'Plastic Checks' Take Hold in American Stores

When he does his holiday shopping this year, Stephen Adcock will beat the credit-card companies: He'll be using a "debit" card that taps his checking account instead.

The advantages: He won't accumulate any more debt - along with the 18 percent interest that gets "tacked on for the next couple of years that it takes to pay [the balance] off," says the Stamford, Conn., resident.

Mr. Adcock is not alone.

A recent Mastercard survey indicates that 24 percent of Americans are using the so-called debit cards, or bank cards, that act like plastic checks.

This shift to debit cards could mark an important turning point as far as personal finances are concerned. Because the cards act like cash, there is no chance of running up a large debt.

"It forces discipline," says Lawrence Chimerine, an economist with the Washington-based Economic Strategy Institute. "In that respect it's not so bad."

When consumers use the card, the amount is automatically debited from their account. This shift is being abetted by the banks, which are sending out either Visa or MasterCard debit cards as replacements for the dip-in cards usually used in automatic teller machines (ATMs).

"They walk and talk just like a credit card but of course it's not a credit line," says Robert McKinley, president of Ram Research Corp., a Silver Springs, Md., company that tracks credit- card trends.

Mr. McKinley estimates debit-card usage this holiday period will double compared with last year. He projects about $8 billion of the $91 billion that's charged this holiday period will be on debit cards instead of credit cards.

The prospect of avoiding debt is appealing to many people. Interest rates on credit cards have risen to as high as 25 to 30 percent per year. In addition, some card companies are tacking on all kinds of nuisance fees. "Credit cards are more of a hassle to consumers," says McKinley.

The use of the cards is still relatively modest compared with the $1.2 trillion in consumer debt outstanding or the $523.8 billion in credit-card debt. And, it's not clear how much of the debit-card use is replacing credit cards and how much is replacing the use of cash or checks. In fact, Visa calls its piece of plastic "the check card." However, McKinley says the use of the debit cards is definitely eating into the growth of credit cards. "It's really been a phenomenon of the last year," he says.

The debit cards have their critics, who point out that they act much like cash, which means there is a risk if they are lost or stolen. "If you lose a debit card, someone is essentially walking around with your checking balance and overdraft protection," says Rob Schneider, a senior attorney with the Austin, Texas, office of Consumers Union, publisher of Consumer Reports.

Consumers Union is pressing for federal legislation to limit the consumer's liability. Mr. Schneider says he has concerns when banks mail out the cards without a request from the consumer. "They may not be aware that this is not an ATM card that is protected with a password," he says.

Aware of this problem, both Visa and MasterCard have implemented measures to help protect users. If the loss is reported within one or two business days, the user has limited liability (between $0 and $50). However, Schneider warns, "It may still turn out be a real mess, because it's really between you and the merchant."

Some financial advisers are also lukewarm on debit cards because the consumer loses the float, the time from when the charge takes place to when payment is due. For most credit cards this is down to about 20 days.

The banks like the cards because the charge is cheaper to process than a check. The issuer still charges the merchant a fee for processing the transaction. And, in some cases, the banks are actually charging consumers an annual fee for the card.

While the cards are relatively new in the US, they have become widely used in Canada. Over the past four years, the number of transactions has increased about tenfold.

"They have become wildly popular," says Peter McKay, manager of debit cards at the Toronto-based Royal Bank of Canada, the nation's largest bank.

Mr. McKay says it's hard to tell if the use of debit cards has made any national impact on Canadians' personal financial management. It has cut down on credit-card use, he says, but many of those users carried zero balances anyway.

It has made a difference to the personal finances of Kara Pechnold, a resident of Langley, British Columbia. She likes the debit card because "I'm not tempted to spend beyond my means." And that's also true for Bev Kauffeldt, a resident of Abbotsford, British Columbia, who uses the card for almost everything except emergencies and costly items like airline tickets. "If a store doesn't use the cards, it's a real drag," she says.