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Will that be Debit or Credit? (Part one)

Years ago at store checkouts the cashier would ask “Cash or Credit”, where “credit” referred to a store credit account. Over the years credit card companies soon dominated the “credit” business. Soon more people started using the credit choice, but with the ease of “buy now – pay later” it was not long before people found they were starting to have financial problems as they were spending more than they took in. This of course was not a major problem for the credit card companies as they were making money every time a person purchased something. The problems belong to the ones holding and using the credit cards. To cut down on overspending people started to reduce or stop altogether the use of credit cards.

Banks soon started to offer a “Check Card” which worked like a credit card and a debit card except instead of having the purchases accumulate in one big bill; each purchase is deducted from your checking account when made. This took off like wild fire as people felt this was the best of both worlds.

Now whenever I take out the “plastic” to pay the cashiers ask “debit or credit”. This brings up the question “what’s the difference and is anything unique about a Check Card”? Before I try to answer that question let me define some terms.

Debit Card – A debit card is a card that allows you to access funds in your bank account. It requires entering a Personal ID Number (PIN). Most people use debit cards at Automatic Teller Machines (ATMs) to get cash out.

Credit Card – A credit card is a card that allows you to charge purchases to an account that you are responsible to pay at a later date. VISA® and MASTERCARD® are in this category. The credit card issuer is giving you a short term loan (credit). If you pay what you “borrowed” back on time most issuers do not charge you interest. If you are late most will quickly charge you interest (around 18% APR) and also a late fee (around $35). With late fees and the high rate of interest a lot of people avoid credit cards.

Check Card – This is a hybrid between a Debit Card and a Credit Card. This card can be used either way with the transactions coming out of your checking account as you make them. No more borrowing and paying later. Even though the Check Card can be used as a Credit Card it is NOT a credit card.

Things to know –When using a Check Card to rent a car or hotel room the establishment will most likely put a minimum temporary hold on funds to cover the cost of rental and miscellaneous. Once the final bill is paid the company will release the hold. Here in Burlington at least two rental car agencies put a minimum of $300 hold on funds. This means that $300 of your checking account balance is NOT available until the hold is released. Depending on your bank it may take up to 2 weeks to have the “held” funds made available. Hotels may do a similar hold on funds.

How can this be a problem? For example start with $1,000 in account. Before taking a trip you estimate expenses to be $100 for car rental, $100 for hotel, and $100 for miscellaneous, for a total of $300. This leaves $700 to use for other expenses. Before leaving you write out five checks for $100 each for total of $500 which leaves you with $500 available in the account. You leave for your trip, rent a car and check into hotel. The car agency and hotel each put a $300 hold on funds. Guess what? Now the account has only $400 available for use. Days later the original five checks arrive at your bank for processing. Since you have only $400 available now, at least one check is suddenly going to become bouncy. Since it appears that you have Non-sufficient Funds (NSF) the bank charges you a NSF fee and when the company that you wrote the check to gets it back they will also hit you with a charge. These charges may be $25 - $35 each. OUCH!

Being unaware of funds being temporarily held could easily lead to one or more checks returned for Non-sufficient Funds.

When using a Check Card at anyplace that puts hold on funds, be aware that the available balance in your account is reduced temporarily.

To be continued next time in Technically Speaking.