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Debit Card Dangers

It’s a hot-button question: If you’re in debt, do you get rid of all of your credit cards and stick to debit cards and cash only? Or can you discipline yourself to still use credit cards for routine purchases and pay the balance off in full every month, even if you’re digging out of existing debt?

When I was getting out of debt, I chose to continue using a credit card–actually a charge card— for monthly purchases, with a keen eye on making sure I paid it off each month. Others argue that total credit elimination is the only sure-fire way to rid yourself of debt. That leaves with debit cards.

Although convenient, debit cards are not perfect.

In fact, debit cards have created so much controversy, two of the nation’s largest banks—JPMorgan Chase and Bank of America—recently¬†announced plans to eliminate and lower fees and provide new ways for customers to opt-out of overdraft protection. The banks’ plans will make it harder for debit card users to overdraw their checking accounts when making debit card purchases and reduce fees for those overdrafts that are currently between $25 and $40 a pop.

Still, there are a number of debit card dangers you need to watch out for.

The Drawbacks to Debit Cards

1. Fraud Protection

If your wallet falls into the wrong hands, your debit card’s fraud protection isn’t as strong as a credit card’s. With a credit card, your liability for fraudulent charges typically maxes out around $50. With a debit card, you may be responsible for up to $500 of charges you didn’t make. Plus, some banks will hold you 100% liable if your debit card is used fraudulently for pin-based transactions. Finally, if a thief uses your credit card, you can withhold payment for the charges until your credit card investigates the suspected fraud. If a thief uses your debit card, however, they can drain your bank account in a matter of minutes, and you won’t get that money back until your bank investigates. So keep track of your debit card and if you lose it—report it at once!

2. Building Credit

If you don’t have a credit history yet or you are trying to rebuild your credit score, a debit card won’t help. On the flip side, if you frequently forget to make credit card payments, sticking with a debit card may prevent you from doing further damage to an already lackluster credit report.

3. Merchant Disputes

Let’s say you go to a fast-food restaurant and buy lunch with your debit card for $6.59. Problem is, the cashier is stoned and rings your card through for $6,590! You decline a receipt, so you never notice the mistake until you use your debit card again and it’s declined. You get home to check with your bank and see the problem. Obviously, the merchant will probably return your money (hopefully with a forceful apology), but returning your money to your account will take several days. In the meantime, you need to get your bank to reverse any overdraft fees. If this same thing happened with a credit card, you wouldn’t owe the card company a penny until the problem was solved.

If there is a dispute regarding a purchase you make, you are in a weaker position when you use a debit card instead of a credit card. The merchant already has your money when you pay with a debit card. So while the dispute is taking place, your money will remain with the merchant and you will only see that money again if you win the dispute.

4. Fees!

If you use a debit card for most of your purchases, you need to be extremely diligent about keeping track of your account balance. If you overcharge by a few dollars (or even a few hundred), your card may not be declined. The bank may allow your charge to go through, and then hit you for one or more overdraft fees of up to $34 a piece. These fees will quickly add up to more than a credit card would charge in interest if you revolved a small balance from one month to the next.

Hopefully many banks will follow Chase and Bank of America’s lead and reduce these fees and or give people the option of opting out of overdraft protection (so if you don’t have enough money in your account to make a purchase, your debit card will simply be declined). Embarrassing, yes, but far less costly.

5. Rewards and Services

Many credit cards offer cash-back or other rewards programs, as well as services like warranties on big purchases and rental car insurance. Until recently, debit cards did not, although debit cards with these perks are starting to appear. I put this “debit card danger” last because I think it’s the least compelling reason to choose credit cards over debit cards. For most of us, the rewards we earn on our annual card purchases might add up to $100. If we carry a balance on a credit card, however, finance charges quickly eat up any rewards we might receive.

The Smart Way to Use a Debit Card

Knowing these debit card dangers, you may still decide that avoiding credit cards altogether is the way to go. In that case, follow these simple rules to use your debit card securely.

