The debit difference

Cash may not be obsolete, but it’s clearly taking a back seat these days to those little plastic rectangles found in just about everyone’s wallet or purse. For years, they consisted of just one type: credit cards. Now, a newer version, the debit card, is proving to be even more popular. While the two have similarities, there are some very important differences to keep in mind.

Debit cards’ popularity can be traced, at least in part, to the catastrophic debt load that millions of undisciplined credit card users brought on themselves. Therein lies the principal difference between credit cards and debit cards. Each time you use a credit card, you are incurring debt. You have a choice of paying off that debt in full each month, or you may pay it off over a period of time, plus (sometimes oppressive) interest.

When you make that purchase with a debit card, you’re using your own money, which is withdrawn from your checking account. This arrangement has proven attractive to those consumers who lack the self discipline to limit credit card purchases to amounts they can pay off in full each month – no debt, no interest charges.

Even if you aren’t aware of it, there’s a good chance you have a debit card in your wallet or purse right now, since many bank ATM cards are programmed to have debit options. While this may well be a satisfactory arrangement for many, the use of debit cards brings with it a number of important disadvantages that you should keep in mind.

Less Protection Against Fraud
Consumer liability for credit card fraud is limited to $50. For example, if you notice suspicious charges on your credit card statement, the credit card company is obligated to investigate, provided you send in a written request within 60 days.

On the surface, debit card fraud liability is also limited to $50, but you must notify the bank within two days of noticing the fraudulent charges. After two days, your liability increases to $500. After 60 days, your entire account balance could be at risk.

Some, but not all, banks are adopting voluntary plans to limit customer liability to $50. However, there is no federal law requiring them to do so.

Merchant Disputes
If there is a dispute regarding a purchase you make with a debit card, you are in a weaker position than you would be with a credit card. Since the merchant already has your money when you use a debit card, the merchant will keep that money during whatever time it takes to resolve the dispute. It will only be returned when, and if, the dispute is settled in your favor.

Risk of Expensive Overdrafts
When you use a debit card, it can be difficult to keep track of what you purchased unless you are diligent in recording each transaction in your checkbook. A single mistake on your balance can result in spending money you don’t have, leading to costly overdrafts.

Pressures on their bottom lines in this economy have caused many banks to institute an entire line of new and increased service fees. One of these is the fee for overdrafts. Many banks now charge $35 for an overdraft, even for a purchase of just a couple of dollars. That fee can go even higher for multiple overdrafts. So if you accidentally make two or more overdrafts, you’ll be hit hard with those fees.

Not Helping Your Credit History
When you use a credit card, transactions and timely payments are reported to the credit agencies, helping to improve your all-important credit score. Transactions and payments made through debit cards are not reported to the agencies, thus they have no effect on your credit. 

With credit scores carrying ever- greater importance in your financial life, building good credit is critical in building a solid financial foundation. Responsible use of your credit cards can improve your credit rating.

That, in turn, will improve your chances of obtaining favorable credit terms, low interest rates and low fees for automobile loans, mortgages and personal loans. Debit cards are no help in this regard.

bottom line. If you find it difficult to control your spending, if you have a history of running up large balances on your credit cards, paying minimum payments and incurring oppressive interest charges, you are a prime candidate for switching to debit cards.

On the other hand, if you have the self-discipline to keep your spending under control, spending only enough that you are able to pay off the full balance each month, you may want to take a second look before using a debit card for your regular purchases.

The author is a freelance writer based in Abington, Pa. He has 40 years experience in business management and financing.