September 2006

Debit cards spell discipline!

In the last issue of Money Matters we discussed credit cards and interest. We focused on the crippling cost that interest can have if you don't pay the full amount owing on your credit card by the due date. We concluded by saying that unless you can be very disciplined with a credit card, rather go without and use a debit card instead.

The wonderful thing about debit cards is that they have exactly the same advantages as credit cards: they eliminate the need to carry cash with you, and they offer you an easy way to track expenses, as your monthly bank statement will show each transaction as an individual item, just as if you had written out cheques – but using a debit card frees you from carrying a cheque book, and also means that you don't have to show identification or give out personal information at the time of the transaction as you do when issuing a cheque.

And here's the even more wonderful part: the amount you spend with your debit card is limited to what you have in your bank account. That might not seem wonderful if you're used to buying on credit, but for undisciplined spenders, it's the perfect form of forced disciplinary spending.

The main difference between a credit card and a debit card is that with a credit card, you are using the issuer's money i.e. the bank's money, and for that privilege, you will pay interest; while with a debit card, you are paying with your own money. When you use a debit card, your money is deducted from your cheque or savings account. While a credit card is a way to "pay later," a debit card is a way to "pay now".

A debit card is very easy to use. Your purchase is processed at the tillpoint when you swipe your card through an electronic reader. You then enter your PIN into the merchant's terminal to authorise the transaction. The money is deducted from your account, usually within a day or two, in much the same way as if you'd paid by cheque. This is known as an off-line transaction. There is another type of debit transaction called an online transaction, which you do at an ATM when you use your debit card to withdraw cash or electronically transfer funds from your account.

Debit cards are rapidly becoming more popular. More than 10 million people use debit cards in South Africa, and their appeal lies in their security, convenience and freedom from debt. In some ways debit cards are even more secure than credit cards. Merchants seldom check the signature on a credit card slip against the one on the card, and even if they do it is still possible for someone to forge the signature. But even if a debit card is lost or stolen, it cannot be used by anyone else unless they have the PIN.

Although, to ensure your debit card is secure, you need to follow basic procedures:

• 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.
• Memorise your PIN. Do not keep your PIN with your card. Also, don't choose a PIN that a smart thief could figure out, such as your phone number or birthday.
• Never give your PIN 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 cheque which has not been cleared by your bank yet.
• Keep your receipts in one place -- for easy retrieval and better oversight of your bank account.

Click here for previous issues of Money Matters.