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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.

But don't feel sorry for the lenders (as if we would).

By the end of 2010, the banking industry is expected to still earn $35.4 billion - yup that's with a "b" - just from collecting overdraft fees. Income may be falling because of the new regulation, but the revenue recovery will be quick, according to Michael Moebs, chief executive of the research firm.

Moebs estimates that overdraft revenue will increase in 2011 to $38 billion - the highest ever for the industry.

About a fifth of financial institutions increased their overdraft prices to offset cost increases and loss of revenue, according to the Moebs survey. Even those institutions that cut their overdraft fees maintained or increased their overall revenue in the past year.

Regulators have given consumers a stopgap to better control the opportunity to spend more money than they have. And yet, Moebs found that overwhelmingly, people have decided to opt in and allow transactions to be approved for the times they don't have enough money in their account. Almost all frequent overdraft users - those with 10 or more overdrafts in a year - have opted in to be charged for overspending on their debit cards.

"Even with the price of overdraft protection going up, it appears from the opt-in numbers that the American consumer is saying they want and need overdrafts," Moebs said.

I'm not suggesting that you shouldn't use a debit card. But don't be lulled into thinking it's the superior plastic with no faults. For many consumers, when they use plastic - debit or credit - they tend to spend more than if they had used cash.

Just be mindful that your debit card (a rose by any other name) can still be thorny.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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