Sunday, September 1, 2019

Should You Use A Debit Card?

Debit cards can be useful, but they do have their pitfalls.

Back when I started this blog, I switched to using a debit card in order to avoid adding any more balance to my credit card. I was experiencing a credit card crisis in my life and adding charges to a credit card really makes that worse.  Since it is "revolving credit" when you make more charges to a card (for daily living expenses) the interest keeps piling on, and you never pay off the balance.

The debit card is really just like writing a check, in that you were taking money out of your checking account to pay for something.  In fact, under Check-21, writing a check is no different than using a debit card - you are merely authorizing the bank to make a debit from your account, in both cases.

There are some pitfalls to using a debit card, however.  As I noted earlier postings, companies often put holds on your debit card when making charges.  A couple of decades ago, I ran into this with my local Chinese restaurant, where the lady who ran the restaurant, who's a very sweet person, kept swiping my card and didn't understand why it didn't go through.  She ended up putting five holds for $25 on my card, which at the time meant that my mortgage payment bounced.

My finances are a little more secure since then, but it illustrates how a debit card can be problematic, particularly if you carry a low balance.  Just like a credit card, you have to watch your debit card like a hawk, make sure that somebody doesn't screw things up by putting unnecessary holds on your card. In that regard, debit card is a really bad idea for renting a car, for example, because they usually put a huge hold on your account which ties up all of your cash.  Even buying gasoline is problematic, as they will put a hold of $100 or more on your card, until you finish pumping.  Don't have $100?  You have to run the transaction inside for a fixed amount.   In Canada, many pumps ask you how much hold you want, first, which is a handy thing.  Saves a trip into the store.

Some credit cards do provide additional protection, for example, if you rent a car.  If you wreck the rental car, they may pay for some or all of the damage.  I would check the fine print on your credit card agreement before relying on this, however - not all cards provide this protection.  Also check the fine print on your car insurance agreement before relying on that to insure a rented car.  Often, if you don't obtain collision and comprehensive coverage on your primary vehicle, they won't extend this coverage to rented cars.

Some folks argue that you should use a credit card instead of a debit card because the use of a credit card will improve your credit score and you'll get all these juicy rewards for using a credit card. These are sort of specious excuses and examples of how the credit card industry tries to lure people into a deadly trap. While both arguments are somewhat true, there are pitfalls to them.  If you are the type of person who has gotten themselves into debt trouble, you're not going to improve your situation by charging more things on your credit card.  Similarly, if you're paying 25% interest on a credit card, the rewards are not going to wipe out that interest charge.

Others, such as famous fraudster Frank Abignale, argue that debit cards are the "worst thing" ever given to consumers.   If someone steals your debit card number (as happened to me) they can drain you bank account overnight!  While that might be possible, your actual exposure isn't as dramatic as Mr. Abignale suggests (and for some reason, his article seems to concentrate more on his bailiwick, check fraud).  The FTC site shows that your actual exposure, in most cases, is $50 - maybe $500 if you forget to tell the bank about it.  His comment about "draining bank accounts" leads me to believe he doesn't know what he is talking about - or is shilling for the credit card companies.

My losses from debit card fraud?  Zero dollars and zero cents.   Bank of America covered even the $50 maximum I was responsible for.  But that doesn't mean debit cards are 100% safe, either.  Nor do I suggest you use them for everything or that everyone use them.  But there may be situations where certain people could benefit from using them for everyday purchases.

NOTE:  One reason I was able to detect fraudulent charges on my account is that I had all notifications turned ON, so I get a text or e-mail (or both) whenever any charge is made to any of my credit cards or any debit from my checking account.  There is no reason NOT to use this free service offered by almost every bank.

There are of course, there are differences between the results of debit card and credit card fraud. And perhaps the credit card industry enjoys this as it forces people to use credit cards over debit cards. When travelling overseas, most merchants will present you with a portable card scanner.  You're supposed to enter your credit card and pin number which secures the transaction.  For some reason, American credit card companies have decided that they don't want to use this technology in the United States. Actually it's not for some reason, but the reason why is money, and lots of it.  They make more money (2-3% on each transaction) on "signature" transactions than they do on PIN transactions (where they are paid a fixed amount per transaction), because PIN transactions are secure.  Thus, they tolerate a huge amount of credit card fraud because they make an awful lot of money on these transactions  If we went to a chip and PIN solution, the credit card companies would be starved for revenue.

Thus, they expect an awful lot of fraud.  And when credit card fraud occurs, it's usually pretty painless for the consumer. The credit card company will absorb the charges (or reverse them), and you are not responsible for any illegal charges to your credit card.  I have discussed this in the past - it is a painless procedure for the credit card holder.  And that's why the credit card companies do this, to encourage you to use credit cards.

