- Avoid using your debit card at the gas station, which can put a hold on a chunk your money for several days.
- Security protections for debit cards are less extensive than protections for credit cards. You aren't allowed as much time to report a lost card, and you could be on the hook for some money lost in the event of fraud.
- When a cashier asks whether you wish to process a transaction with credit or debit, choose credit. Visa and MasterCard will insure purchases you sign for and you'll avoid bank charges for using your PIN at the register.
Long ago, people actually walked into their bank branches to obtain cash from their accounts. Then, the 1980’s brought the widespread use of the automated teller machine, or ATM. When you opened a bank account, the bank would issue you a plastic card to use at these machines to withdraw cash. Simple enough.
By the 1990’s, banks started carrying Visa and MasterCard logos on those ATM cards, allowing bank customers to use their ATM card anywhere those credit cards were accepted, sign for the purchase and pay with money straight from their bank account. Consumers could carry less cash, and they didn’t have to worry about piling up debt on a credit card.
Because this new card worked a lot like writing a check, it was known early on as a “check card.” But because it pulls – or debits – the money from a bank account so quickly, the name debit card soon took hold.
Banks were thrilled. Turns out they get a little slug of money every time someone uses a debit card to pay for something. Visa and MasterCard do, too, which is why they take out ads promoting the cards, even though it’s the banks that create the relationships with the customers and have their brands in big letters on the card.
Do You Need a Debit Card?
Chances are, you already have one. Debit cards are mostly benign. They’re often useful and rarely will they hurt you too badly.
On the plus side:
• Debit cards help you budget. If you use one for all your purchases, you can examine your statements and get a decent sense of where you’re spending money. (For more on budgeting, check out our guide to money-management software and Web sites .)
• It’s harder to spend beyond your means, as long as you turn off the overdraft protection feature. Unlike credit cards, your balance of available funds shrinks every time you use the debit card. That makes it much easier to avoid spending more than you have.
• Some banks and third-party services like Geezeo now allow you to request text messages that contain your current balance – a useful thing to look at before making a big purchase.
So why doesn’t everyone use a debit card instead of a credit card?
• Occasionally, you need to make a big purchase that wouldn’t be covered by your available funds. Some credit-card fans like gaming the system; you can put something on one and not have to pay for any of it for up to 45 days until the bill comes due. With debit cards, the money comes out of your account right away.
• Credit cards offer better rewards than debit cards do. Some debit cards offer cash back or enrollment in cash contests, but they’re often low-volume and have caps. Card issuers can be more generous with credit rewards because they make more money from credit cards, thanks to the interest people pay on debt. Comparatively, financial institutions make a lot less money from debit cards.
• Finally, security issues around debit cards make a lot of people uncomfortable. The biggest one is this – if your card gets stolen or compromised somehow, the money the thief spends comes straight out of your account. With a credit card, as long as you notice the fraudulent charge on your account, you can call the card company, file a dispute and not be out any money. The same thing goes for mistakes that show up on the bill.
With a debit card, however, the money’s usually been sucked out of your bank account by the time you know there’s a problem. While you’ll generally be able to get it back within a few days or weeks by disputing the charge, you could be broke and overdrafting for a while until that happens – and those overdraft fees won’t be repaid by your bank.
How to Make the Most of Your Debit Card
When you pull out plastic to make a purchase, clerks at the cash register often don’t know whether you’re using a credit or debit card, so they ask you, Credit or debit?
If it’s a credit card, the answer is easy: You say credit and sign for the purchase. But if you’re carrying a debit card, the right answer to the question may be counterintuitive — we recommend selecting credit.
Credit and debit cards use different networks to process your transaction. If you say “credit,” you’ll have to sign for your purchase, which is transmitted over Visa’s or MasterCard’s network, though the money still comes out of your bank account.
If you say “debit,” you’ll probably be asked to punch your PIN into a keypad. So you punch in the number, and the money comes out of your account. Often, it
comes out several hours faster this way than if you sign for the debit card purchase.
