Debit cards don’t let you rack up debt, but they can still lead to trouble if not used wisely. Here are tips from the experts.
Debit cards are useful financial tools as they offer the convenience of plastic — without the risk of racking up debt. Just like credit cards, though, debit cards can lead to trouble if not used wisely. Here are experts’ nine best tips for managing your debit card.
1. Know yourself. Do you have bad money habits, such as not balancing your checkbook, losing receipts and getting hit with overdraft charges? If so, avoid pulling out your debit card every time you crave a latte, and pay cash for everyday purchases. “The debit card is a great tool, but it’s not for everyone,” says Susan Tiffany, director of consumer periodicals for the Credit Union National Association. “Just ask yourself upfront: ‘Am I the kind of person who’s going to run into trouble with this?'”
2. Keep track of transactions. Keep good records to avoid bounced checks, overdraft fees and stress. “Write down every purchase right away in your check register,” says Gail Cunningham, spokeswoman forthe National Foundation for Credit Counseling. This goes double for those who have joint accounts, according to Catherine Williams, vice president of financial literacy for Money Management International, a national credit counseling firm. “It’s really important that you both record all your transactions and be in close communication with each other,” Williams says.
3. Don’t automatically “opt in.” This summer, new federal regulations prohibit banks from allowing customers to overdraft with debit cards unless they opt in. Banks are urging customers to do so, but Leslie Parrish, a senior researcher at the Center for Responsible Lending, says 80 percent of consumers would rather have their card declined at the checkout counter than get hit with a $30 or more overdraft fee. “Your debit card could become your most expensive credit card if you don’t have enough money in your account and are extended credit,” Parrish says. Instead of opting in, Linda Sherry, national priorities director for Consumer Action, recommends you set up your own overdraft protection by linking your card to a savings account or a line of credit.
Your debit card could become your most expensive credit card if you don’t have enough money in your account and are extended credit.
|— Leslie Parrish|
Center for Responsible Lending
4. Watch out for holds. Before using your debit card to make hotel reservations, rent a car or even buy gas, ask whether any holds will be placed on your account — and how much and how long those funds will be held. If you don’t want your money tied up for what could be as long as a month, consider using a credit card for hotels and rentals instead, Tiffany recommends. (Or, make the reservation with a credit card and pay the final bill with your debit card.) “If you’re traveling and don’t have the balance to cover the holds they’ve placed, you could go to buy dinner and have your card declined,” Tiffany says.
5. Know the difference: debit versus credit. You’ve just swiped your card to pay for a new pair of jeans, and the clerk asks, “Debit or credit?” If you choose “debit” and punch in your PIN, the transaction happens online and is processed right away. If you choose “credit” and sign instead, the transaction may hit your account several days later, leaving you to think you have more money in your account when you don’t.
6. Be smart about choosing a PIN number. Try to choose a random combination of numbers that you can remember easily, and avoid choosing a PIN that a criminal could guess, such as your initials, your kid’s birthday, the last four digits of your Social Security number or numbers in sequence, recommends Greg Meyer, community relations manager for Meriwest Credit Union. “You wouldn’t believe the number of people who want to choose 0000 or 1111,” Meyer says. “That’s just asking, ‘Please rip me off.'”
7. Go online daily to check your account. Stay on top of every transaction to find out right away about unexpected fees or holds, accidental double charges or fraud. This is especially important with debit cards because any money you lose is your own — not the bank’s, says Tom Harkins, chief strategy officer for Secure Identity Systems and former vice president of security and risk for MasterCard International. By federal law, your losses from fraudulent activity on your debit card are limited to $50 — but only if you notify your bank within two days of noticing a problem.
8. Be careful when linking accounts. If you’re going to link your debit card checking account to a savings account, avoid exposing too much of your money to fraud, Harkins says. “The more accounts you link, the more you’re giving fraudsters free rein,” Harkins says. Your liability might be limited, but it could take days or weeks for the bank to reimburse you. “That’s the risky part — your money is gone, and the mortgage is due tomorrow, you’re going to start bouncing checks and you can’t even make an ATM withdrawal,” he warns.
9. Use a credit card for big purchases. The bottom line: Debit cards don’t offer as many consumer protections as credit cards. Cunningham recommends making large purchases — such as stoves, refrigerators or plane tickets — with a credit card. “You might want that product protection in case there’s a dispute down the road,” Cunningham says. A real-life example: When Steve Rhode, a consumer debt expert at GetOutOfDebt.org, lived in England, he used his credit card to buy plane tickets to fly his family back to the United States, but the airline went out of business before his trip. “I was able to file a claim with the credit card company and they wiped off the charge,” Rhode says. “If I had used a debit card, that money would have been gone for good.”
See related: Fed: Consumers must opt in to debit card overdraft fees, 12 tips for renting a car with a debit card, 6 ways to choose the right debit card rewards program, 10 places NOT to use your debit card, Debit card users now more protected from fraud, study says, Tips for using a debit card for travel