If you use a debit card it's a little more difficult. You may have to file a police report regarding the illegal charges. Money may be held in your account for days or even weeks. You are technically liable for the first $50 in fraudulent charges, although most banks will waive this if you catch the problem in time and file a claim along with a copy of their police report.  But it is a lot more hassle than with a credit card, and perhaps this is by design.  Bank of America wants me to use a credit card because they score 3 to 5% on each transaction. Where is with a debit card they get a measly $0.22.

Of course, one alternative would be to use prepaid credit cards (which are actually prepaid debit cards), but I think those are overpriced.  If you have trouble controlling your spending habits, a prepaid credit card or a gift card might make sense.  It prevents you from spending more money than you have.  The problem with these, is that they are usually fees involved, and the fees are often quite steep.  Even to check the balance often costs money.

UPDATE:  Many online sites which want subscriptions (e.g., negative option) will not accept prepaid debit cards, and/or the prepaid debit card cannot be used for online purchases.  Check this out before you "buy" a prepaid debit card.  I tried to use one for Sirius XM and it was a no-go.  And just because they can't negative-option charge your prepaid debit card doesn't mean you still owe them money (in their minds, at least!).   Using a debit card for online purchases or subscription services (particularly negative option types) is suicide in my opinion.

So what good are debit cards?  Well, I can tell you what they're not good for.  A debit card is a poor choice for renting a car.  A debit card is a very bad choice for use on the internet.  Many, if not most card fraud occurs over the internet. In both instances where I had a credit card and debit card information stolen, it was from a car parts company that I bought BMW parts for over the Internet. They were hiring ex-convicts to pick parts for them and then gave them copies of the order, including credit card information, expiration dates, CVV2 numbers, and complete address and phone numbers. The ex-con then filled the order and photocopied the order forms that sold the information to a friend of theirs, who then committed debit and credit card fraud.

Card fraud can occur in personal transactions. In some restaurants, in particular, when a waitress or waiter walks away with your card and it goes into a back room, you have no idea what's really going on.  But at least in those situations you can sort of control things by not letting them walk off with your card.

For ordinary transactions, like buying gasoline our groceries, where the credit card machine is right in front of you, debit cards are at least somewhat more secure.  It's a lot harder to steal card information from a point-of-purchase machine, despite the scary arguments you've heard.  Yes, it is true that some people have tried to put skimming devices on card readers at gas pumps, but mostly this has been overseas.    Usually skimming devices are attached with velcro and can be easily detected.  In all my years of travelling I've yet to see one.

So when do you use a debit card?  Well if you find yourself in credit card trouble, switching to a debit card can be a way of putting a hold on further credit card charges.  Use the debit card and learn to use it responsibly by checking your balance everyday and keeping track of your purchases.   Work to pay off your credit card debt, entirely.  And don't use the same account for your daily purchases as you do for your rent or mortgage payment.  If you "suck dry" your debit card account, a simple hold or two could cause checks to bounce.   Keep that stuff separate - as I learned the hard way.

Once you get your personal financial situation back in shape, maybe then and only then can you think about going back to using a credit card.

But what about rental cars? What about restaurant meals?  What about airline tickets?  Well, if you are in credit card trouble, maybe you shouldn't be doing these things anyway.

Debit cards could be useful, in certain circumstances.   They are not as wildly dangerous as Mr. Abginale suggests.  But, like a credit card, they need to be watched - like a hawk.   You should check your balance daily which isn't hard to do with a cell phone these days.   A debit card could be a useful crutch for people who have gotten into credit card trouble.   Of course, if you don't have those sort of problems, then maybe a debit card makes less sense for you.

Today, I keep my debit card in the safe.  The only time I use it, is as an ATM card.

UPDATE:  This recent article illustrates why, if you use a debit card, you should not use the same account for paying  your mortgage.  Also, it illustrates why "overdraft protection" is a really, really bad idea.   The fellow was mistakenly charged $68,000 for a beer, and it will take a week to sort out, if not more, and meanwhile, his mortgage payment bounced.

He signed up for "overdraft protection" which is touted as a way of avoiding bounce fees (or having your credit card declined) but in reality, it is a way for the bank to charge you a huge fee for covering an overcharge - in this case, over $1700 in overdraft "protection" fees.   He would have been better off having the charge declined which would have solved the whole problem before it started.

Debit cards can be dangerous - if used carelessly.   Set up a separate account for your beers - separate from your mortgage and other bills.  And never sign up for overdraft protection, unless it is the kind that merely moves money from a small savings account!