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Worry-Free Online Transactions

It's estimated that Americans will spend $228 billion shopping online this year. That's a far cry from the day when users were panicked about giving e-commerce firms their address, much less their credit card numbers.

But with the increased use comes increased risk. The Saturday Early Show asked personal finance expert Ray Martin to scope out the different forms of online payment to let us know which one he was the most comfortable with. Here's Ray's report:

There are still risks involved when shopping online, right?

It's estimated that up to 77 percent of the online population over age 13 will shop online this year. Shopping and buying products online involves choosing a form of payment and sharing your financial information with an online merchant, which can lead to fraud and unauthorized charges. Internet fraud costs consumers over $200 million a year. Also, since the TJX incident, where more than 47 million credit- and debit-card numbers were stolen by hackers from the retailer's computer systems, consumers have learned that no matter how careful they are, their financial information can be exposed to the risk of fraud.

What are the three safest forms of e-payment?

The most common forms of payment people use when shopping online are credit or debit cards. Also, for larger payments, especially on auction sites, people use e-payment services, the most popular of which is PayPal. All three are reasonably safe, but all three are still susceptible to fraud, especially if the fraud involves the theft of your financial information directly from the vendor. The thing consumers need to think about before any transaction they make online is: "How will my money be protected if the payment information I provide is compromised and used fraudulently?" Also, other important considerations include privacy, fees/costs and ease of use.

Let's take a look at how they compare to each other in several key categories. Which is the easiest to use?

Credit and debit cards are very easy to use, as this simply involves entering the requested account information which the merchant then provides through their payments processing systems to the card issuer.

It is also easier to pay for purchases with a credit or debit card than writing a check. However, when you use a debit card, all of the transactions made with it are listed on the same bank statement that lists other transactions such as cleared checks, ATM withdrawals and deposits, all on the same bank account statement. Also, there is only one card needed to make purchases and get cash from an ATM. Many debit card users say they actually prefer using debit cards versus credit cards.

E-payment services, such as PayPal, involve a few extra steps: You need to set up an account and provide your bank or card information and get verified by the e-payment service in order to make payments through these services. Also, when receiving payments, the merchant will also need to set up an account on the same e-payment service.

Which is best in terms of cost and fees?

Because purchases made with a debit card are deducted directly from your bank account, consumers like these as they avoid increasing their debt and interest charges altogether. But if you use a credit card and pay it off in full each month, you will avoid any additional interest and fees. Also, payments made by credit card allow you to keep the payment amount in your bank account, earning interest, until your credit card bill for the payments made with it comes due.

Some of the most widely used e-payment services, such as PayPal, state that consumers can make or send payments without any fees. But merchants are typically charged a fee by the e-payment service when they accept your payment, and often merchants will require that if you want to send an e-payment, they will charge you the fees they are charged for receiving it. These fees can typically be two to three percent, plus a flat dollar amount of $30.

What offers the most privacy and security?

People shopping online logged onto the Web an average of 63 times last year to either browse or make product purchases. When you make a product purchase online with a debt or credit card, you have to provide a lot of personal information — address, phone number, e-mail address, card number, expiration date, etc. — on the Web site for every merchant from which you buy things. The result of doing this is that you have shared your financial information with a lot of merchants, and this can increase the risk that your information could be compromised and used fraudulently.

If you use an e-payment service, you provide your financial information only to them, and they don't provide your information to any merchants to whom you send payments. It is for this reason — that your financial information is kept private from sellers/merchants — that many people prefer to use an e-payment service. This is also the best option to use when the only form of payment a seller will accept is a bank check or an e-payment, which is typical on many items listed on popular auction sites such as eBay.

Which offers the best protection from fraud and unauthorized charges?

When you make a purchase with a credit card, the item is first paid for with someone else's money — the credit card company's, that is. You get a bill at the end of the month, which you pay with your own money from your bank account. I like to think of a credit card as a firewall between the merchant and the bank account where I keep my cash.

But when you use a debit card to pay for products, the charge for the product is deducted directly out of your bank account. While it seems that a more direct payment process is good, there problems that can be caused by this. A major risk is, if your debit card was stolen, fraudulent charges would be deducted directly from your bank account. You don't have to lose your card; as in the TJX incident, your card number can be stolen from the merchant and used fraudulently before they know they were hacked. The problem that can cause is that the cash in your bank account can be drained and if you are also writing checks or automatic deductions for payments are also made from the same account for rent, mortgage or a car payment, the cash in the account could be insufficient and these payments will be rejected and then you'll have to deal with bounced check fees, payment hassles and a lot of explaining.

Both credit and debit cards are susceptible to the same risk of fraud, but the main difference between the two is the level of protections provided to a consumer when either card is used for fraudulent or unauthorized charges.

The Electronic Funds Transfer Act (EFTA), which applies to debit cards, specifies your liability for fraudulent transactions is $50 if you notify the bank within two days of a lost of stolen card and up to $500 if you notify after two days. Your liability may be unlimited if you don't report fraudulent transactions until after 60 days from the date you received the monthly statement on which those charges are reported. Some states limit your liability to lower amounts, and the Visa and MasterCard banks voluntarily limit liability to $50 or less, although they are not required to do so.

But fraudulent charges are not the only problem you need to be concerned about. Unauthorized or incorrect charges such as double billing are more difficult to recover because when you use a debit card, your money is immediately deducted from your bank account, and to get it back, you will have to work it out with the merchant, which may be difficult for online transactions.

The Fair Credit Billing Act, which applies to credit cards, specifies your liability for fraudulent charges is no liability if the unauthorized use involved just the credit card number, and only $50 in the case of a lost or stolen card.

And the FCBA also includes important and valuable settlement protections for disputing changes. First, when billing errors or unauthorized charges are made on your credit card, your liability is limited to $50.

This means that you can claim a dispute with your credit card issuer for the following unauthorized charges:

  • Charges for goods or services you didn't accept or were not delivered as agreed,
  • Charges that are incorrectly identified,
  • Charges that show the wrong amount, date or math errors,
  • A failure to properly reflect credits or credits.

    To take advantage of these significant consumer protections offered under federal law only to credit card holders, you need to notify the "billing inquiries" department, not the department to where you send payments. This can be done over the phone, but also it is advice to do so in writing and send via certified mail, return receipt requested.

    What does all this mean?

    Here is the way I see it: When you file a dispute over fraudulent or unauthorized charges made on your credit card, it's the card issuer's money that is taken and they are on the hook to get it back from the merchant. They withhold payment to the merchant and have to sort it out with them. Your cash in your bank account is not involved. You are not inconvenienced by having to resolve an issue that is not your fault with a stubborn merchant who is slow to respond to your requests to correct their error (or worse, does not reply at all and is cheating you). Your credit is protected and your liability is limited to $50 by law.

    But when fraudulent charges are made on your debit card, your cash is taken from your bank account and your bank account can be completely drained. You will then have to request that your bank make a provisional to your account and you will need to track down the merchant to request that they credit your account for their error (they typically will need to prepare a fax and send it to your bank instructing the bank to reverse the debit transactions in error.) You are not protected by federal laws and you may be left to resolve the matter on your own. Your liability could be as much as the total amount of cash and overdraft limits on your bank account.

    The bottom line?

    If used properly, credit cards are an easy and low-cost payment option for consumers buying products online. Also, credit cards by far provide the best protections for consumers and are my recommendation for making purchases online and anyplace else where accepted. I respect that many consumers hate credit cards (most likely due to their own personal issues with debt and interest costs), but both the Better Business Bureau and the Federal Trade Commission agree with my view.