WHAT YOU NEED TO KNOW ABOUT DEBIT CARDS' EXPLOSIVE RISKS
By ELLEN STARK

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The sales pitch for a debit card can be persuasive: no interest charges to pay, since the money for purchases made with the card is taken directly out of your checking account. No more worries about whether a merchant will accept your personal check, regardless of where in the country you're shopping. No need to carry a wad of cash every time you go to the store. Debit cards, which can look just like credit cards, put an end to all those hassles and more.

But for customers who don't know how their debit card works or understand the risks it carries, the cards can create as many hassles as they prevent. Here's what you need to know if there's a debit card in your future--or already in your pocket.

Today's debit cards come in two very different varieties--called on-line and off-line in the banking trade. An on-line card usually has your bank's logo on it. You can use the card at your bank's automated teller machines and at other institutions' ATMs if your bank is part of a regional electronic banking network, such as NYCE or Most, or a national one like Visa's Interlink or MasterCard's Maestro. You can also use an on-line card at gas stations, supermarkets and discount stores. You swipe your card through an electronic reader, enter your personal identification number (PIN), and the funds are immediately deducted from your bank account.

Off-line cards carry the familiar logos of Visa or MasterCard and are, in many cases, all but indistinguishable from credit cards. Any store or restaurant that takes your Visa or MasterCard also will accept Visa's Check debit card or MasterCard's MasterMoney card. As with credit cards, store clerks are supposed to get electronic authorization from your bank and compare your signature on the receipt against the one on your debit card before they let you use the plastic. But since the merchants' terminals aren't wired directly to your bank's computers, you don't need to enter your PIN.

Before you cut up your credit cards or chuck your checkbook in favor of a debit card, however, there are four big risks you should be aware of.

Risk No. 1: You can pay dearly if your debit card ends up in the wrong hands--far more than you would with a credit card. When your credit card is stolen, your liability is generally limited to $50. With a debit card, there's a $50 limit too, but it applies only if you report the loss within two days. After that, your potential liability jumps to $500 for the next 58 days. Once 60 days have passed, you can be liable for--get this!--as much as the entire balance of your bank account, plus any lines of credit attached to it.

And your bank isn't the only place you can get fleeced. Some brokerage firms, such as Charles Schwab, Merrill Lynch and Prudential, are also offering the cards as part of their cash management accounts. With a debit card tied to a brokerage account, a thief could tap into the borrowing power of your margin account, wiping out up to half the value of your stocks.

Risk No. 2: Debit cards save banks money but can end up costing you more. After years of pushing credit cards, banks are shifting more of their marketing effort to debit. One reason is that debit-card transactions are cheaper for banks to process than the traditional paper check--about 6¢ for a debit transaction, vs. 11¢ for a check.

Another reason: Debit cards can be a juicy source of fee income. Many Visa and MasterCard debit cards carry annual fees of $12 to $15. Some bank debit cards rack up fees ranging from 25¢ to $1.50 for every use. Merchants sometimes pay the card issuers too--typically about 10¢ per transaction or 0.5% of the amount of the purchase.

Risk No. 3: Your credit record won't get any better--but it could get worse. If your debit card is stolen and your bank account is sucked dry, you'll probably bounce a few checks to creditors. Some of them may show up on your credit report as late payments. If you apply for a mortgage or other big loan soon after that, you'll have some explaining to do.

Moreover, unlike credit cards, debit cards don't offer any help in building a credit record or fixing a bad one. That's because credit reports contain information on borrowing but not on bank account activity.

Risk No. 4: You'll have less leverage with merchants. Debit cards don't have some useful consumer protections that credit cards do. Under the federal Fair Credit Billing Act, you can refuse to pay a credit-card charge for an item that later proved unsatisfactory until you resolve your dispute with the merchant. The credit-card company may even intervene in your behalf. With a debit card, you're basically at the merchant's mercy.

This can be especially dicey if you use a debit card for mail-order purchases. A Federal Trade Commission rule protecting consumers from having to pay for undelivered goods covers orders made by debit card. But you don't have the leverage you would with a credit card. "By the time you discover a problem, the funds are gone," explains Robert McKinley, president of the card-tracking firm RAM Research. "So you're fighting to get your own money back instead of just not paying a bill."

Despite these risks, should you go for a debit card? Convenience may be a persuasive reason to accept your bank's on-line debit card, allowing you to get cash at an ATM or fill up at the gas station. But anyone who tends to pay off a credit-card balance in full each month is probably better off with a credit card than with a debit card. For one thing, unlike debit cards, many credit cards still give you the benefit of a float--the time between buying something and actually paying the bill. A decent credit card will also have a grace period of 30 days or so before the interest clock starts ticking.

That's why your best move could be to stick with your credit card but treat it like a debit card and not carry a revolving balance. After all, many credit cards offer perks that debit cards rarely match, such as airline frequent-flier miles, cash rebates or discounts on certain products. And those deals can be dandy.