Like many Americans, I've switched to using my debit card more often than my credit cards. Despite losing the benefit of credit card cash-back rewards, I find that debiting money directly from my checking account keeps me living within my means. And yet, over the years I've also come across debit card traps that have hurt me financially. Here's what I've learned.
Identity theft
When my debit card number was stolen, my checking and savings accounts where emptied of thousands of dollars overnight. By the time I contacted my bank a day later, many charges I authorized through my checking account had bounced, accruing bank fees and return payment fees from merchants. Unlike credit cards, debit cards hit you with fraudulent payments immediately. To protect yourself from this debit card trap, make sure your bank will not only dispute the fraudulent charges and carry an investigation on your behalf, but that your checking account will be credited the amounts immediately. Bear in mind that this credit will be provisional, pending the outcome of the investigation.
Overdraft Fees
As of August 15, 2010, the Federal Reserve has prohibited banks from charging overdraft fees on debit card purchases with insufficient funds in the account. Instead, the charge will be rejected. You may opt-in to your bank's overdraft protection, which will either extend you a line of credit or tie your checking account to your savings account. This said, you may still find yourself trapped into paying bank charges every time you overdraw your account under the Protection Plan your bank includes in your debit card agreement. Avoid this debit card trap by keeping a close eye on your checking account through online banking.
Pre-Paid Debit Cards
Debit cards with preloaded amounts are becoming more and more popular, especially with parents who prefer to give their teens or college students a pre-set amount instead of a credit card with a large credit line. However, pre-paid debit cards carry monthly fees, activation fees, transaction fees and even a re-activation fee after a year has elapsed. At times, pre-paid debit cards may become overdrawn when the fees continue to apply on an empty card. Avoid this debit card trap by setting up a checking account without overdraft protection, to prevent purchases when the account has insufficient funds.
Free with Strings Attached
I've learned the hard way to avoid using my debit card for free giveaways. Many magazines offer one free issue, but you must respond within 15 days to cancel the future membership tied to the promotion. This is true of free books and CD giveaways, free gym memberships, free samples and any giveaways that require you to provide your debit card number, while the vendor assures you that you will not be charged for the freebie. To avoid having your bank account hit with unexpected charges, use a credit card in such cases or forgo the promotion altogether.
Recurring Payments
If you sign up for a membership at a shopping club, gym, or any other club that collects monthly, by-yearly or yearly dues, your debit card will be kept on record for recurring membership payments or any other fees, which you may not be fully aware of. This may cause your checking account to be hit unexpectedly. Even after you cancel your membership, your checking account may be debited for one or two months, due to clerical errors. Avoid this by paying with a personal check and providing a credit card for future payments.
Utility Auto Billing
Experience has taught me to forego the convenience of using my debit card to set up auto billing with my utility companies. For one thing, monthly charges may go up unexpectedly due to increased consumption or the expiration of a promotional rate. In addition, erroneous charges for canceled services will not be credited until the next billing cycle, and even then the credit will apply to the utility account, not my checking account. To avoid this debit card trap, I make the payments online, after I've verified that I have sufficient funds to cover the charge.
Future Concerns
Currently, every time you use your debit card the merchant is charged a fee of $0.44, even if you only buy a pack of gum. The Federal Reserve has proposed capping this fee at $0.12, a matter currently debated by Congress. According to Business Week, if the regulation is imposed, banks like JPMorgan, Bank of America, and other lenders have indicated their intention to supplement this loss of revenue by adding new checking account fees, which may make using your debit card more expensive in future.