Because a debit card lets you make purchases with money in your bank account, it offers the convenience of not having to carry cash and the security of not borrowing funds. But this particular plastic—which has surpassed the personal check in popularity and is rapidly eclipsing cash—has its own pitfalls, detailed below.
Lack of protection. If your credit card is lost or stolen and then used fraudulently, you could be liable for only $50 (most credit-card companies won’t charge even that). If your debit card falls into the wrong hands, however, you’re liable for up to $500 in fraudulent charges unless you notify your bank of the card’s disappearance within two days. Meanwhile, the thief can drain your bank account via the nearest ATM, and the bank may require 10 days or longer to investigate and refund your money. During that time, obviously, your bank account may lack the funds needed to cover any number of checks you blithely wrote in the meantime. The result: a self-reinforcing cascade of bounced-check charges.
Hidden fees. When using debit cards abroad, expect to be hit with service fees on each purchase—but be aware they can be assessed domestically as well.
A 2004 survey by the New York Public Interest Research Group found that nearly nine in 10 banks charged debit purchasers as much as $1.50 for each “online” transaction—defined by the banking industry as any transaction that requires authorization with the customer’s personal identification number, or PIN. This doesn’t necessarily mean you’ll be charged a service fee every single time you enter your PIN for a debit purchase, but New York PIRG found the fee unlikely to be assessed for “offline” transactions (those requiring a signature but no PIN).
Busting your balance. If you don’t have overdraft protection on your bank accounts, making a debit-charge purchase that exceeds the funds available in your account—even by a few cents—will likely trigger a penalty of $25 or more.
If you do have overdraft protection, by contrast, you’ll still get penalized—but in those cases the penalty is usually much lower.
Aside from that minimal safeguard, says AARP consumer advocate Sally Hurme, overdraft protection is a decidedly mixed bag. “Banks are pushing people into loans via this so-called ‘protection,’” says Hurme. “One easily overlooked liability of overdraft protection is that the bank often includes the amount of your overdraft protection in the ‘available balance’ figure it cites you. This encourages you to unknowingly tap into your overdraft balance, incurring both an overdraft fee and interest.”
From "Scam-Proof Your Life: 377 Smart Ways to Protect You & Your Family," by Sid Kirchheimer, 2006, p. 99.
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