Debit Cards: Why They're Not As Safe As You Think

By Tara Struyk | September 29, 2010 AAA
Debit Cards: Why They're Not As Safe As You Think

Debit cards have been around for more than 30 years, but in 2009, the use of debit cards surpassed credit card use for the first time ever, according to a report released early this month by Javelin Strategy & Research. But while reducing our reliance on credit is undoubtedly a good thing, using a debit card presents more risk than swiping your credit card. Read on to find out how. (For background reading, see Credit, Debit and Charge: Sizing Up The Cards In Your Wallet.)

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1. Theft
Unlike with a credit card, if a thief is able to get a hold of your debit card and PIN, he or she will be spending your money, not the bank's. Plus, according to the Federal Reserve, if you don't report the loss within two business days, you may have to foot the bill for up to $500 of the thief's spending spree. If you fail to report the problem for more than 60 days and you could end up paying for the whole thing - not to mention the possibility of overdraft fees.


If the theft is reported in a timely way, your bank will often reimburse the funds, but getting your money back won't be instant, which could mean bounced checks in the interim. (Find out how to protect yourself from overdrafts in When Good People Write Bad Checks.)

2. Blocking
Blocks, or holds, on your debit card account occur when you agree to pay for something before the transaction actually occurs. This often happens when you pay for gas at the pump with your debit card. Because the machine has no idea how much gas you will put in, it may put a hold on your card of up to $100 to ensure that you have the funds available before giving you the fuel. The problem is, even if you only buy $25 worth of gas, that hold could stay on your card for a couple of days, leaving you unable to access that $75.

3. Less Leverage
Although debit cards can often be used much like a credit card to purchase merchandise online, they don't offer the same perks. For example, if you buy an iPod on eBay, only to find it's a cheap imitation when it arrives and the vendor who sold it to you has vanished, you may be able to take up the cause with your credit card company. In fact, federal law stipulates that you don't have to pay the bill until the dispute is settle. Because using a debit card is like using cash, even if what you get isn't what you agreed to pay for, you may not be able to get your money back. (For more insight on the benefits of using a credit card, see Credit Card Perks You Never Knew You Had.)

4. Fee for All
Although debit cards are convenient for banks and their patrons, banks still charge fees - a lot of fees. Depending on your bank and the account you choose, you may be charged for the number of times you swipe your card in a month, be subject to fees if you withdraw cash at a machine other than that of your own bank, and pay overdraft charges if you spend all your cash.



Plus, as a result of credit and debit card reforms passed under the Dodd-Frank Financial Reform Act, cardholders could end up paying higher prices for merchandise - or even pay a debit card fee. As it stands now, merchants pay 7-10 cents on each debit card transaction they make to the bank that issued the customer's card. That's much less than they pay for credit card transactions, but because the Federal Reserve wants to cut these fees down, card issuers may go to consumers to make up the difference. (This and other fees can really cut into your disposable income. Read more in Everyday Fees and How To Avoid Them.)

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5. Not Accepted
Although credit cards are widely accepted around the world, there are some situations where a debit card just won't cut it. Car rental companies, for example, will often require that you use a credit card. Although you may be able to pay for your car with debit, many companies prefer that you reserve with credit because of the added security this provides for the company. The same may also be true for hotels. Plus, debit cards may not always work in other countries, although this connectivity is improving very quickly. (For more on travel and payment issues, read Travel Smart By Planning How You'll Pay.)

6. No Credit
While using a credit card is a way to rack up debt, it's also a way to build credit. And, while you may not need to rely on debt to pay for gas and groceries, you are likely to need a loan for bigger purchases, such as a car or home. Unfortunately, using a credit card regularly is one of the simplest ways to build a solid credit history so that you can present yourself as an attractive borrower when you go to apply for a bigger loan. If you use your debit card, you won't get this benefit.


Debit or Credit?
Choosing between debit and credit is a bit of a catch-22. While credit cards can encourage consumers to spend money they haven't yet earned - racking up interest charges and debt in the process - they still offer a lot of security features that debit cards lack. Many debit card issuers are moving toward improving the security of these cards, such as through the recent introduction of microchip technology in some cards; in the meantime, it's up to consumers to understand that debit and credit are not the same, and to be conscientious about which card to use.

For the latest financial news, check out Water Cooler Finance: The End Of The Recession.

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