Why You Should Never Own a Debit Card

-by Caroline Fouts

(C)Copyright Consumer Publishing Group
All Rights Reserved

http://vur.me/GetItNow/CreditSecrets
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Debit cards have become a very
popular way to pay for everything from
fast food to rental cars. The Federal
Reserve reports that debit card
transactions have been growing more than
20 percent annually and have surpassed
credit card transactions.

The appeal is understandable. Debit
cards are quick and easy to use.

But using a debit card can cost you
hundreds and even thousands of dollars.
We'll show you why you should never
carry a debit card.

More Risky than Carrying Cash

In it's 2007 Debit Issuer Study, PULSE
EFT Association reported that U.S.
financial institutions lost an estimated
$662 million to debit card fraud in
2005. There is no end in sight.

You'd be safer carrying cash. Although
you don't have much recourse if it's
lost or stolen, but at least your loss
is limited to the amount of the missing
currency.

Carry a debit card, and you put the
entire balance in your bank account at
risk. If you link your checking account
to your savings account to avoid
overdrafts, you put the balance in both
accounts at risk.

More Dangerous than a Credit Card

If a thief gets your credit card, the
federal Truth in Lending Act limits your
liability for any fraudulent credit card
charges to $50. You may not have to
pay even that amount, as many financial
institutions don't impose any charge on
their defrauded customers. And while
the theft is being investigated, you can
refuse to pay any part of the
unauthorized charges.

Debit cards fall under a completely
different law, the Electronic Fund
Transfer Act. To limit your liability
to $50, you have to notify your bank
within two business days of discovering
that you're debit card has been lost or
stolen. Wait longer than that, but give
your bank notice of the fraudulent
transactions within 60 days of when your
statement is mailed, and your maximum
liability jumps to $500. Miss that
deadline and you could lose all the
money in your account.

Because the debit card accesses fund
directly out of your account, you can be
left without your grocery money while
the fraud claim is being investigated.

The $350 Taco

One trip to Taco Bell was enough to send
Joseph Rizk's checking account into
freefall.

Rizk made the mistake of paying for fast
food with his debit card. He figures he
spent only about $5 more than he had in
his account. Unfortunately, by the time
he realized there was a problem, the
bank had hit him about $350 in overdraft
fees. At $25 to $35 per occurrence,
it's easy to rack up hundreds of dollars
in needless NSF fees.

"I overdrew, and they pretty much
pummeled me with charges," said Rizk.

The Center for Responsible Lending, a
consumer group, estimates that overdraft
charges cost people about $17.5 billion
each year. The center's research reveals
that about 45 percent of those
overdrafts are the result of using a
debit card or taking out cash from the
ATM.

Banks used to refuse any debit card
transaction that would overdraw a
depositor's account. But not any more.
Banks could warn depositors when their
accounts are close to being overdrawn.
But they don't.

Instead most financial institutions
automatically enroll their depositors in
a program that loans them the amount of
the overdraft—but at a steep price.
The Center for Responsible Lending
estimates that Banks that offer these
lending programs can expect a sharp
increase in overdraft revenues, as much
as 200 to 400 percent.

Calculated as an interest rate, rather
than a fee, the cost of these loans is
astronomical. The average amount of a
point-of-sale purchase that overdraws an
account is $14.75. The average fee is
more than double that amount. According
to the agency, most consumers only use
these loans for a few days. So on an
overdraft loan, the annual percentage
rate can be as high as 20,000 percent.

In defense of this practice, bankers
like to point out that it's the
responsibility of the account holders to
monitor their account balances and avoid
overdrafts.

Of course, that requires the account
holder to know how much money is in
their account.

How Can You Know Your Account Balance?

R. C. Welborn, learned the hard way
about the risks of using debit cards.
To make sure he didn't overdraw his
account, he checked his online bank
statement. Since it showed $80 in his
checking account, he fell free to make
several small purchases a few days
before his paycheck was deposited.
Using his debit card, he bought two
gasoline fill-ups, snacks and
cigarettes, totaling about $65.

