The Downsides of Using Debit Cards
Debit cards issued by your bank enable you to tap into your checking account and are seen by some as a better alternative to using credit cards. Most of them are now co-branded with either Visa or MasterCard making them more widely accepted. So why would you not choose to use a debit card?
High Banking Fees
Your debit checking account is often linked to your savings account to prevent costly overdraft charges which commonly run $25 per transaction. But if your savings account is empty, you can rack up a lot of fees quickly. So, while you are not paying the high interest rates from carrying a credit card balance, you could end up losing money anyway.
Yes, sometimes banks will deny a transaction rather than letting it go through. That means you have wasted your time trying to buy something and not getting what you needed.
Debit card fees, especially overdraft charges, are so frequent that according to Forbes, banks made $11 billion from them in 2019 (1). That is a big reason why banks push debit cards. If you are not very good at handling money and balancing your checking account watch out for the fees.
Far Fewer Benefits
Credit cards come with all sorts of useful benefits like concierge services, extended warranties, and travel insurance. A few of the Visa/Mastercard branded debit cards do have some of these benefits, but most do not. Also, credit cards usually offer shopping discounts and rewards like cash back–unlike debit cards.
Travel Holds on Your Money
Making travel reservations with a debit card can be quite burdensome. A “hold”, sometimes called a “block”, is often put on your money until after the final charges come through. You might not be able to afford to travel due to the hold amount. If you’re living paycheck to paycheck, this also increases the chance you’ll get into financial trouble. And it is annoying.
A debit card might not have travel insurance or car rental insurance the way most credit cards have, which is an additional cost. That may mean paying extra for rental car insurance or getting a worse refund policy. Plus, not all car rental companies accept debit cards.
Even just buying gas with your credit card can put some of your money on hold. On a road trip where you frequently get gas, the holds will add up fast.
Locked Out of Your Own Money
Debit cards have some protection compared to cash because if you lose it, you can call your bank to shut down access to your money. One way to activate better protection is to sign for the transaction as if it were credit rather than using your debit PIN number. Some banks also have fraud alerts which help. The alerts notify you in case of large or unusual transactions or even if your balance is below a certain threshold.
Though the alerts help, if there is a dispute or fraudulent charges, your money can get frozen while the bank investigates. For instance, extra dining charges are a frequent problem.
That means ALL your money in the account can get frozen, not just the money tied up with the fraud. Since the bank is not losing money, they are usually much slower in resolving problems than a credit card company would be.
Worse, there is no guarantee that you will get your money back at the end of the bank’s investigation or if there even is an investigation. That means if a debit transaction goes awry, you could have a huge headache coupled with serious financial pain.
Fraud Liability
If you report fraud within 48 hours, your liability is only $50, which is the same for a credit card. However, after that short two-day window, debit cards then have a $500 liability for up to sixty days and then unlimited liability thereafter. Some debit cards choose to limit liability more, but you cannot count on that. (2) In contrast, credit card liability remains at $50.
This liability risk is the biggest problem with debit cards and why you should not keep all your money in an account linked to your card. Compare this to credit card issuers who regularly rule in favor of consumers for legit problems including fraud.
The Few Upsides of Debit Cards
First, you can get money out of an in-network ATM for free. However, banks make money from the fees you pay when you go out of the network. Do pay attention to the ATM in case there is a skimmer that will swipe your information. Gas stations are also common sites for skimmers too.
Second, if you currently have debt, paying with a debit card can keep you from adding more debt. A debit card may be all you can get if your credit is maxed out or you have a very poor credit score. However, if you really are not good at handling money, going to actual cash may have you spending less than using a card based on studies that looked at financial behaviors. (3)
Lastly, some merchants give you a debit or cash discount because you save them the merchant transaction fees charged for credit cards. You must trust that the merchant charges you correctly because it is more difficult to clear up if there is an error.
Summing Up the Debit Downsides
The few positives do not outweigh the debit card risks. Some of the key problems are:
- Travel reservations put your money on hold or are disallowed completely.
- Fraud consequences are much worse.
- Merchant disputes take longer to resolve and are less likely to be in your favor.
Meanwhile, you do not get to build your credit history, nor do you get the rewards and benefits most credit cards have. Therefore, use your debit card sparingly if at all.
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