As summer approaches, many people will be heading off on family vacations or other getaways, usually armed with plastic to cover expenses. But if that plastic is in the form of a debit card, some specific issues arise.
Debit cards are more popular than ever. According to the Federal Reserve payments study released in March 2008, Americans used their debit cards 30.4 billion times in 2007, racking up an average of $41 each time they signed or punched in a PIN.
However, many debit card users may be unaware of the unique concerns and risks associated with this type of plastic.
One of the most annoying debit-related issues involves security holds placed on the card by hotels, rental car agencies and other businesses. These are temporary holds used as a type of security deposit, since businesses often view debit cards (and, by extension, the people who use them) as a bigger risk than their credit card counterparts.
Businesses sometimes place similar holds on credit cards, as well. However, with a credit card, the hold is usually there and gone before the user ever notices it — whereas with a debit card, that hold is tying up actual cash from your checking account. In essence, it is like your money is being held hostage.
“One of the biggest risks is hotel reservations,” says Tom Harkin, chief strategy officer for Secure Identity Systems (and former vice president of security and risk for MasterCard International). “At check-in they will place an authorization amount equal to the entire stay plus a percentage for meals, telephone calls and other incidentals equal to anywhere from 20 percent to 50 percent of each night stay. If, after one night, you decide to leave, the issuing financial institution will hold those funds until the appropriate charge comes in. This could be as long as six to eight days that those funds will be not available for use. If this occurs a few times, there could be no funds left for legitimate purchases and no additional authorizations will be allowed.”
In other words, if you stay at several different hotels during the course of your trip, you could find yourself unable to access quite a bit of your money.
And it’s not just hotels you need to worry about. Fatima Mehdikarimi of the website The Shopping Queen says that holds can be implemented by just about anyone, “including gas stations or even equipment rental facilities such as bike rentals or water sports.”
Car rental hassles
When it comes to renting a car with a debit card, you may never even reach the point of a security hold. Some car rental companies don’t accept debit cards at all — and those that do often make debit cardholders jump through hoops. Some major rental companies make debit users provide copies of utility bills (with no past due amounts) or require these customers to agree to a credit check. They may also ask to see round-trip airline tickets. If they do accept a debit card, they will place a security hold (usually at least a few hundred dollars) on the card.
Lack of perks
One potential downside to debit cards is that while rewards are commonplace on the best rewards credit cards, they are rare on debit cards. There is also generally no wiggle room if you want to splurge. “For the most part, credit cards have higher limits so you are not constrained if while on vacation you spend a lot of money,” Harkin says. “There is also a ‘pad,’ an amount over your limit the issuing financial institution will authorize. Debit cards normally will not have that same flexibility unless you have over-limit protection tied to the account.”
Theft and fraud concerns
The most troublesome aspect of debit cards is the lack of protection policies, at least when compared to credit cards. This is a major concern away from home because travelers in general are vulnerable to crooks and scammers. “When traveling you are typically out of your element and thieves thrive on this,” warns Mehdikarimi. “To make matters worse, you might be so distracted by your vacation that you don’t realize your card is missing.”
Should you become the unfortunate victim of theft or fraud, you will get a crash course in the differences between credit and debit. “Different regulations cover debit and credit cards,” Harkin says. “Regulation Z covers credit and there is only $50 in liability while debit has different rules on liability. When you use a credit card, you receive a billing statement, giving you time to dispute fraudulent activity before paying the bill. Debit cards electronically transfer money immediately. That means checks you have written, such as mortgage or rent payments, could bounce and trigger large interest or fees that will be charged to your account. This could prove to be quite embarrassing if checks are not honored to people or places you are known to frequent regularly.”
Debit card companies are becoming more attune to consumers’ security firms, however, and are extending the same consumer protections that cover credit cards. Check the fine print on your debit card agreement. Debit cards that bear the Visa, MasterCard or American Express logo are bound by law to provide theft and fraud protections on both credit and debit cards. Despite the coverage, if a debit card is stolen, the funds are gone immediately, and can still cause complications until the situation is rectified between the cardholder and the issuer.
Should a credit card get lost or stolen, the user can generally stop (or at least limit) the damages by calling the issuing company immediately to cancel the card. With a debit card, things can get trickier. If you cancel the card or account outright, any legit charges that may be pending — and perhaps outstanding checks drawn on that account — may also be denied.
If you have both credit and debit cards, it will probably be easier to use credit on the road, at least for big things like hotel charges. If you do decide to use debit, consider setting up a special account with a limited amount of funds – thereby minimizing your risk of loss, and allowing you to avoid tying up all the money in your “main” checking account.
Harkin offers a final piece of advice for traveling with a debit card: “Just protect it as if it were cash!”