Debit Cards: The D can stand for Danger, what you need to know
Jun 20 '00 (Updated Mar 16 '01)
The Bottom Line While debit cards do afford protection to consumers who feel they will lose control with a credit card, they are not as safe and credit friendly as you might think.
Debit Cards are fast becoming a hot commodity. Many consumers prefer them because they are seen as a way to avoid the pitfalls of a credit hungry society. You cannot get into credit trouble by using your debit card... or can you?
• What is a Debit Card?
A debit card looks like a credit card, but it takes the money directly from your account. Whether it's utilized in an ATM to withdraw cash, or in a store to pay for an item, the money will be removed from your account ASAP to cover the payment.
• What is a Credit Card?
A credit card looks like a debit card, but it allows you to float your purchase using someone else's money. Most credit cards will allow you to pay your debt in full each month without incurring any finance charges (if yours doesn't, you need to look elsewhere!).
Let's compare some common events
- Purchases -
• Debit Card:
You can only spend what you have (you can't buy something that costs more than what you have in your account at that moment). There are no associated benefits like purchase protection.
• Credit Card:
You can only spend up to your credit line (money which you may not have available). There may also be benefits such as purchase protection or low price guarantees.
- Cash -
• Debit Card:
You can use an ATM machine to get cash from your account quickly, easily, and at a nominal (if any) cost.
• Credit Card:
Don't even think about getting cash on your credit card because you'll get hit with a higher than normal APR and cash advance fees.
- Approval -
• Debit Card:
Easy to get approved.
• Credit Card:
If you have bad marks on your credit file, you may not be approved. If you try to get approved too many times in a short time period, you may not be approved. If you have too much credit available, you may not be approved.
- Available Funds -
• Debit Card:
You need to keep a close accounting of your funds, because if that check you wrote a couple of days ago didn't clear, and you just spent the last $50 in your account in the supermarket, that check's going to bounce! Boing!
• Credit Card:
The sky's the limit. Can you really afford it?
- Protection -
• Debit Card:
Uh oh. What if someone steals your card? They potentially have access to all your money in CASH, including any overdraft line of credit on that account.
• Credit Card:
You are protected from fraudulent charges by Federal and Visa/MasterCard Regulations. You cannot be held liable for more than $50 of fraudulent activity, though in practice, credit card companies will not hold you liable for any of it. UPDATE: Visa and MasterCard have now moved to "zero liability" policies on fraudulent use.
We all know how credit cards can get us into trouble and ruin our credit, but did you know that debit cards can negatively impact your credit as well? Here are the common pitfalls of debit cards and how to avoid them:
• Overdraft
Think twice about having this feature on your checking account because it can open the floodgates for someone to not just take all your cash, but all your potential cash, causing you to go into debt! If you must have overdraft, make it a low limit.
• Have a back up
If there is fraudulent use on your debit card, and you notify the financial institution in time, you can still be out those disputed funds for up to 20 days. Therefore, you want to have some money in reserve to cover any outstanding debts that have not yet cleared your account. Once you start bouncing checks, you start negatively impacting your credit.
• Know the Law
Here are the current rules that impact your debit card:
• If you report your card lost or stolen within 2 days, you have a $50 limit on your liability of fraudulent use.
• If you report your card lost or stolen within 60 days, you have a $500 limit on your liability of fraudulent use.
• If you do not notify your financial institution within 60 days of your card being lost or stolen, there is NO LIMITATION on your liability of fraudulent use.
Keep in mind that a thief does not necessarily need to have your card in his/her possession in order to use it. Many companies take mail and phone orders on debit cards.
- How to protect yourself -
• Know your balance at all times. Most fraudulent use is discovered when the consumer's checks start to bounce due to insufficient funds in the account. If you see anything strange, call your financial institution and check it out!
• Do you think someone knows your PIN? Change it! Be aware of that person waiting in line behind you to use the ATM. Are they too close? Play it safe and come back later, or ask them to give you some more privacy.
• Don't keep your PIN on or near your card. You'd be shocked to know how many people write their PIN on their card for the sake of convenience.
• Treat your debit card like CASH. It is the key that can unlock your entire account!
Personally, I never use my debit card for anything other than making deposits or withdrawals at an ATM machine. I enjoy the float and the benefits associated with using my credit cards for purchases. I also feel much safer with the anti-fraud measures available on credit cards. I learned long ago to have self-control when using credit, so I don't worry about spending what I don't have.
While debit cards do afford protection to consumers who feel they will lose control with a credit card, they are not as safe and credit friendly as they are cracked up to be. The ultimate protection of your credit comes from YOU, no matter what kind of card you use.
You may be interested in these other associated reviews:
• The ABCs of ATMs: Tips to Avoid the Fees from an Industry Insider
http://creditexpert.epinions.com/finc-review-5F88-AA45237-38E3D91C-prod4
• Save Money, even Make Money, by Choosing the Right Credit Card
http://creditexpert.epinions.com/finc-review-6FE-73F2D35-38EE9644-prod6
• An Insider's Comprehensive Guide to Avoiding Credit Card Fees
http://creditexpert.epinions.com/finc-review-7D30-14D8F7F-3894936A-prod2
• What You Need to Know about Fraud, from an Industry Insider
http://creditexpert.epinions.com/finc-review-78D6-D46160-3887762C-bd1
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Member: Kat
Location: Maryland
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Analytically inclined mom, bank officer, freelance writer, and internet addict.
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