Be Cautious When Using Your Debit Card

by Hank Coleman

Using a debit card that is connected to a checking account poses more risk for the consumer than using a credit card, especially if the card is lost or stolen. According to the Fair Credit Billing Act (FCBA), your liability under federal law for unauthorized use of your ATM or debit card depends on how quickly you report the loss. If you report it missing before it is used without your permission, the card issuer cannot hold you responsible for any unauthorized transfers. If you do not report the theft fast enough, your liability under federal law can increase substantially.

If you report the loss within two business days after you realize your card is missing, you will not be responsible for more than $50 for unauthorized use. However, if you do not report the loss within two business days after you discover the loss, you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. Therefore, you must be extra cautious when using a debit card for retail and gas purchases or buying online.

For example, when using your debit card at a retailer, be careful about the POS fee. A POS fee or point-of-sale fee is typically charged when you use your PIN or select “debit” on the retailer’s card machine when you are making a purchase. To avoid this fee, it is best to treat the card as a credit card and choose “credit” for your purchase before you sign off on what you buy. Check with your bank or read your application prior to applying for any debit card to make sure whether or not the bank will assess this type of fee.

The main risk of using a debit card though is the fact that it is directly connected to your checking account. Therefore, your financial resources become much more vulnerable. For example, if the card is lost or stolen, you run a greater risk of losing a substantial amount of your own money. As a result, you can be deprived of your financial security much more readily.

You are also at more of a disadvantage when you use the card at certain retailers, especially gas stations. That is because they are able to authorize and reserve a specific amount of money in your account to make sure you will pay. For instance, if you make a purchase of $30 and they block your account for $50, in many cases, you might not have access for the remaining amount for a couple days. As a result, you run the risk of inadvertently writing checks above what you believe is available in your account. Therefore, you may either incur a number of overdraft charges, or if you have overdraft protection, you may need to pay the bank back a sizeable amount of money.

Because you are much more likely to bounce checks, it may better to put small purchases on your credit card versus your checking account’s debit card. For example, is it really worth paying $3.00 for a sandwich at lunch with a debit card only to incur an overdraft charge of $30 later? My wife and I personally use an American Express charge card that requires us to pay off the entire balance at the end of every month instead of using a debit card. Even if you have to pay a yearly fee, say, on your credit card, using credit does provide more security with respect to keeping the money you earn in your own hands. Therefore, it is more economical and safe for regular, everyday purchases.

Some may want to avoid the extra interest charged for using credit. Yet, it still makes better sense to select a credit card that rewards you for paying off your balance each month and putting the cash you would normally spend from a debit card into a CD or high-yield interest account.

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