Debit Card Downfalls

"Early Show" Financial Contributor Vera Gibbons Explains the Hidden Pitfalls of Using Debit Cards Instead of Credit

(CBS)  Trading credit for debit is an effective way to manage tight finances during the recession. However, there are some risks involved when using debit cards that can cost consumers money.

"Early Show" financial contributor Vera Gibbons explained there are some surprising pitfalls to using debit cards that you might not expect.

But why are so many Americans making the switch from credit cards to debit cards in the first place?

Many Americans, Gibbons explained don't want to wait for the bulk of credit card reform measures to go into place in 2010. Also banks, looking to boost profits, are reducing the risk of debit cards by offering new perks for consumers willing to switch, such as rewards programs.

And it's working, Gibbons said. Debit cards, she said, now account for about half of card transactions.

However, debit cards do have their pitfalls, such as overdraft fees.

Banks are going to collect nearly $40 billion in overdraft fees this year, Gibbons said, and a lot of those overdraft fees come from debit card purchases.

"If you are the type who uses debit card for every single purchase, you have likely been hit," she said.

Debit cards are often touted as a great way to manage your finances because they don't have interest charges and other fees - and can be an effective way - but if you go over your limit, Gibbons said, you are in essence paying sky-high interest.

Gibbons cited an example from a Federal Deposit Insurance Corporation (FDIC) study, which found a $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520 percent. By contrast, penalty interest rates on credit cards generally run about 30 percent.

And while debit cards are offering some rewards now, they are far fewer, and less valuable then rewards credit cards offer. With $100 in cash back rewards on credit card, you have to spend $10,000. To get same amount of cash back with debit cards, have to spend twice that, $20,000.

In addition, with credit cards the customer has leverage if something goes wrong, such as billing errors or charges for items never received - there are ways to work with the credit card companies to get that charge waived.

However, with a debit card, liability varies depending on when you report the loss: within two days the loss is capped at $50; report within 60 days, $500; beyond 60 days, there's no limit. The loss is all on the consumer.

Reloadable prepaid debit cards are also an option for consumers.

These cards are for the 80 million people who have little or no access to bank accounts, Gibbons said, and the industry is growing.

Last year, she said users loaded about $9 billion of these cards - but a lot of the money, she noted, went to banks. That's because fees quickly accumulate, including activation fees, ATM withdrawal fees, balance inquiries, and purchasing fees.

Also there is little to no maintenance and customer service, and there's also an inactivity fee if you don't use it for 60 days. The average cost per month, Gibbons pointed out, is $39 to $79.

[factsplease23]

I work at a bank and the expense offering debit cards out weighs the income we make off them. Many banks take the loss of debit card fraud and not sure if customers realize that. I think many customer think because we give them the provisional credit they think we have recovered the money from the merchant which in most cases is not true. But we are working on the new regulation where we cannot include ODP in the cardholders balances starting Jan. 1, 2010. I can guarantee you this is going to hurt many people who rely on the ODP when they are short money for gas, groceries, medicine, etc. This fee does not only apply to debit cards it also covers bad checks instead of returning checks and the customer then receives more fees and bad credit history from the return vs. paying the ODP fee. Feel fortunate that you do not have to use the ODP product but for those who do have to take advantage of it here and there appreciate it. I think this story if very one sided.

[eolsn00]

There has been a huge shift from credit spending as of late, for obvious reasons. The convenience factor is quickly disintegrating in America as more and more people are now living paycheck to paycheck. Before there was credit there was layaway, which is also making a profound comeback, as this is sometimes the only way some parents can afford to give their kids gifts this season, myself included.
The new credit card terms that begin in 2010 I think will hurt the credit card companies more than they think as more and more people make the switch to cash only.
Having said that, as tigger expressed earlier, too many folks rely on banks and financial institutions to manage their day to day money and get angry when thier own irresponsinility gets them into trouble with fees and charges. And yes, banks do make money on overdraft fees, and ATM charges, and over the limit fees. It is amazing that the credit card companies weren't making enough money already that they had to resort to all these outrageous fees. Would it not have been easier to deny or drop consumers who abuse the "right" to credit thereby reducing the need to recoup loss revenue due to the number of abusers of credit limits and non-payment? As I see it, credit is a privilege that must be earned, maintained, and respected. At the same time, the credit companies have to have oversight and be in business for the consumers, not the lenders.
But I digress. My own bank charges their own fees, which I have had to pay in the past, but my bank also re-imburses me for ATM surchages, and doesn't charge an annual account fee. I have the option of overdraft protection, but by agreeing to that I would be basically giving myself the o.k. to spend more than I actually have.
The less we rely on businesses and companies to do what we should be doing on our own the less power they will have over our lives. In reality, this issue is more about how we as Americans live as a whole, as a result of our individual decisions. And until the majority of us change our ways and thinking we will only be putting a band-aid on the subject and not dealing with the cause.

[billpl-2009]

banks don't make enough money on debit cards

they need you to go back to credit cards so they can pay back their bailouts

[tigger3268]

okay, honestly, that made absolutely no sense what you just said. I feel if you don't know what your credit line is on your credit cards or know how much money is in your bank account, then you aren't responsible enough to have either. It's your responsibility to keep track, balance, stay on top of your money before you leave the house. We are keeping the banks and credit card companies in business and what exactly are we getting out of it? I use my debit card as a visa card, I get reward points to spend on really cool stuff. No bills, no APR, no overlimit fees, no late fees. Pretty simple.

[45ford]

tigger - you hit the nail on the head. i don't believe there has ever been a time in society where personal responsibility and accountability has been so lacking.

[amundsend]

I wish CBS news would go further with it's stories. The economic tragedy was brought about by our collective goverment's changing banking laws to enable banks to gamble. We have now bailed out the banks from their gamble, however not one law enabling them to make bad loans has been repealed. The money has been given with no strings. Now all our taxes are going up to pay for these gifts. All US taxpayers are being penalized, and have no assurance the problem has been corrected. Banks continue to make bad loans, and these bonus' given are nothing but criminal. I think journalistic responsibility should include in depth reporting on these greivences, and remind our representatives that we the people are being poorly served.

[cateyes1960]

I just wanted to say that i don't agree with the credit card situation due to the fact i and several others have gotten serious overdrafts with the credit cards due to the fact you don't find out how much is left in your account for several days and if you go other places that day and spend you then go into overdraft mode as where dept soon as you make a perchase you can call and it gives you the exact amount right then so if you have more spending to do you know how much you are working with and this is good for people whom do not know math and can't fugure, so no i do not agree with credit card for those whom no no math, at least debt tells you right then what is left in your account for same day more spending instead of waiting several days to know the amount and for sure end up with several hundreds of dollars overdraft cause you don't know the amount in your account after the first transaction i have had to pay upto two hundred dollars overdraft with using credit card, no i will not use one for that if debt goes away i will no longer use a bank acount ill keep it all with me some how.sorry but that is my feelings on it. same with checks won't use them my husband will but not me.