According to the
Federal Reserve, the number of debit card transactions is increasing by more than 20% each year.
Debit cards seem to be the ideal balance between carrying cash and using
credit cards (i.e. increased debt and interest charges). After all, don't debit cards look, act and get accepted like credit cards? Yes, but it does not change the fact that they are NOT credit cards! There are some very significant differences, even potentially dangerous ones, between credit and debit cards. Before using a debit card, discover the potential danger that could be waiting for you.
DANGER #1: Using debit cards can lead to a false sense of security.
Because debit cards are linked directly to bank accounts, it is common for customers to assume that accounts with debit cards cannot be
overdrawn. In reality, banks are more than happy to "approve" your debit transactions and overdraft accounts without alerting you. Then, they charge an
overdraft fee much like if you wrote a paper check that was returned for insufficient funds.
Overdraft protection is available for most accounts. Some banks, however, charge for the service. Additionally, banks will assess overdraft fees for EACH transaction that is processed after the balance is negative. If you are using a debit card for relatively small purchases and happen to go over your bank balance, your "small" purchase has the potential to become a significant expense.
DANGER #2: Debit card transactions are subject to "blocking" and/or "account holds".
Some types of transactions involve prepayment of an undetermined amount (i.e. gas stations). Many merchants use account blocks or holds to tie up an amount of money in an account to guarantee payment. The customer inadvertently authorizes the hold by choosing the debit card as the method of payment. There is not a time limit or dollar amount restriction for the merchants to release the hold. In the mean time, money tied up in account holds is considered spent. Until the holds are released, money spent above the balance in the account is treated as overdrawn. This can result in multiple "overdrawn" transactions without the customer knowing it. Even if the money is technically in the account, the hold will keep it from being used toward other transactions and can trigger the account being overdrawn (i.e. more overdraft and NSF fees). Some merchants are beginning to offer the option of making PIN purchases with debit cards so that HOLDS and BLOCKS won't be necessary. In some cases, these transactions are available at gas pumps and convenience store cash registers.
DANGER #3: Liability for debit card is higher than that of credit cards.
If a debit card is lost or stolen, the rules for a customer's liability are somewhat different than the liability for credit cards that are lost or stolen. The amount of debit card liability is dependent on the time frame in which it is reported. For example, lost or stolen debit cards that are reported within the 1st 48 hours have a low liability amount. Anything reported after the initial 48 hours raises the liability to as much as $500. After 60 days, there is NO limit of liability on a debit card. Generally, credit card liability is limited to $50, regardless of when the loss/theft is discovered and reported. There are some federal regulations that clearly define the liability requirements for debit and credit cards. To learn more about them, see the
Truth In Lending Act (Credit Cards) and the
Electronic Fund Transfer Act (debit cards).
DANGER #4: When debit cards are used, the entire bank balance is at-risk.
Debit card transactions are conducted with real money (i.e. money that we can touch). On the other hand, credit card transactions don't feel as real since they are not backed by actual money sitting in an account with our name on it! That means that debit card fraud is more dangerous because it places all of the "real" money in a particular account at risk EVERY TIME a transaction is made. Since debit transactions remove funds from the linked account almost immediately, it is more difficult to resolve errors made with debit transactions. When the money is physically gone, there is no guarantee that it will be put back.
Yes, there is potential danger in using debit cards. For me, it is enough to make me want to pay close attention and to be aware of the differences between my debit cards and my credit cards. Is it enough to make me want to get rid of my plastic and start carrying cash? No way. Debit cards are much too convenient, even if they are a little bit dangerous!
