Some people believe that debit cards are a good alternative to credit cards because they help curb spending. Does that mean debit cards are a good deal for consumers? No. Although federal law provides some protection for people using debit cards, it still leaves a lot of traps that can end up costing consumers lots of money. Most privacy rights and consumer protection advocates recommend against using debit cards.
(To learn about credit card features and protections, visit our Banking & Credit Cards topic area.)
What Are Debit Cards?
Unlike a credit card, debit cards directly, and almost immediately, withdraw money from your bank account. More and more people have debit cards. In fact, consumers use debit cards nearly as much as credit cards, according to the Consumer Financial Protection Bureau.
Reasons to Avoid Debit Cards
Here’s why you should avoid using a debit card, or, if you must have a debit card, why you should be extremely careful when using it.
No Grace Period
If you have a grace period on your credit card (you should avoid any that don’t), and you pay your bill in full each month, you get the benefit of the use of the money in your bank account until you pay your credit card bill at the end of the month. (Learn about credit card grace periods.) With a debit card, the money is taken from your account almost immediately.
No Protection for Defective Purchases
Unlike credit cards, if you have a dispute with a store or other seller about a product or service you bought with a debit card, there is no process to dispute the bill or assert a claim or defense based on problems with the product or service. (To learn about the process for disputing credit card charges, see Can I Withhold a Credit Card Payment if I Have a Dispute With a Seller?) For this reason, if you do have a debit card, don’t use it for major purchases, especially those that require a large up-front deposit.
However, banks are required to have a process for reporting errors for things like mistaken transfers, transfers from the wrong account, or transfers in the wrong amount. An explanation of how to report such errors is provided either on your initial agreement or with each statement. (To learn more, see How to Dispute an Error on Your Credit Card or Debit Card Statement.)
Less Protection for Lost or Stolen Cards and Unauthorized Transfers
If you lose a credit card or it's stolen and someone uses it, your maximum liability is $50 (although most credit cards don't hold you responsible for anything). Period.
With a debit card, if you report the loss or theft of your card within two business days after you discover it, your maximum loss for unauthorized debits is $50. But, if you don't act quickly enough, your liability can be much more:
- If you don't report the loss or theft within two business days after discovering it, your loss could be up to $500.
- If there is an unauthorized debit on your monthly statement that you don’t report within 60 days, your loss could be unlimited and may continue for 60 days until you do report the unauthorized transaction. (Although if you can convince the bank that there were extenuating circumstances, such as extended travel or hospitalization, that prevented you from providing notice of the unauthorized debit, it must extend the reporting period for a “reasonable period.”)
- Your losses are unlimited if you gave your debit card and PIN to someone who drains your account (unless you instructed the card issuer not to honor that person’s transactions).
Some States Limit Your Liability
Some card issuers, and some states, cap your loss at $0 to $50. But the Federal Trade Commission warns that card issuers’ guarantees have limits, they don’t always kick in, and they are not backed by the force of law, like credit card loss limits.
Checking Liability Caps on Your Debit Card
If you are shopping for a debit card or already have one, check the account disclosures carefully to see if the card issuer does cap your loss, and whether there are exceptions (for example, a cap that applies only if the bank determines you acted reasonably). If you can’t find that information, call the bank and ask for a copy of its policy in writing. If your debit card agreement doesn’t fully cap your loss, it is imperative that you check your monthly statements carefully so you can catch errors or problems quickly.
Even If You Do Dispute the Debit, You Might Not Get Your Money Back Right Away
When you dispute a debit as unauthorized or in error, the bank may take ten days (20 days for new accounts) to put the money back into your account, but can still withhold $50 until it completes its investigation. Meanwhile, if your bank account has been emptied, you won’t be able to pay your regular bills, like rent or mortgage or car payments. The bank may take 45 days to investigate (90 days for transactions at a store or on new accounts) and could still remove the money from your account if it determines you are responsible for the loss.
No Limit on Fees & Limited Notice of Changing Terms
There is no limit on the kind or amount of fees that banks may charge for debit cards. Often you have to pay a fee when you use your debit card at an ATM or store. You only get a 21-day notice if the bank increases fees or limits your privileges.
If necessary for the safety or security of the account or the system, the bank may make changes to the terms of your account with no notice. In contract, credit card companies must provide notice of changing terms in many types of situations.
Cheaper fees on the way?
As the result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and some large class action antitrust lawsuits, you may see a reduction in debit card (and even some credit card) fees. Sellers will be able to offer discounts if you pay with cash or one of the debit or credit cards that charges the seller less.
More Susceptible to Theft
Debit cards are reportedly more susceptible to theft than credit cards because thieves can set up readers to get your pin number when you enter it at a store or other location. To avoid this, choose the “credit” button when you use a debit card -- usually this will prompt the system to ask for a signature, instead of a PIN. Although the money still comes directly from your bank account, by using a signature instead of a PIN, you can prevent thieves from “skimming” your PIN number.
High Overdraft Fees
Overdraft fees are one of the most expensive features of debit cards. Banks often allow you to use more money than is in your account, and then charge a high overdraft fee. Some banks charge an overdraft fee for each purchase that is above the amount in your account, even if you make several purchases in one day. And, some banks purposely debit the largest purchase first in order to trigger an overdraft on that and each of the smaller amounts that would not otherwise have triggered an overdraft. Overdraft fees of up to $35 are not uncommon. Banks also often offer a so-called overdraft or “bounce” protection plan -- instead of paying a fee for each overdraft, you pay a high fee for the plan.
Don't Opt Into Overdraft Protection
The good news: Banks cannot charge you for overdraft fees or an overdraft plan on a debit card unless you opt into the protection. If you plan to keep a debit card, despite all the negatives, don’t opt in for overdraft protection. The possible embarrassment of a rejected transaction if your account is empty is well worth the money you will save by avoiding overdraft fees.
Did You Opt Into Overdraft Protection Without Meaning To?
Many consumers opt into overdraft protection without meaning to. The notice explaining your right is not particularly clear and banks, which make a lot of money from overdraft fees, are busily getting consumers to opt in for overdraft service or protection. Check all solicitations you have received or signed. If you have already opted into allowing transactions that are over limit or into an overdraft protection plan, you can opt out whenever you want.
Overdraft Fees Permitted on Checks and Regularly Scheduled Debits
Even if you are careful not to opt into overdraft protection, banks can still charge overdraft fees for checks and regularly scheduled debits that you have authorized (for example, when you authorize a utility company to automatically debit your account each month). This means that you must keep track of how much money you have in your debit account. If you carry your check register with you and enter every debit transaction or use an electronic system, you will avoid rejected transactions and overdraft fees for checks and regularly scheduled authorized debits.
No Benefit to Your Credit Score/Report
If you are trying to establish, or reestablish good credit, a debit card won’t help you. If you can control your spending, you are better off using a credit card, even a secured card that you pay in full each month.
Alternatives to Debit Cards & Safe Use of Debit Cards
If you are afraid that you’ll be tempted to overspend with a credit card, consider using checks and cash instead of a debit card.
If you do get a debit card, treat it like a checking account. Use a check register to record each debit transaction and calculate the balance left in your account. If the bank offers online banking, check your account frequently. If you don’t do this, it’s difficult to know when you have reached the limit in your bank account.
Excerpted from Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).