Debit or Credit Card? Mistakes Will Cost Dearly

Debit or credit cards or checking accounts, banks want to "protect" user. And it's going to cost you

In, as my grandchildren like to say, the olden days, one had a savings and a checking account at the neighboring local owned and operating bank. Once in a while, we would make a deposit assuming it would "clear" the banking process and be credited to our account by, say, next Thursday. On the preceding Monday, however, the rent or electric bill or something else had to get paid, so we wrote out a check and mailed it off, secure in the knowledge that the mail could not possibly be delivered for two or three days, the payee of the check would deposit the bank in its own account and wouldn't reach our account until Friday, at the earliest, and all would be right in the world. This even had a name: "working the float" and was a practice used by major corporations where the delayed transfer of large sums was of significance. It is also the way purveyors of gift cards and travelers' checks make a whole bunch of money; you give them money to hold, and invest, and later either spend the money or, better from their point of view, the cards or checks are lost or misplaced.

Every once in a while, however, something went wrong. The mail was delivered more quickly than had been anticipated, the written checks hit your account sooner than had been hoped and the deposit made to your account wasn't paid and become available until additional days had passed.

Disaster! One or more of your checks could not be paid because there were insufficient funds to pay them. If one were a good customer of the bank, the checks would nonetheless be paid after a telephone call from the bank requesting a deposit be made NOW. The first time this happened, that was then end; if overdrafts became more frequent, a charge would be imposed and, if the practice became even more frequent, the bank closed the account. Now, banks have merged and consolidated, the friendly neighborhood bank manager has his or her office in Dallas or Charlotte, North Carolina or somewhere else far, far away. And the imposition of charges on overdrafts has created a revenue stream for financial institutions that would make the most venal mob boss jealous. Consider, a $25 overdraft, usually paid within a few days, results in a $30 charge. Figure the APR on what is essentially a short-term loan! Talk about loan sharks.

And to add insult to injury, banks choose to "clear" the charges or checks in descending order of size; thus more items will bounce! And more penalty charges will be imposed.

There used to be a significant difference between debit and credit cards but, at least to the former, the differences are non-existent. Both types of cards offer the same protection against fraud. One major difference, however, is that a debit card places one's entire associated bank account at risk, at least for a while.

Most debt cards can be used as credit cards, but the only real difference is that, in the case of a debt card, a "pin" number is used whereas when the card is used as a credit card, the receipt is signed. There are other differences insofar as the merchant is concerned; usually smaller fees are imposed for a card which is used with a "pin". But for the customer, there is no difference; when Joan or I go to the supermarket and ask that the debit-credit card be used as the latter, because of card rewards we receive, the charge is out of our bank account before we got home.

When debit cards were first introduced, charges were authorized only if there were sufficient funds at the bank. Now, however, banks have become greedier. Your friendly banker will gladly pay on a debit card - even if there are insufficient funds available to pay. Of course, the bank will do so after imposing a $30 or $40 fee.

Of course, people should be better managers of their account, they should never overdraw, and they should never swipe the debit card if there are not enough funds to pay the charge. But the reality is that we are all careless from time to time and our bankers are thrilled and fining is a leading revenue stream - to the extent of billions.

And taxpayers are bailing those guys out of trouble?