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3 problems with debit cards vs. credit cards

Posted on Jul 27, 2008 by Tom Fragala

Using a debit card for purchases has some inherent problems, so you should at least be aware of them. (When we talk about debit cards here we mean check cards or ATM cards with a credit card network logo on them like Mastercard or Visa.) You may want to avoid using them for purchases or having one at all. The underlying reason is that buying something on your debit card pulls money right from your checking or savings account. This can lead to these problems.

1. Card blocking. Some retailers, including gas stations, hotels and rental car companies, will block a card in advance of the transaction clearing. Some will block using a default value for every purchase. If you buy $10 worth of gas, your checking account might have $75 blocked. Several days may pass until it is unblocked. So if your balance is low, you might end up bouncing checks or causing costly overdrafts--and you'd have no idea why.

2. Fraud results in no fund access. When your debit card is used fraudulently, it's your money that has been pulled, not your card issuer's. With credit card fraud, the criminals are playing with the card issuer's money. Your maximum liability for credit card fraud is only $50 by Federal law—this is governed by the Fair Credit Billing Act. Debit cards are governed under a different federal law: the Electronic Funds Transfer Act (Reg E). If you don't report debit card fraud within 2 days, your liability could be $500.If not reported within 60 days it could be as high as 100% of the fraud! To make matters worse, no matter what the situation, if you're fighting to recover from debit card fraud, the bank is holding your funds in the meantime. That's your money--and your bank balance is that much lower. You might be bouncing checks all over the place or be unable to pay bills on time, when you did nothing wrong.*

3. Fees. Banks earn substantial fees on debit card transactions. Some consumer advocates are up in arms about this. Apparently, when you use your debit card with a PIN, some banks charge you a special point of sale fee. And when you use it as a credit card, they charge merchants a lot--even though there's much lower risk than credit cards.

Some experts like Javelin argue that survey data shows that debit cards are not riskier than credit cards. That may be true, but point #2 goes beyond analyzing pure fraud data--even if you get your money back eventually, you can still get hosed. Regardless, you should be aware of these risks and make your own decision.

If you are seriously concerned about debit cards, then you have the choice of having an ATM-only card (but I've heard of some banks charging you a fee to make it ATM only!). When opening an account, ask for an ATM card only with no credit card logos.

* Note: Both Mastercard and Visa have a zero-dollar fraud liability policy and they do apply that voluntarily to debit cards with their logo. But the criminals still are using your money, not the bank's.