By Sloan Barnett (MSNBC)
Read this before you swipe! Debit-card dangers
Yes, debit cards are convenient — but consider these points of caution
First, some basics: A debit card looks just like your credit card, but works like an electronic check. The payment is deducted directly from your checking or savings account. When you use your debit card to purchase items, you or the cashier slides the card through a scanning machine that enables your bank to verify that the funds are available and then approve the transaction. Most debit cards can also be used to withdraw cash at ATMs, and can also look just like your ATM card (look at the face of the card to find the “debit” language).
Debit cards are handy — so handy, in fact, that two-thirds of American households have them. They are more convenient to carry than cash or a bulky checkbook, plus swiping the card is easier and faster than writing a check. In addition, there are no interest payments. The money is deducted out of your account right when the purchase is made. Finally, you can use your debit card’s cash-back feature to get cash when you make purchases at a store, avoiding a separate trip to the bank or the ATM.
Despite all these benefits, there are some cautions to keep in mind:
Credit-building
You are not building credit with a debit card like you do with a credit card. Your debit card purchases do not enable you to build up positive credit. That means your good habits go unnoticed. However, by using your debit card instead of your credit card, you can avoid running up a big bill and making late payments, harming your credit. So if you have trouble making payments on time, a debit card would be the way to go.
Fraud protection
Debit cards do not give you the same fraud protection as credit cards do. The federal regulations are very different for debit cards than for credit cards when it comes to financial liability. When using a credit card, you are generally responsible for the first $50 of fraudulent charges, whereas your liability on many debit cards can be as high as $500. In addition, unlike a credit card, if there is a problem with your purchase, you are not able to withhold payment until further investigation by the credit-card company. If your debit card is stolen or lost, report it to your bank immediately. In many cases, if you wait more than 60 days to report your card lost or stolen, you could be responsible for all of the damages. Of course. always check with your bank to understand its policies and applicable state laws. Don’t take this lightly: A recent study in 2007 put fraud losses from debit-card purchases at $245 million.
Lost or stolen cards
A debit card is like a blank check, so you need to guard the card and the number on the card. If your card gets stolen, a thief can empty your bank account in minutes. Thieves don’t even need your card. As long as they have your name and card number, they can shop online or over the phone with your card information. If your debit card is lost or stolen, call your bank immediately! Follow the phone call with a letter.
Protect your debit card by holding on to your debit-card receipts and checking them against your bank statement each month.
Merchant disputes
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.
Rewards
While some debit cards are beginning to offer rewards, they are still far fewer and less valuable than those offered by credit cards. Ask your bank if there is a rewards program you can enroll in to earn points toward travel or goods every time you use your debit card. Most likely the rewards will not be as valuable as the ones you get with your credit card.
Immediate deduction
When you use a debit card, the money is immediately taken out of your banking account. With a credit card, there is a float period between the time you make the purchase and the date the credit-card bill is due. This means that you earn a little bit of extra interest on your money sitting in your bank account when you use a credit card vs. a debit card.
No added services
Credit cards often come with added benefits, such as extended warranties on products purchased and insurance for rental cars and airline travel. Debit cards do not offer these services.
Tracking spending fees and overdrafts
When using a debit card, it can be difficult to keep track of what you purchased if you aren’t diligent in writing down everything or if you don’t go online constantly to check your account. Making a mistake on the balance can cause you to think you have more in the account than you really do, and can ultimately result in accidental overdrafts.
If you unintentionally let your balance get too low, each debit that comes through will bounce. With fees as high as $34 per bounce, this can add up to hundreds of dollars in a matter of seconds. So, for example, if you forgot to track a few debits and you have written a large check, many banks will honor the large check and then bounce all the debits, even debits as small as $2.
Even if you do keep track of your accounts, the bank’s calculations may not be as accurate as you are. It takes time for deposits to become available and the funds may not be accessible as soon as you would like, leading you to believe you have more in your account than you really have access to. This can cause you to spend more than is in the account and rack up overdraft fees.
Debit-card overdraft loans are more expensive than overdraft loans from any other source, including overdrafts by check. Debit-card overdrafts cost people $2.17 in fees for every dollar borrowed, compared to check overdrafts, which cost $.86 per dollar borrowed.
Fees
Banks prefer the credit option when you use your debit card, because they make more money in fees. For a $200 transaction, for example, a bank could make $1.99 if the customer chooses the “credit” option and signs his or her name. This is more than three times the 60 cents they usually make from customers who choose “debit” and enter a PIN number.
WHAT YOU CAN DO:
Here are some ways to stop banks from stealing your hard-earned money.
Keep your balance up
Keep a cushion of money in your account to avoid bouncing checks or debits. Decide that you are not going to let your account fall below a certain amount, like $1,000; when you see it getting close, transfer money into it from another account. If you don’t have the money to replenish it, then you should cut back on spending.
Track your account
Sign up for your bank’s online banking program. This is an easy way to see what is going on with your checking account. Pay close attention to the available balance.
A lot of us think that once you deposit a check in the bank, it’s yours for the spending. Watch out, this is not the case! Most banks put holds on checks for several days, even up to a week. Until the money clears, you should not use your debit card. Debits go through right at the time of purchase, and if the bank is holding your deposit, you’ll get huge fees on the overdrawn debits. If you need the money right away, take the check to the bank and have it turned into cash, then deposit it. When you deposit cash it is available almost immediately.
Call your bank
When it comes to overdraft fees, banks hope you won’t fight back and request courtesy credits. Many banks will credit you back the fee or part of the fee if it’s your first offence.
Use cash
Cash can’t bounce and that’s the beauty of it. If you are not willing to use a credit card, then cash is the next best option. I’ve found spending actual cash makes you more aware of what you are spending. It seems when you swipe a debit card, you tend to spend more because it doesn’t seem like spending “actual” money. At the beginning of each week, take out what you think you’ll need and stick with that.
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