5 reasons using a debit card is dangerous

Close-up of woman?s hand holding plastic card while going shopping in the mall

Last Updated Feb 8, 2011 3:33 PM EST

(MoneyWatch) More people are using debit cards than credit cards these days, which has spurred the Federal Reserve to push ahead on restricting the amount banks can charge merchants for each debit swipe. While banks gripe and merchants rejoice about the fledgling Fed rules that were put in place in late 2010, budget-savvy experts consider the rise in debit card usage good news because it means that shoppers are attempting to spend no more than they have in the bank.

The bad news is that using a debit card is just not as safe as using a credit card — even after new rules went into effect to restrict overdraft charges caused by debit purchases. What makes using a debit card so dicey?

Phantom charges

Traveling? Be careful about pulling out that debit card. We all know that when you use your credit card at a gas station or hotel, they charge the card when you leave for the amount of the purchase. It doesn't work that way with a debit card.

When you check into a hotel with a debit card, many hotels put a "hold" on money in your account. That "hold" starts the moment you check in and can be for more than the amount of the room multiplied by all the nights you're planning to stay, too.

How can it be for more than you'll be spending? They argue that you may decide to use the mini-bar or charge things to your room, so they're just protecting themselves from your potentially free-spending ways. Meanwhile their hold, while temporary (and often arbitrary), can cause devastating results for you. One consumer complained that a phantom charge -- a hotel hold for a room that was eventually paid for with cash -- cost him $140 in overdraft fees because he was unaware that his stated bank balance was made partly "unavailable" by the undisclosed hold. That caused his regular bills, which were scheduled to be paid while he was away, to bounce.

Gas stations also commonly place holds of $50 to $75 on your bank account when you use a debit card to purchase gas. These holds can last for days after your visit to the gas station. And it doesn't matter that you only put $10 of fuel in the tank to top off the rental car.

If you use your debit card at a gas station or hotel, find out what their hold policy is and make sure you have plenty of money in your account to cover it.

Overdrafts

Last summer, the Federal Reserve Board enacted new rules that stopped banks from automatically enrolling consumers in overdraft plans that would subject them to high fees when they used debit card for purchases that exceeded their balance. Banks have gone to great lengths to actively enroll people in these costly overdraft plans since then. If you were gullible enough to sign up, you could be at risk of overdrafts if you use a debit card anywhere. If you weren't, any transaction that exceeds your balance should be declined.

The only catch: Some debit transactions -- any debit transaction that does not require a pin number, for instance -- aren't recorded immediately, opening the door to overdraft charges. The good news here is that you may be able to dispute these overdraft fees, saying that they should never have been levied. The bad news? Dickering with your bank is not fun.

Merchant disputes

Let's say you're doing some shopping online and the goods show up damaged -- or don't show up at all. When you've ordered using a credit card you have two things going for you: You're usually billed some weeks after the purchase, giving you a chance to receive and inspect your order before you pay. You also have the right to dispute a charge -- and not pay that portion of your bill -- when something shows up damaged or the merchant fails to deliver it.

When you use your debit card, the amount of the purchase is subtracted from your account immediately -- often long before you've seen the goods. You then have to fight with the merchant to get your money back. If this was a reputable merchant, you shouldn't have a problem. But good luck if you're dealing with a crook.

Account safety

Like credit cards, federal law limits your liability for fraudulent use of your debit card to $50. But that's only if you report the card stolen within two days of discovering the theft. If you take an extended holiday and don't check your statements for a couple of months, the crook can drain your bank account and there's nothing you can do about it. If there's any chance that somebody could steal your debit card, you need to keep close and regular track of your bank balance and dispute any unfamiliar purchases promptly.

Pay Now/Reimburse Later

If someone has fraudulently used your credit card, you (or your credit card company) are likely to spot it before you get the statement. That means you're never out the money. You dispute the charge, subtract the disputed amount from your bill and let the credit card issuer worry about it. With a debit card, the stolen money may have already left your account. That means you have to dicker with your bank to get reimbursed. Some banks are quick and helpful in resolving these disputes. Others? Not so much.

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