Why Debit Cards Scare Me
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I’ll be honest, debit cards scare me. I know that I am probably in the minority on this; if my close friends are any indication, debit cards are quickly replacing cash as the average student’s primary means of payment, and are perceived as responsible, safe, and easy to use. But while there are certainly benefits to debit cards, compared to credit cards, there are risks, too. What scares me?
Bankrupt Airlines
I cringed the other day when a friend bought an airline ticket home using his Visa Debit Card. Within the last month, Aloha Airlines, ATA Airlines, and Skybus have all completely ceased operations. For customers with tickets on those airlines, the airlines themselves gave no refund option — the only advice was that if you purchased using a credit card, you could contact your credit card company for a full refund. Otherwise, out of luck.
If you have the choice, you should always purchase travel arrangements using a credit card. Over at Money Blue Book, Raymond wrote an excellent post recently covering this very topic, “Always Pay By Credit Card to Protect Against Airline Bankruptcy Loss,” which does a very detailed job of explaining how credit cards offer federally-mandated protections that you just don’t get with debit cards. With a credit card, under the Fair Credit Billing Act, you can dispute charges within sixty days for services that were not delivered as agreed to, and get a full refund. With debit cards, you simply don’t have the same protections; some banks may offer more limited debit protections, but these policies are not standardized and are on much more uncertain territory.
These protections, of course, do not just apply to airlines, but also to any transactions where the goods or services weren’t delivered as agreed.
The Blank Check
The other major factor that scares me with debit cards is how they are directly tied to your checking account. Now, many people consider this to be a major positive over credit cards — with debit cards, you pay immediately out of money you currently have. However, consider the danger if you lose the card: the thief has the ability to drain all of the money in your checking account. For me, that is a scary proposition.
Most banks these days try to reassure you with zero liability protections. Bank of America says that it guarantees “reimbursement for fraudulent transactions when reported within 60 days from statement date.” Chase has a similar claim, promising that “your account will be credited by the end of the next business day as we resolve the unauthorized transaction dispute.” What is the problem, then?
The problem is that your money is still taken out of your account to start. Unless you are in the habit of checking your bank account every day, it may take a while to realize that someone has gotten your debit card number. During that time, your account could have been wiped out, and you might be bouncing checks to utilities, having debit card transactions declined for insufficient funds, or not have immediate access to that money in an emergency. Its true that in all likelihood the bank will get you your money back quickly, but you may still have quite a headache to deal with. This is where a credit card comes in handy; you always get to see the final bill before paying it.
Other Downsides
There are certainly other downsides and risks associated with debit cards. A little while back there was an interesting article over on MSNBC.com called “Read this before you swipe! Debit-card dangers” that listed several risks. I recommend it for reading, but to quickly list the downsides to debit cards they covered:
- Lack of credit-building with debit cards
- Lack of strong fraud protection
- Dangers with lost or stolen cards
- Weakened position in merchant disputes
- Missing out on generous credit card rewards
- Not as many added services as credit cards
- Not as easy to track spending fees and overdrafts
Some of these are more important than others, but you should be aware of all of them.
Do You Really Need the Debit Card?
Personally, I make responsible, heavy use of my credit cards for almost all of my purchases, and so I look at a debit card as a walking liability in my wallet. Not many people realize this, but most banks still give you the option to have an old-fashioned ATM card rather than a debit card — I recently have begun doing this. You simply need to call up your bank and request the change. The advantage is that you still have a card you can use at the ATM to withdraw money, but it does not have a Visa or MasterCard logo and cannot be used as a debit card — and so if it gets lost or stolen, its much safer.
I am not saying that debit cards are necessarily evil, but I think it is important to be aware of the risks and dangers associated with debit cards, and to take the proper precautions to guard yourself.
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I’m not a big fan of debit cards either… using them generally doesn’t seem to benefit me much more than using cash (I get something like half a percentage point of cash back with my debit card). And there’s always the possibility that I could screw up and overdraw my account - in fact, I think that’s one of the main reasons the banks like issuing these things.