Why Are Banks so Eager for You to Use a Debit Card? It’s in Their Interest

Q: Can you explain why in the world any consumer would possibly want a debit card? For the life of me, I can’t imagine why these pieces of plastic are preferable to either checks or credit cards.

--M.T.

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A: First, as a quick refresher: Debit cards function as electronic checkbooks, allowing customers to tap their checking account balances to pay for goods or get cash at stores. However, they, unlike traditional automated teller machine cards, do not require a personal identification number, or PIN, for use.

The chief attraction of debit cards for consumers is that they offer the convenience of paying for goods without cash or checks while avoiding the potential problem of accumulating more debt at a time when maintaining high levels of consumer debt makes little, if any, sense.

If you’re disciplined about your use of credit--meaning you are able to pay off your charges in full each month--you are much better off using your credit card rather than a debit card. Why? With a credit card, you’re postponing paying for your purchases for as many as 20 days each month. Plus, you, like many charge card holders, may benefit if each dollar you charge is worth a mile on a frequent-flier or other incentive program.

But if you prefer not to use a credit card, a debit card is certainly more convenient than paying with a traditional check. It doesn’t take up a lot of room in your purse or pocket and can be processed at the checkout counter far faster than a check. And now that the largest card issuers are moving to shield consumers from liability for fraudulent use of debit cards, carrying them is certainly safer than walking around with a large amount of cash.

But evaluating debit cards from the consumer’s point of view doesn’t paint the full picture. You’ve got to see them in the full context of payment methods that generate commissions for banks. And guess what? Banks make more money--a lot more money--from debit cards than they do when you pay for your merchandise by check or cash.

MasterCard and Visa, the two main credit and debit card associations to which banks that issue cards with these logos belong, charge merchants between 1.4% and 2% of a total transaction when consumers use either a credit or debit card.

Now, let’s assume that most of the debit card transactions are replacing what would have been check or cash payments. During the first six months of 1997, debit card transactions on just Visa and MasterCard debit cards totaled $50 billion, according to Robert McKinley of Ram Research, a credit card research firm in Frederick, Md. Now apply the 2% transaction fee and you’ll see about $1 billion in fees for transactions that otherwise would have generated nothing for the banks.

Merchants who have opposed the proliferation of debit cards complain that in addition to costing them money to accept, the cards--unlike credit cards that encourage consumers to buy now, pay later--do nothing to make their businesses grow. After all, if you use a debit card, your spending is limited to what you have in your checking account. Not so with credit cards.

Does all this help explain why your bank is trying to make you think debit cards are so wonderful?

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Q: My son owes the Internal Revenue Service and the California Franchise Tax Board taxes for three years of nonpayment. Both agencies have agreed to a payment plan of $25 a month. But each month the agencies apply additional penalty and interest charges. I can’t believe that my son will ever be able to pay off the total charges at this rate. Is there any way to change this?

--F.R.

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A: Once the taxes have been assessed and a payment plan agreed upon, the federal government theoretically has 10 years in which to collect its due. (The state says it has no such limit.) You would think that collection agreements such as the one your son is operating under would be structured so as not to exceed that limit. However, that isn’t necessarily true. Both the state and the IRS charge an interest rate of 9%, compounded daily. And so, yes, it is more than just theoretically possible that your son will never be able to pay off his debt completely at the rate of $25 per month.

How can this be if the federal government has just 10 years to collect the debt? Because when a taxpayer enters into a time-payment agreement for back taxes, he also waives the 10-year collection limit.

The net effect is that the debt can continue to balloon while a taxpayer is diligently paying it off. Bizarre but true.

What can your son do about this? He could dramatically increase the amount he’s paying each month, assuming that’s possible. Or perhaps he could get out from under this payment program entirely.

How? If he can demonstrate that he is unable to pay the tax bill, he should consider filing an “offer in compromise” with the IRS. This process is designed to allow taxpayers who are either contesting their tax obligations or financially unable to meet them to negotiate a settlement with the IRS that will erase the taxpayer’s bill.

Each negotiation is separate, and it is by no means an easy process to complete successfully. But if he is truly unable to pay outstanding obligations, the government feels it is better off getting what it can rather than nothing at all.

The bottom line for your son, it would seem, would be to demonstrate that he is on a treadmill that is doing him more harm than good, and to make an offer to the government that will satisfy its interest in getting repaid as well as his need to move on with his life.

For more information, see IRS Form 656. You can order it by calling the IRS tax form hotline at (800) 829-3676.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com