June 16, 2008


The pros and cons of credit cards are well documented and seem to be understood [although many people continue to fall into the CC trap]. In a stark contrast to credit cards, debit cards enable consumers to make purchases with existing money (checking account), avoiding the prominent problem that credit cards promote (get today, pay for it later).

Although debit cards typically look like a credit card (Visa or Mastercard logo on it), that is where the similarities really end. The Privacy Rights Clearinghouse (a consumer rights organization) does a great job outlining the drawbacks of debit cards ...

- Do not have the same legal protections as credit cards. Legal liability with a lost or stolen credit card is a maximum of $50. With a debit card, federal law limits your liability to $50 only if you notify your financial institution within two business days of the theft ($500 if you don't meet the two day deadline). Experience has found that in many instances, although stolen funds are eventually replenished, the compromised funds are usually not available during the interim (a deficiency most people aren't prepared financially to deal with effectively).

- Consumer protections for debit cards are not as strong as those for credit cards. Because funds are withdrawn from your account quickly, you aren't able to 'stop payment' during a dispute.

- Payment acceptance. Many large rental car firms [namely Hertz and Avis] have stopped people from renting cars using debit cards (you can pay for the rental after, you simply can't reserve the car with a debit card).

- Merchant 'blocking'. A common practice where merchants withhold an amount on a debit card until the transaction is fully processed. Hotels, gas stations and rental car agencies are the most common culprits of this practice. Because the "held" amount is 'unavailable' in your account, it can cause the account to be overdrafted.

- Can be charged for 'potential' overdrafts. With signature (non-pin) transactions, the debit is processed through a credit card payment system [meaning the money will take a couple days to clear your account]. Even though the money is 'physically' in your account, some banks will charge an overdraft fee if the pending activity exceeds the available balance, even if the balance is sufficient to cover the debit when it finally posts.

- Debit cards aren't necessarily a way to avoid debt. One common reason debit cards are favored by some over credit cards is "fiscal responsibility" - not allowing one to spend money they don't have. The reality? Some banks will process debit card charges despite insufficient account balances, creating overdraft fees and undermining your management system.

- Debit card usage. Many card issuers limit the number of uses each month; after that, fees are charged. Some will enforce maximum daily spending limits.

- Credit. Using a debit card to the exclusion of a credit card can affect your creditworthiness ... a debit card won't build your credit. That may or may not matter to you, but is worth consideration. Obviously good credit is important when searching for credit (car loan, mortgage, insurance, etc.).

To learn more, visit: http://www.privacyrights.org/