Credit, Debit, ATM Cards - a Primer

In the olden days, as my children used to say, credit cards came in one flavor. A card was issued by a specific store or a specific gasoline company for use in that merchant's operation or at a gas station operated under a brand. When I started to drive, my father gave me a gasoline credit card (I think it had the Socony-Mobil or Esso brand) so I could conveniently put fuel in the family car at 15¢ per gallon. I should add that on the day I was married, my father asked for the card to be handed back.

When I was in law school in the mid to late 1950's, I applied for and received something new. A few years before, a new company had been formed, offering a new concept. Diners' Club signed up different restaurants and merchants, initially in the New York metropolitan area, each of which accepted the membership as a credit card. The "card" when I had it, was a small business card sized booklet which listed the establishments honoring the card. Diners was the prototype of the Travel & Entertainment card and required all balances to be paid in full every month; payments could not be spread out over long periods. (Diners' Club was eventually bought by Citibank.)

From that concept has come the variety of charge cards, check cards, debit cards, and ATM cards, each of which has its advantages and, more important, its dangers. There are, in addition, charge cards issued by an individual store or fuel company for its branded stations.

The safest card to use in every case is the charge card. As many of the cards discussed, it commonly has a Visa or MasterCard logo. It is the only card to use in purchasing by telephone or on-line. This type of card provides total and complete protection from unauthorized charges and even some protection for defective or otherwise unsatisfactory merchandise. With these cards, payment is not due for up to a month from the date of purchase, at which time either the balance is paid or a lesser amount, thus spreading out the purchase price. If a transaction is disputed, payment is deferred while a resolution is accomplished.

By the same token, if your card is stolen or unauthorized charges are made by someone else, liability is limited to $50 even if timely notice isn't given the card issuer. While there are limits on liability for unauthorized charges on a debit card, by the time one is aware of the loss, it may be too late to avoid very unpleasant consequences.

With charge or credit cards, the interest can be painful. Interest rates of 18% are common and the rate can be far greater. Also, the rate does not totally depend on your credit history with that card issuer; be late in paying any card or utility bill or other bill, the interest rate on a credit card that has been faithfully paid for years may soar! Interest charges can have a devastating effect. If one pays the standard minimum 3% of the balance, at 18% interest, it will take 47 months to pay off the bill, if nothing more is charged.

A debit card often looks like a credit card, with the Visa or MasterCard logo, is issued by your bank and may be called a "check card". It can be used in two ways - but the effect on the holder is the same. The are usually used as more convenient than a check in that no identification is required. There is also a factor of self-discipline; purchases are limited by the money available.

One goes to the grocery store and "swipes" the card through a machine and enters a "pin" four digit number. The amount of the charge is immediately withdrawn from your bank account. Alternatively, one can treat the card as a credit card, meaning that a receipt is signed. In that case, the transaction results in an immediate withdrawal from your bank account; in other words, the results are the same.

In the event of a stolen card or an unauthorized charge, there are protections that depend on notice to the bank. Many banks limit liability much the same as charge cards, but there is a vital difference: since charges are taken from your account immediately, by the time notice is given the bank and the institution investigates, damages have been done. As an example, you have $500. in your checking account when tour debit card is lost or stolen. Before you realize this, the thief has charged $400 to your account. In the belief that your balance is $500, you proceed to mail checks for utilities and rent totaling $450. Bounced checks - even if in two or three weeks, the bank puts $400 bank in the account!

Debit cards, and some charge cards, are also used as ATM cards, allowing withdrawals at nearly all ATM machines regardless of the machine's owner, and many services at the machines owned by the issuing bank. While the cost to your bank is considerably lower for electronic transactions compared to paper checks, most banks impose charges for the use of ATM's other than their own. Nearly all ATM machines not owned by your bank will charge a "transaction fee" of several dollars. An argument can be made that the owner of the machine has costs that are incurred (filling the machine, servicing and repair, etc.), when your own bank also imposes a charge, it simply isn't fair. But that's just my opinion.

Charge cards, credit cards and debit cards. Each has its advantages. Unfortunately, credit cards are a readily available and convenient way to be in serious debt!