If you’ve ever paid for gas at the pump, you know that you swipe your card before pumping gas. The machine doesn’t know how much gas you are going to buy. As a result, it has to take a wild guess. It checks to see if you have at least $50 or $100 available in your account – in other words it authorizes a purchase. If authorization comes back, the retailer “blocks off” that $50 or $100 so you can’t spend it elsewhere.
You might only by $10 worth of gas. Nevertheless, $100 will be blocked off for several days. In a worst case scenario, you’ll end up bouncing checks even though you have the money – it’s just “not available”. This means that if you use your debit card for everyday purchases, you need to be careful. Two ways to protect yourself are:
- Keep extra cash in your checking account
- Use your PIN if you don’t have extra cash in your checking account
Note that using your PIN will make the transaction clear your account more quickly. However, there is a security issue. By entering your PIN number, you run the risk that somebody else will discover it. Thieves (or a hidden camera) may see which numbers you hit on the keypad, or the retailer’s device could give up your pin number – whether on purpose or by accident.
If your PIN number is compromised, scammers have direct access to your checking account. This is pretty scary! They can spend that money, or they may even create a fake ATM card make withdrawals. If they drain your checking account, you won’t be able to pay important bills. Of course your account may be protected from fraud, but you’ll have to go through some harrowing days or weeks without any money while the issue is resolved.
Your Rights With a Debit Card
You are protected if your debit card is used by a thief. However, you have to act fast. Compared to credit cards, debit cards carry a lot of risk. With credit cards, you’re limited to $50 of liability for fraudulent use. What’s more, the thief spent the bank’s money – he didn’t empty your checking account and cause you to bounce important checks (or rack up fees for overdraft protection).
With a debit card, you are protected as follows (source: federalreserve.gov):
Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of loss or theft.
If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit, if any.
Given the added risk of loss, plus the headaches of risking direct access to your checking account, I don’t think it’s worth it to use a debit card for purchases. Nevertheless, there may be times when it makes sense – if you can’t qualify for a credit card or if you want to help a youngster develop good habits.
The Price of Choosing Credit
Note that choosing credit drives up costs for retailers. They have to pay an extra 2% on everything they sell (plus taxes). Because money doesn’t grow on trees, they have to pass this cost along somehow. They do it by charging higher prices on everything, or by earning less and profits. If everybody chose debit, goods and services would likely be less expensive. However, the banks currently have the most power to influence our decisions. In their defense, they have the right to try and recoup costs – plus, you can always choose debit, pay a small fee, and feel good about it.
