How debit cards work
By Lucy Lazarony • Bankrate.com

WASHINGTON -- More and more people are paying by debit cards, yanking money from their checking or savings accounts right at the register.
They like the ease of paying this way. But all this convenience comes with risk, and even fees. And most consumers are woefully in the dark.
They don't understand that there are two different types of debit cards with different risks and benefits.
When you use a debit card, you can choose to make the transaction with a personal identification number or a signature. Whichever choice you make, the money is immediately removed from your bank account. These cards are often accepted at gas stations, supermarkets and stores such as Wal-Mart and Walgreen's. Many banks now issue ATM cards that also function as debit cards.
Many debit cards have the Visa or MasterCard logo, and these cards are accepted anywhere Visa and MasterCard are accepted. Increasingly, banks offer rewards for debit card use, but often points are awarded only for signature-based purchases.

Different banks, different cards
Different banks offer debit cards under different names, ranging from express checking to enhanced ATM cards, and this has led to some confusion among consumers.
"There's still a learning curve out there on debit cards," said Cleo A. Manuel, vice president of public affairs for the National Consumers League. "We still see a lot of consumers who see the logo and don't realize that, though it may say Visa or MasterCard, it's not a credit card."
She added: "We know consumers are confused. They're concerned about personal finances. They don't have enough money saved," Manuel said. "Having a new payment option can be daunting."
Ken McEldowney, executive director of San Francisco-based Consumer Action, a consumer advocacy group, said the way in which many debit cards have been distributed to bank customers is confusing and irksome, as well. Many issuers simply replaced customers' standard ATM cards with an ATM card with debit features without warning.

Customers had no choice
"What has upset consumers the most is they weren't given a choice," McEldowney said. "It was something that was thrust upon them."
Experts suggest customers closely read account agreements and look out for fees, which vary not only from bank to bank but from checking account to checking account within the same bank.
BankBoston, for example, does not charge customers for PIN debit payments, but it does charge some checking account customers 25 cents each time they make a PIN debit payment at a supermarket or grocery store. Bank of America charges some of its customers who pay either way with debit cards a fee of $1 a month. Both Citibank and NationsBank charge no fees.

Overlooked small fees can add up
"Charges for use vary a lot," McEldowney said. "Institutions may have no charge, or lower charges, for ATM cards, but by using a debit card, you could be triggering higher charges. Consumers should know that if they want to avoid getting get an unpleasant surprise in their bank statements."
It's easy to overlook. It happened to Consumers League's Manuel, a First National Bank of Maryland customer. "I was paying 50 cents a pop and I didn't even know it," said Manuel.
She said a lot of times people are guilty of going on automatic pilot when it comes to their personal finances. But small fees do add up.
"Every penny counts. Don't just go on automatic pilot. Because if you go on automatic pilot you could be paying too much. It's worth the time to sit down and look at a couple of bank statements," Manuel said.
And people would be wise to study their options closely from the start.
"When you get a new card, find out how you're going to be charged. Find out what the uses are," Manuel said. "Evaluate the best time to use the card."

Use them safely
A look a debit cards wouldn't be complete without some talk about safety.
There was much uproar last year surrounding signature debit cards, which simply need a signature to use. Several consumer groups were concerned that a thief could empty a customer's bank account in seconds by simply forging a cardholder's signature.
As a result Visa and MasterCard both stepped up liability protection in the late '90s, extending their "zero liability" coverage. MasterCard limits a customer's liability for losses incurred from a lost or stolen card as long as their account is in good standing. Visa debit card customers pay nothing if the card is reported missing. Visa will also give provisional credit, equal to the amount of money in the account at the time the card was reported missing within five business days, rather than the 20 days as required by law.
Issuers such as Bank of America and NationsBank have also stepped up safety protections. Bank customers are not liable for any charges made with a lost or stolen card.

Legal safeguards may be needed
"There's an inherent flaw in the voluntary safeguards in that they are voluntary and could be changed at any point. It's not the same type of protection if a law had been passed," McEldowney said. "We still need regulation."
He also pointed out that deciphering all the new voluntary safeguard measures can be difficult.
"There a sea of voluntary safeguards out there," McEldowney said. "Even though I've read them I couldn't tell you how one differs from another."
Experts suggest people focus on the protection offered by their issuer and report a lost or stolen card immediately.
"Consumers should err on the side of caution. You need to know where your card is at all times," Manuel said. "You need to protect your PIN number. You need to know who to call if you've lost your card. And you need to call immediately if your card is lost or out of sight."
The National Consumer League with help from Visa has published a free online information brochure on debit cards. To receive a printed copy through the mail, call 1-800-355-9625. An excerpt from the brochure is listed below:

Seven tips for responsible use of debit cards

• If your card is lost or stolen, report the loss immediately to your financial institution.
• If you suspect your card is being fraudulently used, report it immediately to your financial institution.
• Hold on to your receipts from your debit card transactions. A thief may get your name and debit card number from a receipt and order goods by mail or over the telephone. Your card does not have to be missing in order for it to be misused.
• If you have a PIN number, memorize it. Do not keep your PIN number with your card. Also, don't choose a PIN number that a smart thief could figure out, such as your phone number or birthday.
• Never give your PIN number to anyone. Keep your PIN private.
• Always know how much money you have available in your account. Don't forget that your debit card may allow you to access money that you have set aside to cover a check which has not cleared your bank yet.
• Keep your receipts in one place -- for easy retrieval and better oversight of your bank account.  

-- Posted: Feburary 15, 2007