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Using Debit Cards Wisely For The Most Benefit

March 2009debit-card

Debit cards, also known as check cards, offer convenience in managing personal cash flow. In just a few days, I’ve observed people using debit cards to pay for purchases ranging from a pack of gum, bottle of water or cup of coffee to larger purchases such as weekly groceries, a tank of gasoline, or a set of new tires. According to surveys, many people are embracing debit cards because they felt that they can better track where their money goes and that they have less risk of incurring debt because purchases are deducted directly from their checking accounts. Used wisely, debit cards can offer these benefits and more. Like any tool, however, debit cards may present some pitfalls to users who aren’t careful or adequately alert. In this review, we’ll look at ways to ensure wise use for the best benefits from debit cards.

How debit cards work—a quick review.

A debit card, or check card, enables the holder to make a purchase or withdrawal from his or her checking account instead of using a paper check or ATM-only card. Most debit cards (as opposed to ATM-only cards) are branded with a Visa or MasterCard logo and can be used just as a credit card is used; again, the difference is that the money for purchase or cash withdrawal comes directly from the holder’s checking account, where the credit card purchase/cash advance is a loan from the card-issuing company. Depending on the type or place of purchase, using a debit card may require you to enter a PIN (personal identification number) or to sign your name (a signature purchase); PIN and signature purchases for the same account/card may have different terms (including fees and security protections). Overdrawing an account using a debit card typically incurs penalties or fees just as bouncing a check does. Smart consumers know the terms of their accounts and associated debit cards.

Tips for using debit cards wisely

Some of the most obvious benefits of debit cards are convenience, wider acceptability than checks, a record of purchases in account statements, and potentially lower costs than paper checks (no checks to buy). But failing to manage accounts and debit cards wisely can also be costly. In a 2008 analysis, the Center for Responsible Lending found that consumers paid $17.5 billion in overdraft fees for $15.8 billion in credit. The largest single cause of overdraft fees was debit card purchases at point-of-sale machines (such as gas pumps, swipe-and-go purchases, etc). Managing your checking account and debit card wisely can keep you away from such pitfalls and enjoying the benefits of the debit card. Here are several pointers.

Tips for using debit card wisely

  • Know the terms of your checking account and associated debit card/check card.
  • Keep track of your balance and your account.
  • Guard your card like cash and report fraudulent activity immediately.
  • Be selective where you use your card.
  • Know the terms of your checking account and associated debit card/check card.
    • Many charge fees for using the card to make withdrawals from non-network ATMS; what ATMs are non network and what are the fees?
    • What kinds of overdraft protection are offered and what are the fees? Options may include having your checking account linked to a savings account, credit card, or line of credit or placing an automated overdraft protection program on the account. In many cases, institutions using the automated overdraft protection place it on the account with out the consumer’s knowledge or direct request. Typically fees for automated overdraft protection are higher than for those such as linked account protection; the CTF report found an average fee of $34 and a 2008 FDIC report found fees ranging from $10 to $38, with a median fee of $27. A typical fee for a transfer from a linked savings account was $5. (Bayport offers several overdraft plans; potential transfer fees and overdraft fees are listed in the fee schedule.)
  • Keep track of your balance and your account. Do you record every purchase or withdrawal you make with your debit card in a paper or online register? Did you really write down that morning cup of coffee at Starbucks, that snack from the convenience store, the lunch you grabbed on the concourse as you rushed to catch your flight? If you’re like me (and my examples) you don’t. Most of us rely on regularly checking transactions in our accounts online. With some precautions this approach can work, although the gold standard is still daily recording of all purchases using the receipts that you saved. The precautions:
    • Check your balance and account daily. Most but not all transactions post immediately or within a day to your account.
    • Know when direct deposits are made and check them. Let’s say that your monthly paycheck or pension check is scheduled for direct deposit to your checking account on the 25th of each month. Don’t use your debit card to draw against that amount until you’ve confirmed that the deposit has posted.
    • Keep a cushion in your account. I recommend keeping at least $100 at all times in your account as a cushion. Mentally keep a tally of that cushion by subtracting the amount of $100 plus any still-to-come automatic payments (monthly mortgage, insurance and bills) from the balance each day.
    • Understand how your financial institution pays transactions. If several small purchases come in earlier on one day and a large purchase later, some institutions pay the largest item first then the smaller ones even if the smaller ones arrived first during the day and paying the large one will result in overdrafts on the smaller purchases. Keeping a cushion in your account neutralizes this
  • Guard your card like cash and report fraudulent activity immediately. By law, debits cards are protected to a degree against fraud, but the protections are not as strong as for credit cards. Because any use of the debit card draws directly from your checking account, vigilance is the watchword.
    • By law, if you report loss of your debit card or fraudulent charges to your account using the card/card number within two days of the fraud, you are responsible for only $50 dollars, within 60 days for only $500, and after that for the whole amount.
    • Visa-associated and MasterCard-associated debit cards (they will have the logo on the card) typically offer “zero liability” on signature-based transactions on debit cards as they do for credit cards. An important caution: They typically do not offer this protection on PIN transactions. This is a good reason to use your debit card as a signature card whenever possible (just punch “credit” on the keypad).
    • Although you may be protected against greater loss in the long run, in the short term, debit card fraud will have taken money directly from your account. Financial institutions may take from days to weeks to investigate and restore your money, depending on specific circumstances. Having to wait for your money may create financial pressures and hardships.
  • Be selective about where you use your card. Financial institutions report that most difficulties with debit cards seem to arise when consumers use the card in actual stores or online merchants with which they are not familiar.
    • Many personal finance experts continue to recommend that you use credit card for online purchases because if you dispute a purchase or discover a fraud you can dispute the charges with the card-issuer which must restore the money to your credit account while it investigates the charges. No money from your personal account is at risk or missing.
    • Some merchants may put a block on a certain amount on your account for certain reservations or purchases. For this reason and others, using a credit card when making hotel or rental car reservations is a smart move.
    • My recommendation: Keep a little cash in your pocket for small, incidental purchases, particularly in random, incidental places. To control spending, give yourself a weekly “allowance” and don’t spend more.

Debit cards are a great convenience—my life wouldn’t run along so smoothly without it. Following the tips above can help ensure that you too enjoy the debit card as a financial management tool and avoid potential pitfalls.

For more information

Study of Bank Overdraft Programs from the FDIC

Out of Balance from the Center for Responsible Lending

Reviewed and updated August 2014.

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