Friday, February 05, 2010

By 

James W. Stone

Do you use a Debit Card? Is it any better than a Credit Card? Do you still get hit with bank fees on a Debit Card? What's this all about? We see a lot more people using debit cards today than we did just five years ago. Some people choose to use a debit card as a step toward living debt-free. For others, the choice might have been made when the bank closed out their maxxed-out credit card. Still others might not have given it any thought at all. For them, the card was handed to them when they opened their checking account. It was an ATM card that was also a debit card. The bank might have called it a check-card.

The big difference between a CREDIT card and a DEBIT card is that your debit card is tied to your checking account or some other account that actually holds money. But your credit card is tied to an account that seldom, if ever, has any money in it. Instead, it is tied to an account that keeps track of how much money you owe it — a line of credit.

The interesting thing about these two types of cards is that they look almost identical in physical appearance, and they're used almost identically in paying for purchases. At first glance, they are hard to tell apart.

Because a debit card is usually taking its money directly from your checking account, your bank is very willing to issue you a "debit" card. What is the risk to the bank? It's your money. As they look at it, the debit card is a convenience for you. "It's just like writing a check," they tell you. And it is. When you use the card, the money comes right out of your checking account, immediately.

Your bank could also have some other reasons to encourage you to use a debit card. If you aren't keeping track of all the transactions with your debit card, checks, and automatic bill payments, using a debit card can create overdrafts in your checking account. Banks can easily collect money from customers who encounter overdraft charges and penalty fees.  In fact, it's easier to get money from a customer who regularly puts money in his/her checking account than it is to get money from someone who ran up a huge debt on their credit cards and can't make the monthly payments.

And so it goes. The bank has made it more difficult to qualify for a credit card. They have lowered the credit limit for many credit card accounts. And they can offer you a debit card to replace the credit card they just canceled. The debit card lets you continue to pay for online purchases like travel tickets, and it is easier than carrying cash. With the debit card, the bank won't end up holding a credit card account with a huge balance that will never get paid off. Chances are, they will make good money charging you for overdrafts and penalties. Some banks will charge you a fee for trying to use the debit card when there are insufficient funds in your account, even though they decline the transaction.

Maybe by forcing you to live without a credit card and to use a debit card, the bank is really helping you discover how to live without debt. That's not a bad idea. In fact, if you have trouble managing money using your debit card, you should learn more about living without debt. So, here's a small bit of wisdom I learned from someone only last week. I was a bit surprised to learn this simple technique from someone who figured it was only common sense. But it is common sense, and it is also precious guidance.

Her common sense approach to using her debit card is to call it a check card and treat it as though it represented checks that she wrote. She keeps her debit card in her checkbook! She has one of those checkbooks that has a register where you make entries for all of your deposits and checks. Whenever she uses the "check card" she makes an entry in her checkbook register. Now, how cool is that?

She explained two types of errors she sometimes makes: First, is that she might forget to enter an automatic payment that she has scheduled to come through her checking account. Second, she says, it's hard to miss entering a check when they are numbered to help you count them. But she doesn't have a way to track the use of her debit card.

To overcome these problems, she tries to keep a minimum balance in the account to cover all of the automatic payments that might be paid from her account between monthly statements. It's better to have too much money sitting in the bank than to pay the overdraft fees. Then she keeps the receipts for all of her debit card transactions to help her review what she has been spending money on, and to verify that no unauthorized charges are being processed.

So there are advantages to using a debit card. But there are also disadvantages you should know about. If there are unauthorized charges on your account you have some protection, but not as much as you had with a credit card. For one thing, the unauthorized use of the debit card caused an immediate withdrawal from your checking account. A credit card would have isolated the charge until your claim against it was resolved. Then it would be billed to you, or removed from the account.

Your limit of liability for unauthorized use of either a credit card or a debit card is only $50 if you report it within two days of its use. After two days, your liability for the debit card is increased to $500. The credit card stays at $50. But after sixty days, the limit of liability for both credit cards and debit cards is unlimited and will be handled on a case-by-case basis.

Purchases on many credit cards are covered by some form of extended warranty or insurance. The credit card will also give you a better bargaining position with a service provider in case of disagreement over the bill. That consideration is usually not available if you paid by debit card.

The way we handle money is changing. We all need to learn how to live in the "New Normal." It just requires a little more attention to the details.

James W. Stone
(follow me at http://twitter.com/theJamesWStone)
Copyright 2010, James W. Stone, all rights reserved worldwide