Paying for Online Purchases

The best way to pay for online purchases is with a credit card. Period. And it's a great idea to get a credit card that you use exclusively for online shopping so that you can quickly and easily review the charges each month and be sure they match what you actually bought.

Paying by credit card online is fast and safe. Yes, safe. Credit card companies are working hard to protect their customers from fraud. Most cardholder agreements limit your liability for fraudulent charges to $50 -- and, most credit card companies don't charge you that even though they can. Recently, I got a call from the security department at Discover questioning some online purchases on my account. The charges had been made on Sunday evening; the call came in first thing Monday morning. As it happened, I had made a couple of online catalog purchases on Sunday afternoon, but there were two charges -- one to an online auction site I never use and another to an online porn site -- that weren't mine (or my husband's, and he has been teased mercilessly by our friends about the porn site charge). Discover immediately closed the account and issued us new cards. It was mildly inconvenient, because we had to take the time to notify the companies that use that account for automatic payments, but we didn't lose any cash.

Another advantage of paying by credit card is that you have additional security because you can dispute the charge if there's a problem, such as if the merchandise doesn't arrive, doesn't work, isn't what you expected, or you returned it and didn't get your refund.

Virtually all online retailers accept credit cards, either as a direct merchant or through an online payment service such as PayPal (more about that shortly). It's a good idea to check to see what payment method the merchant accepts before you spend too much time shopping. Most accept Visa and MasterCard. American Express and Discover charge merchants higher fees than Visa and MasterCard, so some online retailers don't take those cards.

Smaller retailers may not accept credit cards directly but may accept them through online payment services. PayPal, owned by eBay, is probably the best known and most popular online payment service, but there are others, such as BidPay.

Here's how online payment services work: You set up an account with details on how you want to pay (credit card, bank transfer, whatever). When you want to make a payment to a seller that accepts that particular payment service, you just tell the service who to pay. The amount is charged to your credit card or withdrawn from your account and immediately transferred to the seller. If the payment cannot be made electronically, some services will issue a check or money order -- this is most commonly used when buying items from individuals overseas.

You could also pay by mailing a check or money order, but there are some drawbacks. First is the convenience factor, especially if you have to go somewhere to purchase the money order. Second is the time it will take to get your merchandise. Many sellers who accept checks and money orders will delay shipping your purchase until your check has cleared or they have been able to confirm the money order is legitimate. Third, and perhaps most important, is that you have no extra layer of consumer protection with checks and money orders as you do when you pay with credit cards. Banks and money order issuers can't do a charge back the way a bankcard merchant account provider can. And finally, while this is not a particularly common issue, the potential for fraud with check payments is higher than with credit cards. Check amounts can be altered, or the seller (or the seller's payment processing staffers) can use the information on your check (your name, address, phone number, and bank account number) to steal from you later.

Most online merchants do not accept cash -- and you shouldn't pay with cash anyway. Cash is easily lost or stolen, and you have no way of proving how much you sent if the total doesn't arrive. Reserve paying cash for face-to-face transactions.

Another online payment option that is more commonly used with high-dollar purchases is an escrow service. This is where you deposit the funds with an independent third party. The merchant ships when it receives confirmation that the funds have been deposited. When you receive the merchandise and advise the escrow company that you are satisfied, the funds are released to the seller. If you are not satisfied or you don't receive the goods, the funds are held while you resolve the problem with the merchant.

Don't use a debit card for online purchases. While most online payments are processed without a problem, if yours happens to be the exception, using a debit card could give a hacker or scammer access to your entire bank account. While debit cards do offer some security and fraud reimbursement programs, most debit cards do not offer the same level of protection that is available with a credit card.