No matter what you call it, your debit card is still plastic

By Michelle Singletary
Washington Post Staff Writer
Friday, December 3, 2010; 9:38 PM

What's in a name?

That's what Juliet asks Romeo in William Shakespeare's classic love story.

Juliet knew that what matters is not what you're called, but what you are at your core. "A rose by any other name would smell as sweet," she says.

Take the case of a debit card versus a credit card. Increasingly, people have come to believe their debit card is the sweeter answer to credit. Credit card use is at an all-time low as people turn to pay-now options such as debit cards, according to Javelin Strategy & Research. Debit transactions have grown 10 percent from 2008 to 2009, reports Pulse, an ATM/debit network.

As the theory goes, a debit card is considered the good plastic.

Forty-three percent of holiday shoppers will use debit cards as their primary form of payment, up 20 percent from five years ago, according to the National Retail Federation. About 28 percent of shoppers will be using their credit cards, the lowest level since 2002.

"Many families may choose to leave credit cards at home as they shop this year, making sure to only purchase what's on their list and within their budget," says Matthew Shay, NRF president and chief executive.

However, my experience with helping people with their budgets and debt has taught me that debit card users don't necessarily stay within their budget. They may not accumulate the kind of debt you find on a credit card, but they can still overspend.

When people pay with plastic, they don't see their money being handed over. Many consumers don't do the same mental accounting they might do if they have to peel off actual paper money, researchers have found.

Still, people have come to believe that a debit card is the same as cash. It's not. Thanks to a feature called overdraft protection, a debit card is not the same as using cash if your financial institution will cover you when your account is short. Of course, that service will cost you.

The fees charged for overdraft protection recently came under intense scrutiny, resulting in new Federal Reserve rules that prohibit banks and others from charging for covering overdrafts on ATM and one-time debit card transactions without a consumer's consent. If you opt in for overdraft protection, you open yourself up to be charged a fee. But you can cancel at any time.

As a result of this new rule, overdraft-fee revenue for banks and credit unions is expected to drop, according to Moebs Services, a financial services research firm. About $2 billion in revenue was lost in the fourth quarter of 2009 as banks and credit unions began to change their overdraft policies in response to consumer and congressional complaints. Another $2.3 billion in revenue was lost during the first quarter of this year.

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