But there are some good reasons you should use the credit network when making purchases with your debit card:
• If your debit card earns rewards, you may only get them when you sign for purchases.
• Visa and MasterCard will insure purchases that you sign for, just as they do with purchases you make on a credit card.
• Some banks charge you 50 cents or $1 for using your PIN at the register.
Banks make more money if you sign for a debit card purchase because merchants pay more to use the credit-card network than they do to use the various PIN-based networks. It does save the merchant some money to use the PIN, which can lower prices for everyone at the store over time. Beyond that, however, we can’t think of any reason to use the PIN.
Debit Card Security
Keep track of your balance and report strange activity as soon as you notice it.
If someone steals your card and manages to use it, your money is protected to varying degrees depending on how long ago it happened. By law, the theft cannot cost you any more than $50 as long as you notice it within the first 48 hours and $500 if you don’t figure it out for up to two months. After that, there’s no limit on your loss – you could lose everything in your account.
Given how much that troubles people, Visa and MasterCard, whose networks are the backbone of the debit card purchasing framework, promise zero liability. That means you’ll get all your money back if a thief goes after your account and signs for purchases (rather than using your PIN).
The bigger problem here, however, is that the money stays gone from your account while the bank investigates. That could take a while. Meanwhile, checks might bounce and billers who automatically take money from your account each month may find nothing there. And that could have a negative impact on your credit report.
If you’re not going to use your debit card to make purchases, ask for just an ATM card without a Visa or MasterCard logo. This is a fine idea for people who don’t want to use their debit cards for anything but the ATM.
But banks don’t want you to have this sort of card. Remember, they make more money when you sign for purchases, so when you open a new account, they send you an ATM that has the Visa or MasterCard functionality. Their hope is that if you have it, you’ll eventually use it.
Some debit cards reward your spending like credit cards do. You can get free travel, frequent-flier miles, merchandise or cash back. You might need to spend $25,000 to $50,000 to earn a free plane ticket, depending on the program (some of them charge fees so that you can earn rewards more quickly).
But treat these incentives as an afterthought, not a major concern. The most lucrative debit-card rewards programs are still worth less than the stingiest credit-card rewards program. Debit cards give less away because people with debit cards don’t generate as much profit as folks who are paying off $10,000 of debt at 18% annual interest.
Banks, however, have realized that they can make more money from your debit transactions by automatically giving your account overdraft protection. Once they do, if you put $100 on a debit card but only have a $50 bank balance, they might let you make the purchase. But the bank will also hit you with an overdraft fee, plus charge you interest on the $50 of credit they effectively extended to you.
Some people like overdraft protection, because it can keep you from accidentally bouncing a check (or otherwise overdrawing if, say, the cell phone company automatically takes its bill money out of your bank account each month and your paycheck fails to come through one time, leaving you without enough funds to cover the phone bill).
If you don’t want overdraft coverage, you may be able to turn it off if you ask the bank. But keep an eye on your monthly statements to make sure it’s really gone.
If you bounce a bunch of checks or otherwise make a mess of your account, this will go down on your permanent record at the bank. It’s a different record than your credit report, though it could make it impossible to get another regular checking account for years afterwards.
Your Debit Card and Your Credit
If you have overdraft protection, then run up a huge balance and don’t pay, this could affect your credit score.
If you don’t keep a lot of money in your checking account, you should indeed avoid using debit cards at gas stations, rental car outlets and hotels.
When you use a debit card in these places, they will often place a hold on some of your funds – often for many times what you actually spend (or intend to spend, in the case of a three-night hotel stay or car-rental booking). The reasons are a bit complicated; there’s nothing you can do about it, however, and merchants don’t necessarily tell you they’re doing it.
It’s better to use a credit card for gas, hotels, and rental cars. It’s probably wise to use a credit card at unfamiliar retailers, for instance those in a foreign country or online. That’s because the credit-card dispute process is more consumer-friendly. After all, you’re not fighting to get money back that you already paid, so long you dispute the charge before you pay your bill.
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