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Why Debit Cards are Dangerous

Most idividuals with a bank account posess a debit card; their ATM card bears a MasterCard or Visa logo, and can serve double duty as a "check card" also called a debit card. Unlike a credit card, the cost of purchases made with a bank account linked debit card is debited directly from the checking account balance. These cards can be used for "debit" transactions, by entering a PIN at the point of sale, but more often they are used for "credit" transactions where a PIN is not required, even though the transaction ultimately results in a debit from the customer's account.

Banks encourage their customers to use these cards for "credit" transactions, since the bank collects a percentage of the purchase in transaction fees. Merchant's end up paying lower fees, typically, when the card is used in debit mode, when a PIN is entered.

For consumers, debit cards have have very few advantages over credit cards, and many disadvantages. This articles discusses some of the dangers of using debit cards:

  • This biggest danger that arises from using a debit card is the hold placed on the funds in your bank account. When you card is swiped and used as a credit card, the "authorized" ammount is locked in your bank account, even though the settlement of the charge will not occur until later, someties several days later. These funds are locked, because as part of the authorization, you bank is telling the merchant that the funds (or sufficient credit) exists for them to settle the payment, and they need to keep track of the settlement requests that are expected to come in. By itself, this hold would not be a problem, so long as you keep track of your charges and make sure you do not overdraw you account.

    The problem arises for merchants that authorize your card befoe they know the actual amount of purchase, such as hotels that add to the authorization amount for expected incidental charges, car rental companies that add for extra time or in some cases as a deposit, and restaraunts which add for an anticpated tip. These extra amounts emain as holds on your account for several days and they may result in overdrafts, or returned checks.

    While there have been recent changes to consumer credit cards laws that limit require eplicit acceptance of overdraft protection, and their associated fees, dropping of overdraft protection does not prevent the problems associated with returned checks due to these additional holds, and in fact it could make the problem worse (at least in terms of the number of such returned items in those cases where an overdraft would not have existed except for the extra held amount that was not actually added to the purchase and which would thus never appear during settlement).

  • A second disadvantage of debit cards over credit cards is that there are specific consumer protections in the United States that apply to pruchases made with credit cards. These protections include the ability to dispute a charge from a merchant in certain cases when you do not receive a product you ordered or if it is not as described. Some of these protections often do not apply when using a debit card, and although your bank might still be willing to grant you such protection, your rights may be different.

  • Finally, the impact of a fraudulent charge to your debit card is amplified as compared with such a charge to a credit card. Because funds come out of yoru account (or are held) immediately with a debit card, such charges can result in bounced checks before you ever see the fraudulent charge and have an opportunity to dispute it. While you might not get to choose which you your accounts (a credit card or a debit card) a criminal chooses to steal from, it is important to note that most credit card numbers are stolen when the card is used, so choosing to use a credit card instead of a debit card can reduce the opportunity of theft of your debit card number.
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