Money Matters: The Dangers of Debit Cards

Credit or debit? Before you commit to using debit cards, make sure you understand their risks.


Credit or Debit?

"Credit or debit?" That's the new question cashiers are asking at grocery store checkout counters.

They're asking this because many of us now have a new type of debit card from our bank or brokerage -- one that looks like a credit card because it has a logo from Visa or MasterCard (American Express, Diners Club and Discover don't offer debit cards).

These new debit cards can be used two different ways. One way is as an ATM card, either to withdraw cash from an ATM or make a purchase at a store that accepts debit purchases (this is when you tell the cashier, "Debit," or press the debit option on the keypad at the cash register). The other way is similar to a credit card in that you simply sign the transaction receipt the same way you would for a credit card purchase. Either way, however, the money to cover your purchases is withdrawn immediately from your checking or brokerage account.

Debit cards, also called check cards, have become a way of life for many consumers. When you use a debit card, the purchase is deducted directly from your checking or brokerage account -- just as if you had written a check. And instead of getting a credit card bill at the end of the month, your purchases are recorded on your regular bank or brokerage statement.

So it would seem that these new Visa or MasterCard debit cards offer convenience and versatility that plain old logo-less debit cards and ordinary credit cards don't. However, this convenience comes with certain risks, and there are some security issues you need to understand before you use your debit card freely.

Debit Card Theft

A debit card is no more or less secure than a credit card. After all, it's just a piece of plastic that can be used by anyone who forges your signature on a receipt or orders something from a Web site. But you have bigger liabilities and the potential for more headaches if your debit card is stolen.

If your credit card is stolen, most credit card companies will only hold you liable for up to $50 of purchases, no matter how much has been charged against your account. Usually, that's the most you're liable for, no matter how long it takes for you to realize your card has been stolen (each card account has different theft policies, so check the fine print for your cards).

But debit cards are different. Under federal law, if you report a debit card as stolen to your bank or brokerage within 48 hours of the theft occurring, the most you'll be held responsible for is the first $50 of purchases made with your stolen card. If you wait between two and 60 days to report the theft, you're responsible for up to $500. If more than 60 days pass before you report the theft, you're responsible for the entire amount. Both Visa and MasterCard say that if a thief makes purchases with your debit card and you report it as stolen to your financial institution within 48 hours of the theft, you aren't liable for the purchases made with your card, and the money is supposed to be credited to your account.

Sounds similar to the protections of a credit card, but there's a catch. The balance in your bank or brokerage account can shrink quickly if your debit card is stolen. Banks are allowed to take up to 20 days to restore the stolen amounts to your account, as they investigate the alleged fraud. In the meantime, you could potentially be out thousands of dollars, and you could be short money that you need to pay your mortgage or other bills. And if you've already written some checks based on the amount you initially had in your account, those checks will start to bounce -- and that means more fees from your bank. (Some banks will waive overdraft fees if you report the stolen card early, so check with your bank to see what it will do in this situation.)

Purchase Protection

When you use a credit card to make a purchase, the card offers certain protections. If the item you bought is defective or you've been billed incorrectly, you may be able to dispute the charge. While you're negotiating with the merchant to resolve the problem and the credit card company is investigating the situation, you don't have to pay the disputed part of the bill.

But debit cards offer no such protections. Because they act like cash, you can't hold up payment to a merchant if you're having a problem -- the money is transferred from your account within one to two days, if not instantly, when the transaction is put through. So by the time you realize the product is broken or has a defect, the merchant has already been paid.

Record-keeping. Sure, debit cards record your purchases and send you the details on your monthly banking statement, but what if you forget about a purchase or two in the meantime? Your checking account could be out some cash, and that could lead to bounced checks. With a credit card, if you forget about a few purchases, you may risk going over your credit limit -- but at least you won't be writing bad checks.

No rewards. If you use a credit card to accumulate rewards, such as airline miles or cash-back bonuses, you won't find the same benefits with a debit card.

Pluses and Minuses

All these cautions aside, if you use a debit card wisely, it can be a great money management tool. But if things go wrong, debit cards may make your life much more complicated -- and more costly -- than a regular credit card.

I use my debit card strictly as an ATM card, and I keep it safely tucked away when I'm not using it.

Karin Price Mueller is the author of Online Money Management (Microsoft Press, 2001).

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