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Consumer News - Spring 2000
FDIC Consumer News - Spring 2000
Paper or Plastic?
Your decisions arenít over when you make up your mind to buy a product or service. Next comes figuring out your best way to pay. Hereís our guide to the potential risks and rewards of using cash, checks, credit cards or debit cards.
Youíre browsing at a local store and you see the lamp youíve been searching for, the last one left, drastically reduced to $100. You know you canít live without it, but you also know you want to be able to return it if you find out the lamp doesnít 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 youíre like many people whoíve 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 thatís 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 Ďas isí 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 Techís National Institute for Personal Finance Employee Education.
FDIC Consumer News wants to help you understand your rights and the potential risks and benefits when it comes to the most common ways to pay for things. Weíve compiled information we hope can save you time, money and hassles when you make purchases, even 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 gono fees, no service charges, no interest payments," says Kathleen Nagle of the FDICís 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 youíre not using your own institutionís machines.
What else makes cash so popular? Itís accepted by other consumers as well as by all merchants, including businesses that wonít always take your check, credit card or debit card. You canít get in debt using cash because itís money you already have. And, if privacy is a concern, cash allows you to pay for something anonymously.
Cash doesnít provide the solid consumer protections that exist for other forms of payment. (See next section.) If you donít keep good records and receipts, you wonít 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 wouldnít negate the applicability of laws against unfair trade practices," he says. Example: If you paid cash for a bad product and youíve 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 canít resolve this on your own you might have to go to court," which can be costly, time-consuming and frustrating.
You canít 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. Thatís especially a problem with big-ticket items.
More Words of Wisdom
Always get and keep receipts, written warranties and other documentation. Without them, itís your word against the merchantís in a dispute, and those battles can be hard to win.
Donít depend on the merchant to get you the right backup records if thereís a question about a payment. "Under state law, if thereís 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.
Donít 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.
How They Work
You write a checkessentially 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. Itíll 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 arenít comfortable with newer forms of electronic payment, such as debit cards.
Checks also create a paper trail that can be followed if thereís a dispute over who got paid or how much. If your bank doesnít 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 checksí 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 donít accept personal checks. You canít 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.
More Words of Wisdom
Do some comparison-shopping every few years to make sure youíre 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 donít 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: Donít 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, youíll either pay your credit card bill in full each month and (usually) be charged no interest, or youíll 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 latermuch later than with a check or debit card. Thatís 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 acceptedwhen buying in other cities and countries, on the Internet, through the mail or over the telephone. (Theyíre 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. Theyíre 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 youíre far from home. The same canít be said for cash or checks.
Interest charges, fees and penalties can add up, especially if you donít understand how your card works. "Too many consumers think that every bank gives them 20 or 30 days before charging interest, but thatís not the case with many banks today," warns the FDICís 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. "Itís 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. It 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 cardsnot cash, checks or debit cardswhen paying for big ticket items or services that you want to know will work as promised.
More Words of Wisdom
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. And do your best to be aware of fees and service charges so you donít 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. Hereís one possible approach: If youíre 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 youíre unlikely to pay off your card balance each month, many experts say youíd 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 thereís always the potential to become "overextended" with debt, from credit cards or any other loans. If you think youíve got a debt problem, think twice before using your credit card, and find ways to spend less and save more. For more suggestions, see our 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
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:
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. Itís 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 wonít accept your check may accept a debit card, because thereís 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 arenít as strong as those for credit cards. (See next section.) Also, because funds are deducted from your account very quickly, donít 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 thereís 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, itís important to promptly notify your card issuer. If you wait too long, thereís 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 Boardís 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 donít require the use of a PIN), generally to the same $50 limit that exists for credit cards. (More details about the EFTA.)
More Words of Wisdom
Immediately deduct your debit card transactions and fees from the balance in your checkbook, and balance your checkbook regularly so you donít 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:
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