Debit your way to better cash flow

By Terry Savage

Making purchases with a debit card makes it easier to track your spending. Another advantage: You don't wind up with a huge credit tab at the end of the month.

The hardest part of organizing your finances for the future is figuring out where your money went in the past. It's the "cash flow" that most often messes up your plans to stay on budget and have money to invest.

Cash flows easiest down the drain! But there are ways to track and trim those cash-flow leaks. The easiest solution is to use a debit card (sometimes called a "check card") for as many purchases as you can. It's not just one more piece of plastic to acquire. In fact, you probably have a debit card in your wallet already.

If your automated teller machine card carries the Visa or MasterCard logo, it can be used as a debit card anywhere the merchant accepts credit cards. But when you present this card, the money is taken directly out of your checking account. There will be no bill at the end of the month and no interest on unpaid balances. Plus, you'll have a complete record of all purchases as part of your monthly bank statement.

Keeping your card secure
Let's address the issue of security right away. Since this piece of plastic is a pipeline directly into your checking account, you might be worried that you could be wiped out if it is stolen. Federal law guarantees stronger protection for credit cards than debit cards if your card is stolen, lost or used for fraudulent purposes. But the big credit card companies -- MasterCard and Visa -- know this, and they guarantee stronger protections than the law requires.

In fact, a debit card carries zero liability if fraudulent use is reported within 48 hours of discovery, if it's with Visa or Mastercard. That means even if you don't realize someone has used your card until you receive your bank statements, you won't be liable for the charges with these two companies. If reported later than two days, the maximum liability is $50, no matter what the loss. (Of course, the issuing bank reserves the right to investigate claims of loss.)

Federal law says you can be liable for the first $50, even if you report it within two days after discovering the theft or loss. And if you wait two to 60 days to report the missing card after discovering it, you're on the hook for up to $500. If you wait more than 60 days after you've received a bank statement with invalid charges on it, your liability is unlimited. So the rule here: Be sure to review your bank statements.

Nonetheless, a debit card is a great cash-flow system. So anytime you might be tempted to use cash or a check, pull out your debit card. Use it at the gas station, drug store or grocery store instead of cash. You can then easily download your transactions into My Accounts, quickly sort them into categories and track your spending against a simple budget.

Credit card vs. debit card
If you successfully pay off your bills each month, you may want to continue using a credit card. It allows you to use that money (preferably gaining interest from your bank) until you pay off the bill. But if you end up with a balance each month, as the majority of Americans do, a debit card is a solid money management technique.

There are a couple of other drawbacks to using a debit card in place of traditional credit:
With a debit card, if you purchase a defective item or choose to dispute a bill, you're still out the money until the issue is resolved. If you dispute a purchase that was made with a credit card, you aren't out the money until the issue is resolved.

You don't get airline miles or bonus points for your purchase. So go ahead and charge your large purchases to get the goodies, as long as you pay your bill at month's end. It's rarely worthwhile to pay interest on a credit-card balance just to get miles.
If you don't want to face a monthly credit-card bill, carry your checkbook or risk carrying a lot of cash, just make sure it's your debit card you pull out of your wallet. It gives you a new level of control over your cash flow.

Quick and easy
It's a system that's catching on, with more than 100 million debit cards now in circulation. It's happening with good reason. The debit card is more secure and easier to carry than cash, and it's much faster to use than a check.

There are actually two ways your debit card can be used. It's considered an "online" debit if the merchant has a personal identification number (PIN) pad, where you punch in your PIN as you would with an ATM card. The cash is withdrawn instantly from your checking account. But if you simply present your debit card in place of an ordinary credit card, the merchant treats it as a credit card. You'll sign the charge receipt, and the merchant will process it with his or her other charges. Then your account will be debited within two or three days. The authorization process assures that you have the money in your account, just as a traditional credit card authorizes your credit limits.

The one exception to this rule comes when you're renting a car. The rental company checks to make sure your credit line will cover the deductible on the rental insurance. So you can't reserve a car with a debit card, although you may switch payment to your debit card when you return the car.

Source: MSN