreed recently to voluntarily limit the liability for off-line debit cards (those that don’t require the use of a PIN), generally to the same $50 limit that exists for credit cards. (More details about the EFTA.)
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Immediately deduct your debit card transactions and fees from the balance in your checkbook, and balance your checkbook regularly so you don’t overdraw your account. Also, keep your debit card receipts so you can compare them to your bank statement.
How can you protect your account against unauthorized transactions by a thief? We gathered these tips:
- Understand your card’s security features and the different consumer protections that apply to the different types of cards. "A card that is only protected by a signature requirement, if lost or stolen, can more easily be used for unauthorized transactions," says the FDIC’s Bonnette.
- Safeguard your account number and PIN. "Just knowing your card number can be enough for a crook, perhaps in conjunction with a dishonest retail employee, to make purchases in your name and gradually drain your bank account," says Steve White, a fraud investigator for the FDIC in Washington. His recommendations: Take home your receipts (which may have account numbers printed on them) instead of leaving them in the trash. Shred the receipts after you’ve verified the accuracy of your monthly statement. Don’t write your PIN number on your card or leave it in your purse or wallet—memorize the number instead. And, always stand so that no one can see the keypad at the ATM or checkout counter where you punch in your PIN number.
- Check your monthly bank statement and balance your accounts each month in order to spot an unauthorized transfer. Federal Reserve staffer Hogarth also suggests that, between bank statements, you should look at the account balance printed on your ATM receipts. A suspicious drop in your balance could be a sign that a thief has tapped into your account.
See Web Site Debit Cards vs. Credit Cards.
Computer Banking: Also known as "home banking" and "online banking." This service allows you to pay bills, move money, or do other banking 24 hours a day using your computer.
Direct Payment: A way to automatically pay bills (such as your mortgage or health club dues) without writing and mailing checks. It usually involves giving a voided check and written permission to withdraw from your account electronically.
Telephone Banking: Enables you to pay bills any time using a touch-tone phone. Dial in and then enter your account number, personal identification number (PIN), a code for the company you want paid, and the dollar amount.
Telephone Debit: Over the phone, you authorize a merchant to electronically withdraw from your checking account, and you provide your bank routing and checking account numbers off your check. This payment method can prevent late fees on bills or speed the delivery of goods. (Note: Only give this information to reputable merchants when you initiate the call, and not in response to unsolicited calls, which may be fraudulent.)
- Financial Regulators of Depository Institutions. These agencies offer publications, Internet sites, staff and other resources that can help answer your questions about checking accounts, credit cards and other bank products.
- The Federal Trade Commission. The FTC enforces a variety of consumer protection laws, especially those involving unfair or deceptive sales practices, and it publishes many brochures for consumers. Call toll-free 1-877-382-4357; write to the FTC's Consumer Response Center, 600 Pennsylvania Avenue, NW, Washington, DC 20580; or go to its Web site.
- State Governments. Many consumer protections, especially those involving checking accounts, are based on state laws. Contact your state's Attorney General's office or consumer protection office as listed in your phone book or other directories.
- The Better Business Bureau: A private, non-profit organization that provides information that can help consumers make buying decisions. It also often helps consumers and businesses resolve disputes. Start by contacting the local Bureau listed in the phone book or go to their Web Site.
- Your Financial Institution. Call the local or toll-free number for the customer service department as listed in your phone book, on your monthly statement or on the back of your credit card or debit card. These institutions also may have useful Web sites.
Note: The links on this page that go to web sites outside of this agency's control are provided as a convenience only. The Department takes no responsibility for their content.
See other Web Sites on Credit Cards.