Water Well Journal
Issue link: http://read.dmtmag.com/i/451364
M aking a purchase at a retail store many years ago was a simple transaction. You dug into your wallet or purse to come up with the cash or you wrote a check. Then, in 1950, an entirely new way to spend your money was born. Birth of Credit Cards Frank McNamara, a New York businessman, embarrassed when he discovered he didn't have enough cash on him to pay for dinner with some business associates, came up with the idea for Diners Club. His innovative new idea eventually spawned the gigantic credit card industry in which Visa and MasterCard are the dominant players today. For decades, credit cards on the retail scene involved sim- ple transactions. The cooperating retailer accepted your credit card for payment, and you received a bill from the credit card company. The retailer got his money right away (less a small percentage of the transaction) and you had up to 30 days to pay for your purchase. A win-win situation for everybody. It didn't take long for financially shrewd buyers to recog- nize this was a great way to make larger purchases. It allowed you to use someone else's money for up to 30 days at no inter- est (provided you paid your bill in full every month). That all changed when the credit card companies figured out a profitable way (profitable for them, not you) to put a stop to all those free loans. They named it the debit card. Credit or Debit? As you undoubtedly know, there's a huge difference be- tween credit cards and debit cards. When you use a debit card, there's no free loan. Every time you make a purchase with a debit card, the money is immediately deducted from your checking account. No more free lunch. So why would anyone want to switch to a debit card? The credit card companies came up with a great selling point: convenience. When you use a debit card, you don't have to write a check at the end of the month. Of course not, the company already has your money. Despite the obvious disadvantage of no longer being able to use "someone else's money," millions of Americans went for the bait and signed up for debit cards. Today when you swipe your card through that little machine, a new question often pops up: "Credit or Debit?" That harmless-appearing question was at the heart of a dragged-out class-action lawsuit brought by major retailers against the leading credit card companies some years ago. The retailers accused Visa and MasterCard of overcharging retailers more than $13 billion over a decade for use of their debit cards. If their accusations were correct, you and I are paying this big tab through higher prices. The reasoning behind the lawsuit's charges is complex, involving lower risk to the credit card company for offline (other than ATM machine) debit transactions than for credit card transactions, resulting in higher costs to merchants. Small retailers pay an even larger premium when a debit card is used for an offline transaction, all of which, said the law- suit, has resulted in huge overcharges to merchants for the use of debit cards. To make this possible, said the lawsuit, the credit card companies have used their huge market power to impose an "Honor All Cards" rule which requires merchants to accept Visa and MasterCard debit cards if they want to accept their regular credit cards. Choose Wisely It's still a complicated mess, but there is one thing for sure. If you're using a hybrid card such as the Visa Check Card which can be used for either "credit" or "debit" transactions, you're not getting credit in the old credit card sense when you use it. If you answer the question with "Debit"—you'll get an "online" transaction which is likely to cost the merchant less (and an immediate deduction from your bank account). If you answer "Credit"—you'll get the usual signature transaction likely to cost the merchant more. Sounds complicated? It is. Now there's a new wrinkle that muddies up the waters even more. Banks are increasingly imposing so-called "point-of-sale" charges for using MAC and other online systems. This, critics say, is intended to steer debit card holders away from ATM machines and into offline use of debit cards. There's little or nothing you or I can do to influence this untidy situation. Still, I feel it helps to underscore what I've WILLIAM J. LYNOTT YOUR MONEY The smart way to use credit is to pay with a regular credit card and pay the bill in full when it arrives. CREDIT OR DEBIT? As you undoubtedly know, there's a huge difference between credit and debit cards. 50 February 2015 WWJ waterwelljournal.com