A common mantra among the big name personal finance advice gurus is to only use debit cards for purchases and avoid credit card use. However, this is one piece of advice I simply will not follow. Using debit cards is playing with financial fire and here’s why:
Debit Cards Are Risky
Credit/Debit card fraud is becoming more and more common. Whether it is an online retailer whose credit card database is hacked, or a card skimmer at the gas station, thieves are always trying to get your card information. Unfortunately, a debit card is tied directly to your checking account and all of the funds contained in it. If your debit card information is stolen, a thief can quickly drain the entire balance of your checking account and potentially overdraft it if you utilize your bank’s overdraft protection program.
Some places that you could run into potential theft of card information include:
- Gas Stations (card skimmers)
- Independent ATM (card skimmers)
- Restaurants – this is a very common source of card fraud and I have caught numerous employees at establishments I managed who were increasing the tips on cards or copying customer card info.
Et tu, Autopay?
Do you use autopay for your utility bills, rent, credit card payments, or other regularly recurring bills each month? Hopefully the debit card thief doesn’t drain your account when those autopay transactions come through or you could further overdraw your account, incur bank overdraft fees, or even late fees and returned item charges from the companies you are trying to pay. Am I trying to scare you or be over-dramatic? No. However, I have worked in banking and seen the damage that debit cards cause, first hand.
I have honestly forgotten how many customers I dealt with who came into my branch because their checking account was completely emptied out due to fraud. They had no way to pay their rent, car payment, or buy food. Upon examining their account, it was discovered that there were numerous debit card transactions that brought the account balance to zero or negative. This is also a good time to mention that you should probably have more than one bank that you keep money in, just to further protect yourself in one of these unfortunate events.
Debit Card Liability Protection & Reimbursement
Debit cards do have mandated consumer protection that limits your liability for fraudulent use if reported within 60 days. If your card is lost or stolen, your liability is limited to $50 if reported in the first two days, and $500 if reported after the second day and within 60 days. If you fail to report the fraud within 60 days, your liability is unlimited! Be sure to check your statements each month in order to avoid this outcome.
Even if you experience a fraud incident, banks are not very quick to return the money to your account and are only required to provide temporary reimbursement after 10 days. Keep in mind that these funds are not “yours” until after the completion of the bank’s investigation, hopefully in your favor. This means you are left without those funds for weeks while things are sorted out. In the meantime, your landlord wants her money, your car needs gas so you can go to work, and your kids need to eat.
Disputing Debit Card Transactions
Another downside to debit cards is how much more difficult it is to dispute a transaction versus a credit card. Whether it’s a recurring service charge, an incorrectly billed amount, or some other discrepancy, credit card companies are much easier to deal with and prove the error than a debit card servicer. Save yourself the headache and avoid the debit card dispute resolution process if at all possible.
If you find yourself needing to dispute a transaction, it helps to have pro-actively written down the customer service number found on the back of each of your cards and store it somewhere you can quickly refer to it. Otherwise, you can look up numbers online or call your local bank branch if it is a debit card that you have lost or need to dispute a transaction on it.
Excessive Holds on Funds with Debit Cards
A significant pain in the you-know-what with debit cards is the hold the merchant places on your checking account balance when you use the card to purchase gasoline or book a hotel or rental car. From the moment you swipe your card, the hold goes into effect and often won’t drop off your account until at least a couple of days after the transaction is initiated.
Many gas stations place a $50-100 hold, and hotels and rental car companies could place holds in the hundreds of dollars to cover any potential damage they may want to charge you for at the end of your reservation. When renting a car, I was once told they would place a $1,000 hold on my card in case of damage because I refused their overpriced damage waiver in lieu of using my own. If you use a debit card for these types of transactions, those holds mean that the money is not available for your use even though it’s still in your checking account!
What’s the Alternative to Debit Cards?
Credit cards are the best alternative to debit cards. Cash is also an alternative to debit cards, but it is becoming more difficult to use cash as many businesses convert to electronic payments only. The best advantage with credit cards is that your liability for unauthorized use is limited by law to $50, but many card issuers offer $0 liability. You do not risk losing access to your checking account funds for up to 10 days in the event of fraudulent activity, like with a debit card.
Credit card companies will not require you to pay for the unauthorized purchases while they investigate the incident. Additionally, many credit cards will double manufacturer warranties (at no charge) for appliances and other major purchases made with the card. Credit card perks are almost always better and more plentiful than those available with debit cards.
For those who are able to obtain a credit card, because of a good FICO score and credit history, the credit card options are plentiful. For those who may be just starting out and don’t have a credit history or have had some negative credit issues in the past, you may need to look at alternative options like a secured credit card. A secured card requires that you place a deposit with the credit card issuer or bank and they will grant you a credit line equal to that deposit. This protects the bank from a cardholder not paying their bill because they can use your cash deposit to cover any potential loss. I have used a secured card in the past when I needed to establish credit history. After about a year of using a secured card, I was getting pre-approved offers from the major credit card companies.
If you are flat-out against the use of credit cards and want to continue using a debit card, at least do the following in order to protect yourself:
- Open a separate checking account for debit card use only.
- Decline the bank’s overdraft protection feature. This will prevent your account from being overdrawn should a scammer use your debit card to ring up thousands of dollars of purchases.
- Transfer money to your new debit-card only checking account as needed each month.
- Keep the debit card “locked” when not in use. Many banks offer the option to electronically lock your debit card through your online banking portal or mobile app. Simply unlock the card when you know you will be making a purchase and then reactivate it when you’re done.