Although the balance in his account was
more than enough to cover the price of
what he bought, when he checked his
account about ten days later, he found
he had incurred $120 in overdraft fees.

"I couldn't figure out what was going
on, I knew I had money in the bank,"
Welborn remembered.

Like most people, Welborn didn't know
that merchants can place a pre-
authorization hold on a customer's
account. In situations where the exact
amount of the transaction isn't settled
when the approval is given, it makes
sense a merchant would want reserve a
little more to cover their transaction.
If you give your debit card to a waiter,
hotel clerk, car rental company, or gas
station, the merchant is likely to get
an approval of a higher amount—to cover
any tip on their service, higher
purchase amount, or room service. Car
rental companies that accept debit cards
routinely place holds in the amount of
$300 to $500.

Now Welborn understands that the pre-
authorization hold the gas station put
on his account resulted in overdrafts on
at least six other small transactions.
He estimates that he paid over $2,000 in
overdraft fees because he used a debit
card.

"The quickest way to bankrupt yourself
is not knowing what's going on with your
debit card, but if you don't get a
warning when you're doing it, how to you
know?" Welborn asked. "I won't touch a
debit card anymore. I do everything
with cash."

Pre-authorization holds placed by
merchants are just one of the factors
that make it difficult, if not
impossible for a depositor to know his
or her available account balance. It's
becoming more difficult to tell when a
transaction hits an account.

Some debit cards allow for both
signature-based debit card transactions,
that, like a check, take a few days to
clear, and PIN-based transactions, which
hit the depositor's account instantly.
Take into account paper checks that
merchants and service providers
frequently convert into electronic
drafts, and, without real-time account
information, it's impossible to know
what's in any checking account.

Nessa Feddis, senior federal counsel for
the American Bankers Association in
Washington explains that even the banks
don't have up-to-the-minute
information. "We don't have real-time
transactions. There will always be
outstanding transactions that the
consumer has authorized but have not hit
the bank."

Comparing debit card transactions to a
plastic checks, some financial
institutions instruct depositors to keep
track of their purchases, just like in
the old days when checks and drafts were
the only way to draw funds from a
checking account.

But in the old days, a depositor could
wait for their bank statement to
reconcile their balance. Now, by the
time the statement arrives, the damage
may already be done.

"The debit card is really where it's a
serious problem," argues Ed Mierzwinski,
the consumer program director of the
U.S. Public Interest Research Group in
Washington. "It's harder to keep track
of your balance because of the tricks
banks use."

In addition, there are no regulations or
statutes that limit the amount of a pre-
authorization hold, or the length of
time that it can be imposed on an
account.

When Penny Chaisson's bought $20 worth
of gas, the station put a hold of $75 on
her account, more than 3 times the
amount of her purchase. She contacted
both the gas station and her bank, but
each pointed a finger at the other.
Even after escalating her complaint to
management, it was 72 hours before the
hold was released.

These holds stay in place until the bank
or the requesting merchant gets around
to releasing the amount held in excess
of the purchase amount. Generally this
takes a few days, but it could be
longer.

How You Can Protect Yourself

Promptly reconciling your account to the
monthly statement or monitoring your
account balance on-line won't always
prevent loses associated with the use of
a debit card.

There is only one solution—Don't carry a
debit card. When opening a checking
account, it is standard practice for a
bank to send the depositor a combination
debit/ATM card. However you can pick
and choose the services you want to
accept. If you want to avoid the risks
of having a debit card, but would like
the convenience of ATM access, you bank
will issue you a card for just that
purpose, without the debit card function.

You can always pay for your purchases
with cash or a credit card, since both
are safer than using a debit card.
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The "CREDIT SECRETS BIBLE" has been in
print since 1994 and is published by
Consumer Publishing Group.

For more information on the "CREDIT
SECRETS BIBLE" you may visit:
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