Could this boon boomerang on you?

By Peggy Bendel
Special to Land Line

It's so easy. Pull up to the pump, swipe your debit card and you're good to go. But wait a minute. Do you know how much money is left in your account? Unless you keep track of what you're spending, all the speed and convenience of a debit card can backfire.

The increasingly popular debit card is strictly a buy-now-pay-now system. For practical purposes, the moment you use the card, the money evaporates from your account, which can be with a bank, savings and loan, or credit union.

In contrast, the credit card is a buy-now-pay-later system. You get to keep your money and use it if you want to, during the time between "buy" and "pay." This period of time is a bonus called a "float." It's one of the rare floats financial institutions allow today thanks to a federal law dubbed "Check 21."

According to the Federal Trade Commission, since October 2004 the financial industry has been processing fund transfers faster by using sophisticated electronic systems instead of physically shipping paper from one place to another.

By law, checks, withdrawals - and debit card transactions - now clear very quickly. Deposits also clear more quickly, but how quickly is not a matter of law, just something each financial institution gets to decide.

If you have a bank account, you received a notice with a full explanation of this change within the past year. Chances are you're one among the millions who didn't read all the fine print, so here's the main message: Make sure you have the funds in your account before you spend them

Watch out for holds
Debit cards seem like cash, but they aren't. They allow for automated transactions to be transmitted electronically. Although it takes from one to three business days for a debit purchase to be deducted from your account, a "hold" or "block" can be placed on your account by the financial institution to reserve the money for the merchant. The hold remains in effect until the actual transaction clears.

Holds can trigger trouble. As explained on both the Visa and Wachovia Web sites, sometimes a merchant estimates the hold. For example, a restaurant may slap a 20 percent tip on the estimated tab, a motel may add a charge for incidentals to the per night room rate or a rental car agency may add an allowance for fuel to the anticipated lease fee.

This could tie up more of your money in holds than will eventually be deducted for actual purchases. Meanwhile, you could find your debit card has been declined when you need it the most to handle an emergency on the road.

Beware of fees
Or, worse, you could use your debit card to purchase more than can be covered by available funds.

For example, you could pull up to the fuel station, swipe the debit card and get an OK-to-pump message even though there's only $80 left in your account; the merchant determines how much needs to be in your account for this preauthorization, and it's an estimate based on what the merchant considers an average fuel purchase. But, you pump $150 worth of fuel, and when the transaction goes through, it causes an overdraft.

When a debit card transaction bounces like a rubber check, you might owe a penalty fee to the financial institution, probably the merchant, too, in addition to money you owe for the purchase. You could find yourself coping with a balance shortfall that turns into a free fall.

You also can be charged a fee for getting cash back with a purchase or getting cash at an ATM outside your bank's network. If you count on your paycheck being deposited directly into the debit card account on a regular basis to cover debit card purchases, fees can erode the balance, leaving you less money than you thought you had.

Of course if you keep a beefy balance in your account, you'll be fine. But, if what goes into the account pretty much equals what goes out, you could overdraw your debit card account and pay plenty for the privilege.

Avoid protection pitfalls
Financial institutions offer plans to help you avoid debit card shortages. Programs such as overdraft protection, which links your savings account to the debit account, or establishing a special line of credit that kicks in when you run out of money in the debit card account, may seem like a good idea.

However, some "bounce protection" plans actually make it easy to run a debit card account into the red. For this reason, they've become controversial among consumer advocates such as the Center for Responsible Lending and have drawn the attention of regulatory agencies such as the Federal Reserve Board.

Besides charging you hefty fees for overdrafts, questionable debit card plans don't tell you when you're overdrawn. They let you continue to use the debit card until your savings account is cleaned out or you've maxed out the special line of credit. You might not know this is happening until you open the monthly account statement and find yourself in a deep hole.

Here's an example showing how the downward spiral can begin.

Suppose you didn't realize you had only $80 in your debit account and bought $150 of fuel, then drew $50 cash from an ATM and bought $30 of groceries. These three transactions overdrew your account a total of $150. How much will this cost you?

Because you have an overdraft protection plan, the bank may decide to cover all three transactions. Each of the three overdrafts will cost you a bank fee, usually $20 to $30, so let's say the fee is $25 per overdraft.   

That means you owe the bank $225 - the $150 you overspent plus three $25 fees.   

The $225 automatically comes out of your savings account. Meanwhile, you continue using your debit card without a clue you're racking up fees. The only consolation is at least you won't owe the merchants a fee for paying with insufficient funds.

Another type of debit card protection that can turn into a personal finance peril links the debit account to one of your credit cards. In this plan, a debit card overdraft amount is automatically charged to your credit card as a cash advance. Of course, you pay for this, probably with a cash-advance fee plus interest charges that start immediately on the cash advance.

You can avoid these kinds of problems by taking charge. Be assured that all banks are not alike.

"Consumers need to know their fees," said Mary Brown, senior vice president of communications at PULSE, one of the country's leading ATM/debit networks.          

"Shop around for debit card terms, fees and overdraft policies. Banks are very competitive in this area."

Keep good records
Many people prefer using a debit card because it seems like less trouble than writing a check.   

However, just like managing a checkbook, you need to manage debit card activity with good record keeping.

To avoid trouble with a debit card, collect receipts and tally all debited purchases, including any fees.

"If you're not good at keeping up with expenses, a debit card will force you to become good at it," says Glen Sanginario, vice president of credit and collections at Fleet One banks.

Above all, know your current account balance. Many card issuers make this easy by offering on-line access to your account so you use a personal computer to track holds, monitor transactions as they clear and verify the remaining balance.

No computer? Most institutions have a toll-free phone number you can use to obtain the information you need. You can also use an ATM to find out your account balance, a convenient solution since ATMs seem to be everywhere.

Equally important as knowing the balance is reconciling the monthly debit card account statement with your records. To report any questionable entries, contact the financial institution where you have the account. It's worth noting that sometimes a merchant bills transactions under a corporate name you may not recognize. In this case it doesn't hurt to ask for clarification, and it's an easy question for a bank's customer service representative to answer.

Limit your liability
In addition to being a useful record keeping tool, the monthly statement is the key to keeping your debit card use secure. According to a study conducted by PULSE, in 2004 financial institutions lost an estimated $546 million to debit card fraud.

Not all the fraud was committed by crooks. A common problem is what the industry calls "friendly fraud," which is the use of your debit card by a relative or buddy who forgot to tell you about it.

Who's responsible for unauthorized use of your debit card - you or the financial institution that issued the card - depends upon how quickly you report the matter, according to the Federal Trade Commission's Web site. You risk unlimited liability if you fail to report an unauthorized transaction within 60 days after your bank statement containing the bogus charge was mailed to you.

If you lose your debit card, report it immediately. You can't be held liable for any unauthorized transaction that occurs after you've reported the loss. If you report the lost card within two days, you're responsible only for the first $50; report after two days and you're responsible for the first $500.

Peggy Bendel is a freelance writer who lives and works in Island Heights, NJ.