As Americans try to recover from the credit bubble that has sent the financial markets in a tailspin, many consumers are reaching for their debit cards to make those every day purchases. In fact, Visa Inc, the biggest credit card network in the U.S., recently reported that consumers are spending more money with their debit cards as opposed to credit cards.
While it is true that debit cards provide consumers with a convenient method of payment and can help control spending, when used improperly, they can be even more detrimental then credit cards. Debit cards typically offer a lower level of fraud and theft protection then credit cards do, and they come with their own schedule of fees (many of which are significantly higher than the interest charged by most credit cards).
The bottom line on debit cards: They can be a helpful (and even profitable) financial tool, but only if they are used responsibly. So how can one maximize the use of a debit card? Consider the following tips:
Know the Bank’s Terms and Conditions
Debit card holders should be familiar with the schedule of fees attached to the account, such as over-limit fees, international transaction fees, and cash withdrawal fees, and they should contact the bank if confusing or unexpected charges appear on the account.
It is also important find out what the bank will do when the account reaches its limit. Some banks automatically initiate overdraft protection when the account balance reaches zero and will approve a purchase without informing the customer. But they charge a hefty fee (usually around $30 per purchase) for this “service.”
Card holders can try to cancel their overdraft or have the bank automatically transfer money from one account to another to cover the cash shortfall. But doing so will increase the potential financial loss should the card be lost or stolen.
Use Caution With Debt Card Purchases
Since a debit card is directly linked to a person’s bank account, it should be guarded just as one would cash or checks. The PIN number should be memorized and should be difficult for thieves to figure out. Debit cards should only be used to make purchases at trusted businesses, and the card holder should request the receipt at the end of the transaction. Finally, the card holder should avoid using a debit card to make payments online or over the phone.
Know What to Do When a Debit Card is Lost or Stolen
If a debit card is lost or stolen or if one suspects fraud then it should be immediately reported to the bank. Account holders should know how the bank wants a loss reported beforehand so the issue can be resolved as quickly as possible.
Debit card holders should also know their liability for fraudulent charges. Under the Electronic Fund Transactions Act, account holders will be held liable for up to $50 in fraudulent charges if the bank was notified within 2 days of an unauthorized transaction. If one reports a lost or stolen card between 2 to 60 days after a charge appears, then he or she can be held responsible for up to $500 in fraudulent charges. If one reports the loss 60 days after an unauthorized transaction went through, then he or she can be held responsible for all of the fraudulent charges made to the account.
Debit cards with the Master Card or Visa logo, however, may offer a higher level of protection. Both companies place a liability limit of $50 on their debit cards if the transactions are signature-based.
Keep Track of the Account Balance
Debit card holders should review their bank statements carefully. While most debit card transactions will clear immediately, some transactions may take a bit longer. If, for example, one makes a signature-based transaction (as opposed to entering the PIN number), then the payment is processed through a credit-card network and the account will be debited a few days later. One should also be on top of any other withdrawals from the account that may not yet have cleared, such as checks and bank transfers.
Be Aware of How Merchants Charge Debit Accounts
Some merchants will charge a fee to use a debit card, while others, such as hotels and gas stations, may put a hold on funds in the debited account until a debit transaction is processed. For a signature-based payment, this can take a few days, and the amount of the blocked sum can significantly exceed the actual purchase amount.
Get a Good Rewards Program
In order to lure customers into using their debit cards more, many banks and credit unions are offering rewards programs for their debit cards. Card holders who have good credit and can use their cards responsibly can take advantage of cash back or air mileage incentives.