As a society, we love the convenience that comes with swiping a piece of plastic. However, many of us are wary of credit cards. Debit cards, though, are connected to your checking account, so, in theory, what you spend is what you already have in the bank. As long as you are careful to record your transactions in a ledger or using personal finance software, you can still enjoy the convenience of plastic without the worry of debt. However, it is important to understand that debit cards come with their own risks:
One of the main issues with debit cards is the hold. This happens mainly at gas stations, rental car places and hotels. It’s one of the main reasons that using a debit card for travel is such a pain. When you use your debit card, there are establishments that place an extra hold on the money in your account. At the gas pump, the authorization is high so that you can get the amount of gas you need. At the hotel, extra money is claimed from your account, just in case you order room service, break something or wrack up other “incidentals.” While your money won’t ultimately be taken from you, while the hold is in effect, your funds are unavailable. That means you could end up with overdraft charges or other problems. You think your money is there, but it isn’t accessible to you.
Another issue is the way fraudulent charges are handled on a debit card. While your losses are limited to $50 — like a credit card — there is a catch. You have to let your bank know that there is a problem within two days of learning of the theft. If you don’t keep tabs on your account, you could lose your chance to limit your losses. Make sure that you understand the fraud liability terms associated with your debit card.
On top of that, with your debit card the money is gone immediately. When a credit card is used, and you discover problem charges, you can have the payment stopped. However, since the debit is taken directly from your account, the money is gone. While you may not be liable for the charges, it can take weeks for the bank to review your situation and put the money back, leaving you without access to your money.
The issue is the same with merchant disputes. Once you pay with debit, the money is gone, and you have to fight hard to get it back if product or service you received is not what was promised. Meanwhile, you are out the money, which could affect your ability to pay other bills.
In order to protect yourself from these issues, you need to plan ahead. Make sure you have adequate money in your account to cover holds, or use a credit card dedicated to that purpose. Then pay off the credit card immediately so that you aren’t carrying a balance. Do what you can to protect yourself from fraud, by limiting where and when you complete debit transactions to avoid identity theft through such methods as skimming. If you have the discipline, you can do most of your spending with credit cards, paying them off as you go.
Another option is to use cash for most things, and to use secure third-party payment processors (like Amazon Payments, PayPal and Google Checkout) when you are shopping online. However, many people find that carrying large amounts of cash is dangerous itself, especially if your wallet is lost or stolen. Limiting the number of cards and amount of cash you carry can help you protect yourself, and that may mean carrying a credit card that you pay off every month.