  • Treat your debit card like cash—always keep it secure—and if lost or stolen, report it immediately.
  • Never, ever, write down or share your PIN
  • Keep a cushion in your checking account of between $500 and $1,000
  • Keep extra funds in a savings account—not the checking account linked to your card
  • Keep a checkbook register, on paper or electronically, so you always know how much money you have

Or, get a credit card and use that card for almost everything you buy. Just pay it off religiously at the end of the month.

Do you use your debit card as your exclusive payment card or are you sticking with credit cards? Let us know your thoughts in a comment.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I am an advocate for keeping credit cards at a zero balance, but not using them. I will sometimes use them as a pass through account for big ticket purchases, just to keep them active. But as soon as I make the purchase on the credit card I make a payment from my checking account to zero it back out. I am not disciplined enough for day to day use.

    -Dan Malone-

  2. I think is it better to use a credit card and pay off your balance. You get protection (fraud and issues with merchants) and free float of money until your bill comes. If you chose to use a debit card instead though you are right that keeping a cash cushion is wise.

  3. Many of these points are very important to consider when shopping for a debit card – especially since they aren’t true for all cards to the same extent.

    For example, I work at PerkStreet Financial (http://www.perkstreet.com), where we are soon launching a new debit card product that addresses some of the points you raise.

    - Fraud and Merchant Disputes: we have the Visa Zero Liability Policy

    - Fees: you can choose not to opt in for overdraft protection at account signup

    - Rewards: we offer 1% cash back or similar rewards in the form of coffee or music purchases at leading retailers

    So, as in all matters of finance, it pays to shop around, compare cards, and choose the one that is best for you.

  4. I KNOW TO WELL WHAT YOU ARE TALKING ABOUT, I HAVE A NETSPEND DEBIT CARD, AND I HAD MY WHOLE ENTIRE CHECK DEPOISTED INTO THIS ACCOUNT. AND I WENT TO GET SOME OUT TO PAY MY BILLS AT A ATM MACHINIE IT KEPT TELLING ME I HAD 0.8 IN THE BANK, I DIDNT BELIEVE IT SO I WENT TO ANOTHER TELLER MACHINE. AND IT SAID THE SAME THING. SO I CALLED CUSTOMER SERVICE @ NETSPEND AND THEY SAID I HAD A TRANSFER OUT OF MY ACCOUNT, WHICH I KNOW I DIDNT AUTHORIZE. BECUAUSE WE GOT PAID ON THE 16TH , BUT IT WAS DEPOSITED EARLY ON THE 12TH, AND SOMEONE TRANSFERED IT OUT ON THE 13TH, AND NOW I AM GETTING THE RUN AROUND, SAYING THAT I HAD TO LET SOMEONE HAVE MY ACCOUNT INFORMATION. WHAT PERSON DO YOU KNOW, HAS BILLS, WOULD LET SOMEONE DRAIN HIS OR HER WHOLE BANK ACCOUNT, AND KNOWING THEY HAVE TO PAY BILLS. AND IF I DIDNT GO TO HAVE MY TRUCK WORKED ON, TO GET THE MONEY OUT THE BANK TO PAY THE GUY. I WOULD HAVE NEVER KNOWN. THIS WAS DONE TO WAY AFTER 2 DAYS. BUT I ALWAYS CHECK MY ACCOUNT BECAUSE I ALWAYS CHECK MY ACCOUNT. AND I AM IN A DISPUTE NOW AS I AM WRITING. SO TAKE MY ADVICE I TRUSTED THIS COMPANY TO. AND SEE WHAT HAPPEND. I HAVE BEEN WITH THEM SINCE 2008. AND NEVER THOUGHT THIS WOULD HAPPEN.

  5. My bank offers a pretty good dividend rate (1.25% APY) on my checking account, but in order to get that high dividend, I have to use my debit card at least 12 times per month. So for most purchases I use my debit card. After I’ve already used it 12 times though, I may use my credit card.

    I typically use my credit card only a few times per month, usually only to buy gas (I get 3% cash back on gas) and when I order stuff online, for the fraud protection. I only have a $500 limit on my credit card and I like to keep my debt utilization ratio down, so I frequently make early payments of $50-$100 to keep the balance around $70 or below. I also have automatic payments set up so it will automatically pay the balance in full every month on the closing date.