Dave Ramsey might hate me for this, but I’m going to make a case for something today with which he might disagree. Proceed at your own risk, if you are a Ramsey-head (which is definitely NOT a bad thing to be!).
But before I get there, just a couple of tax things:
1) [I mentioned this last week, but it’s worth repeating] Because of the government shutdown earlier in the fall, the IRS systems missed some crucial preparation days, and resultingly, the start of actual tax filing will not begin until January 31, 2014. This does NOT mean that we can’t begin the preparation process earlier (we can, if you really have your paperwork in order), but it does mean that the IRS won’t be issuing refunds or otherwise officially accepting returns until that point.
2) Dying to know what tax breaks have gone away and which ones are new for 2014? Yes, I know there are some tax code geeks out there … here’s the best, most concise list I’ve found, and it also lists the cost to the government of extending some of these once more (which is still possible, as Congress often “extends” credits retroactively) … http://taxfoundation.org/blog/out-extenders-new-obamacare-taxes
Now, the reason I’m risking Dave Ramsey’s ire is that one of the hidden benefits of using a credit card versus a debit card is SECURITY. And, as the Target mess from last month showed us, the more we rely on electronic payments, the more we put our information in harm’s way.
[Here’s an interesting look at the Target thing, btw, which shows that Target Corp. was actually ahead of the curve on this … but other retailers weren’t, and so they were forced to hold back their security measures: http://www.startribune.com/business/238738351.html ]
But if you ARE going to use that debit card, there’s really only one way to do so. It’s difficult to make this case without slides or illustrations, but since I’ve committed to keeping your inbox unclogged from too many graphics, I’m going to do my best…
“Real World” Personal Strategy Note
“Run It Debit or Credit?”
“Have the clarity and courage to not enter every door and to not accept every invitation. Protect your peace.” -Thelma Davis
You are just trying to buy $20 worth of groceries. You swipe your debit card at the card reader and the clerk quickly asks, “Debit or Credit?” Which should you choose? The answer could actually determine how safe both your money and identity are.
There are three basic steps regardless of which method you choose. First, you are asked to provide identification. Second, your identity is verified. Third (and only if step two is approved), your money is deducted. However, Debit and Credit go about those three steps very differently.
When you say Debit, the cashier or the card reader will ask you to enter your PIN. This is your means of identification. A success results in your identity being verified. A failure gives you a few more attempts to retry.
When you run it as Debit, the cashier may ask you if you’d like to get “cash back,” meaning do you want to use this store as though it were an ATM and withdraw additional funds from your account. In this case, we’ll have you say no. If you did say yes, the store would be paid however much cash you withdrew and the store would pay you the same amount in cash.
In any case, your verified identity authorizes the system to send a request of funds to your bank. The bank, upon this receipt and authorization, immediately transfers the $20 from your bank account to the store’s account. You now are $20 poorer.
When you say Credit, the cashier prints out a receipt and asks you to sign at the bottom. Your signature is considered your identification. Your information — location of sale, credit card number, etc. — are sent to your debit card’s sponsoring credit card company, like Visa.
Visa then takes 1-7 days to look for fraud. If any factors look suspicious, such as the location of sale seeming unlikely, the sale is reported to you as potential fraud and the $20 remains in your bank account.
If everything checks out though, and your identity is authorized, then $20 is moved from your bank account, and divided up among three locations:
1. $0.20 (1%) is given to Visa, for their service of fraud detection;
2. $0.20 (1%) is given to your bank, for their service of providing a card; and
3. $19.60 (98%) is given to the grocery store to pay for the goods
Even though your money has gone more places, you are still just $20 poorer. These hidden fees of credit cards are only a cost for the store, not you. If the store chooses to accept credit cards, they also overcharge all of their goods by 2% in order to cover the possibility of people paying with credit. When you run your card debit, they just pocket the additional 2% for themselves.
At this point it sounds like you might want to run it Debit, in order to give all the money to the store, but if you stopped the analysis there, you would be compromising your identity.
But let’s say: prior to your $20 purchase, a thief had attached a device to the store’s card reader which records all of the information.
If you ran it Debit, the thief’s recorder has access to your credit card number, name, expiration date, and PIN. He can access all of your funds and can make a copy of your card. With this copy, he can run it Debit and verify his identity by entering your PIN.
Because the PIN is the only verification of your identify when running a card Debit, your bank transfers the money out he asks for, sometimes regardless of how much it may look like fraud, with no questions asked. No one is watching over your Debit purchases but you. It’s only if you log on to your bank account and see that your funds are gone that you could find out that a copy has been made.
If you do catch him and cancel your debit card, the damage done in this case may be permanent. Because the PIN number is the only identification used, it is hard to prove that such purchases were actually fraud. Even if they do determine it is fraud, often times no one will refund you the money. The bank, who is the only reasonable candidate who might, does not (usually) offer you such fraud coverage. That’s why Visa sponsors your card, to catch fraud. But since you didn’t run your card Credit, Visa was never given a chance to perform that role for you.
If you ran it Credit, the thief’s recorder has access to your credit card number, name, and expiration date. He notably does not have access to your PIN. With this information, he can still make a copy of your card and, with this copy, he can still try to make purchases running the card as Credit.
Running it Credit in stores will require that he forges your signature. The information of the sale is then sent to Visa for fraud checking. If Visa’s systems detect a change from your typical behavior, they will flag the transaction as fraud, and alert you.
Even if Visa doesn’t catch that it is fraud, just the process of going to Visa keeps the funds in your account for 1-7 days. That may be long enough to give you some time to see the stolen activity as pending charges, cancel your card, and report the identity theft to your bank. Doing this protects your bank account from ever having to pay for these charges.
If Visa doesn’t catch the fraud and neither do you, then the money transfers out of the account to pay the thief’s bills. However, because all the information passed under Visa’s watch, if you catch the fraud after the fact, you are protected by Visa’s fraud protection policies, which are much more likely to pay you back in the event that the fraud can be proven.
If the thief uses the stolen information to make purchases online, he will have to know your billing address, which is information he likely has not acquired.
Conclusion: Always run your cards as Credit. Protect your funds by allowing your sponsoring credit company to implement their fraud protection. Never be afraid to dispute or question charges you see pending or fulfilled. Time is important in cases of fraud, and waiting may make the process of proving fraud more difficult.
Oh, and I hope this goes without saying — but always pay your Visa bills on time, and fully every month. That way, you get all this protection … for free!
Note: Actual percentage reimbursements and fraud policies vary across credit companies and banks. Read the fine print for your specific card, for a more detailed and specific description.
I do hope all this helps. To your family’s financial and emotional peace…
Valerie McLaughlin, EA