Debit-Card Smarts

Debit cards are fast becoming U.S. consumers' plastic of choice. Bank customers used their cards more than 26 billion times last year to spend more than $1 trillion, says Nilson Report publisher David Robertson. Debit-card use now accounts for two-thirds of Visa's total transactions and half of its dollar volume.

With more than 60% of those transactions less than $25, it's clear that shoppers see the cards as a convenient substitute for cash and checks. And many banks encourage debit-card use by offering rewards points. But the cards also raise concerns about security. To minimize risk, be smart about how you use your card.

PIN or pen? Debit-card users are caught in the crossfire between merchants and card companies. Merchants want you to punch in a personal identification number because processing PIN-based transactions costs them less in fees. Meanwhile, Visa and MasterCard prefer that you sign for transactions, which are then processed through their networks.

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From your point of view, it generally boils down to personal preference. To get cash back, you must punch in a PIN. To earn rewards, you usually have to sign for a transaction -- and retailers don't always make that easy. To sign, you may have to first press "cancel" on the PIN pad and then choose "credit."

Despite a few well-publicized cases of criminals substituting fake terminals to capture PINs, most debit-card fraud occurs when someone gains access to your account information by stealing your wallet or a paper bank statement. If you are a victim of debit-card fraud, your legal protections are more limited than they are with credit cards.

As with credit cards, the law caps your liability at $50 -- but only if you report the fraud within two business days of learning about the loss. Miss that deadline and you're legally liable for up to $500 if you report the loss within 60 days. Delay longer than that and your liability is unlimited.

In practice, however, both Visa and MasterCard require banks that issue their cards to have "zero liability" policies for transactions they process. Technically, this requirement applies only to signature debits and PIN-based transactions that use the Visa and MasterCard networks. But banks are likely to be more generous. Wells Fargo's WellsProtect program offers zero liability on all unauthorized transactions, regardless of how they're processed.

With debit cards, there's also the matter of how quickly a card issuer will replace funds that have been emptied from your account. Federal regulations allow banks up to ten business days to make you whole. But Visa cuts that to five days for its member banks. And some banks may give you provisional credit in as little as 24 hours.

Once money has been paid from your account, you lose leverage if a problem crops up with your transaction. So if you're buying a big-ticket item and want to preserve your ability to dispute the purchase with the merchant, pay with your credit card.

More rewarding. Slightly less than 40% of issuers offered debit-card rewards programs in 2006, reports a survey by Dove Consulting. And you generally get fewer miles or points per dollar spent than you do with credit cards. But the number of programs is likely to grow. "We've seen a renaissance in the past 12 to 18 months," says Kelly Hlavinka, of Colloquy, a marketing consulting firm.

For instance, Citibank now has a program that pools the points customers earn from both debit and credit cards, as well as other banking activities. You might get extra points for arranging direct deposits, taking out a home-equity line of credit or booking travel arrangements through Expedia.com. Smaller banks and credit unions offer rewards by tapping issuer-sponsored programs, such as Visa Extras.

If such a bonus program appeals to you, choose one that doesn't charge a fee. "Fees dilute your reward," says Greg McBride, of Bankrate.com, and that's especially true for debit transactions because they tend to be small. The average amount spent annually per card is about $7,790.