Using Debit Cards: The Advantages and Disadvantages
Using debit cards is an easy way to draw money out of your banking account. They can be used for purchases, instead of writing out a check, which is time consuming and frustrating to people standing behind you. One swift swipe of your card will help you get out the door in a hurry. They are a convenience of modern times that allow a person to access their bank accounts from just about any location!
Advantages of Using Debit Cards
Why are so many people making the switch from credit cards to debit cards? Many people got left 'holding the bag' at the start of the recession. It was like being in the wrong place at the right time. They also don't want to wait for the bulk of credit card reform measures that will to go into place in 2010 and they learned an important lesson.
Trading credit for debit is a good way to manage tight finances during a recession. You don't create debt using debit cards and that's always smart if you have the money in your account. Most people got used to whipping out a credit card, and maybe got a little too comfortable with holding large amounts of debt thinking that the party would rock on forever.
Banks are looking to boost profits by reducing the risks of using debit cards and offering new perks for consumers who are willing to switch, such as rewards programs. And it's working. Debit cards today account for about half of all card transactions.
Debit cards are also handy to use. Two-thirds of American households have them. They are more convenient to carry than cash or a bulky checkbook, plus swiping a card is easier and faster than writing a check. In addition, there's no interest payments. The money is deducted from your account right when your purchases are made. You can also use your debit card to get cash back on any purchases, which save's you a trip to your bank or local ATM.
When you use a debit card, the money is immediately taken out of your banking account. With a credit card, there is a 'float period' between the time you make your purchase and the date your credit card bill is due. This means that you earn a little bit of extra interest on the money sitting in your bank account.
You don't build credit using debit cards like you do with credit cards though. That means your good habits go unnoticed by credit lenders. However, by using your debit card instead of your credit card, you can avoid running up a big bill and reduce the chance of making late payments, which only harms your credit. If you have trouble making payments on time, using a debit card can be highly beneficial to you.
However, there are some risks when using debit cards that can cost you money that you should be aware of. Using debit cards makes good sense but there is a downside to them. In fact, there are some surprising downfalls to using debit cards that you might not expect.
Disadvantages of Using Debit Cards
A debit card is like a blank check, so you need to guard your card and the number on your card. You also need to keep track of your card. If your card gets stolen, a thief can empty your bank account in minutes. Thieves don't even need your card, as long as they have your name and card number. They can shop online or over the phone with your card information. If your debit card is lost or stolen, call your bank immediately. Follow the phone call with a letter. Protect your debit card by holding on to your receipts and checking them against your bank statements.
Banks prefer that you use the credit option when you use your debit card. Why? Because they make more money in fees. For a $200 transaction, for example, a bank could make $1.99 if you choose the credit option and you may or may not have to sign for the transaction. That's more than three times the 60 cents they usually make from customers who choose the debit option and enter a PIN number.
Credit cards often come with added benefits, such as extended warranties on products purchased and insurance for rental cars and airline travel. Debit cards don't offer these services.
Debit cards have overdraft fees just like overdraft on credit cards. Banks are going to collect nearly $40 billion in overdraft fees this year and a lot of those fees will come from people using debit cards, when the money's not available.
If you're used to using debit cards for every single purchase you make, you have likely been hit with a hidden fee. Debit cards are often touted as a great way to manage finances because they don't have interest charges and other fees, but if you go over your limit you will end up paying sky-high interest.
For example, a Federal Deposit Insurance Corporation (FDIC) study found that a single $27 overdraft fee (that a customer would have to repay in two weeks on a $20 debit purchase), would incur an annual percentage rate of 3,520%. By contrast, penalty interest rates on credit cards generally run about 30%.
Debit cards do not give you the same fraud protection as credit cards do. Federal regulations are very different for debit cards than for credit cards when it comes to financial liability. When using a credit card, you are generally responsible for the first $50 of fraudulent charges, whereas your liability on many debit cards can be as high as $500. A recent study in 2007 put fraud losses from debit-card purchases at $245 million.
In addition, with credit cards, you have leverage if something goes wrong, such as billing errors or charges for items you never received. There are quite a few ways to work with some credit card companies to get charges waived, especially if it's your first offense.
However, with a debit card, liability varies depending on when you report the loss: within two days the loss is capped at $50; report within 60 days - $500; beyond 60 days, there's no limit. The loss is all on the consumer.
Debit cards are offering some rewards now, but they are far fewer and less valuable then rewards that credit cards offer. For example, to get $100 in cash back rewards for credit card purchases, you have to spend $10,000. To get same amount of cash back with debit cards, have to spend twice that much or $20,000.
