Debit Cards Can Be Bad Investments


This post may sound like heresy to the died-in-the-wool debit card user. However, if you put the same overview on debit cards you do to other investments, you may agree with me. After all, it is YOUR money at risk.

I fully realize debit cards have overtaken credit cards as the plastic du-jour for Americans. The ratio is something like 2 to 1 meaning for every credit card used, two debit cards are used. Don’t hold me to this as a concrete figure as the numbers are a little over a year old. But, they are very close to accurate.

I also fully realize how easy it is to use a debit card. I watch my wife at the grocery store check out counter. Fast, easy and convenient to say the least. I don’t own one so all I get to do is watch. Oh, she also uses her card at two restaurants when we go out to dine. (More on why this is a bad idea later.)

Debit Card Hazards

Since I believe the only positive features about a debit card are the fast, easy, convenient features mentioned above, I’ll move into the hazards. Many people wrongly assume debit cards offer the same protection against fraud as credit cards. I should emphasize the word “wrongly” in bold and capital letters.

Debit cards don’t offer the same grace period as credit cards should you be zapped by a criminal. You can contest the charges as with a credit card (CC) but the contest period is only two days. Ouch! Also, with a CC, your liability is generally limited to only $50.00. With a debit card, your liability is generally limited to $500.00 if you have reported the fraud within the two day reporting period.

People don’t know debit cards fall under the Electronic Fund Transfer Act. Under the EFTA, the debit card issuer isn’t required to step in and bail you out of a messy situation. Granted, today, many of them do as a customer courtesy/service. However, they are not required to do so.

Another fact many debit card users don’t know is the “hold” transaction. It is also called “blocked” but means the same thing. This means the recipient of the debit card transaction – the merchant – is allowed to block an amount of money in your account until the transaction settles.

For example, let’s say you need 10 gallons of paint, 4 rolls of masking tape, brushes and rollers and other miscellaneous items to complete the fix up job on the house you just acquired in a very shrewd transaction. You go to the nearest big box warehouse type store and purchase these supplies using your debit card.

Let’s assume the total cost is $675.00. The selling merchant’s system recognizes this as a debit transaction and immediately places a “hold” or “block” on your account for $1,000.00. Wait a minute you say, you only spent $675.00.

True, but the merchant wants to be sure they receive that amount in full so they over block the amount in your account. The law permits them to over block so they routinely over block on big ticket items like your purchase.

Taking this one step further, let’s assume your account only has a balance of $1050.00. You wander off to the nearest restaurant to feed you and the crew helping you with the house work. The tab for the meal comes to $75.00. No big deal since you know you have $375.00 in your account.

Imagine your surprise when one of two things happens. First, the waiter tells you your card has been rejected and asks if you have another one. Embarrassing to say the least. However, let’s say the waiter comes back to the table with your receipt. You walk out thinking the transaction went smoothly.

Two weeks later you receive your statement and you see $390.00 in overdraft charges at $39.00 per charge. After you paid at the restaurant you used your card 9 more times and everytime you did, the bill was paid but the bank added another overdraft charge.

Generally most holds/blocks are removed in two to five business days but in your case it took the bank ten days. Ouch, ouch and ouch.

A Bank Dirty Trick

The above overdraft scenario is not really a dirty trick because the bank told you about the overdraft protection on your card at the time you opened your account. It might be considered robbery at $39.00 a pop but, technically, it isn’t a dirty trick per se.

Let me expose the dirtiest of their dirty tricks. It is called transaction order changing. All orders are processed after business hours which just makes sense as this doesn’t disrupt the flow of commerce. What the banks do is take your biggest transactions and run them first. Never mind, they happened after several small transactions.

Had they processed the small transactions in the order received, you never would have had the extra three or four overdraft charges. You can see that I hope because it is obvious it causes you to overdraw sooner and more often. This earns the banks an enormous amount in overdraft fees.

When debit cards first hit the scene, the banks acted honorably. If you didn’t have the transaction amount in your account, your card was declined. That was pretty straightforward and honest. However, when banks realized they could gouge a tremendous profit from people by the overdraft method, the scenario changed.

If you intend to use a debit card, read every piece of paper the banker gives you when you open your account. If you’ve had a card for a number of years, read all of those account change notices you receive from the bank. It could save you thousands.

My Wife And The Restaurant

Earlier I said I’d talk more about using a debit card in a restaurant. I did so with the above example and now I’ll mention one other way you can get screwed in a restaurant. This story didn’t happen to my wife but a friend of hers.

I”ll call the lady Janice. She paid for her meal using a debit card like my wife does. No big deal except in Janice’s case, when the waiter took her card to the payment area, either he or an accomplice had a “skimmer” device. This electronic device allowed the thief to copy Janice’s account information, security codes and clone her card.

Janice did not know she had been ripped off until the bank called and asked if she was purchasing a Harley Davidson. You already know the rest of the story, right? Janice was past her two day notice period so all she could do was close her account and start calling the merchants listed on her statement. It took her two years to right all the wrongs that happened to her.

I will admit my wife only uses her debit card in two local restaurants. We know the owners and feel comfortable with their service personnel. However, that doesn’t mean a crook won’t land a job there. Fortunately, my wife checks her bank account online the next day to see the amount of the block as well as the size of the transaction. This practice is a great procedure. Always, and I mean always, check your account the very next day.

I could write more about debit cards but I think I’ve pontificated on the most important points involving debit cards. However, let me point to two other hold sources. Gas stations are notorious for holds. Most people don’t think about the hold that occurs when they pay for their gas by debit card but the gas station certainly does.

Another spot most people don’t consider is their local watering hole. You stop in for a cold beer and start a tab. When you leave, you pay by debit card. Your friendly mixologist more than likely will put a hold on your card.

Suffice it to say that anyplace you use your debit card, puts a block on your card. Think about that the next time you are tempted to pay by debit card.

Photo Credit: Alan Cleaver

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  1. Thanks for the extremely informative post. I didn’t know almost anything about debit cards, apparently, before now. I use my debit card all the time, but I will definitely be a little more cautious and more aware of what is happening when I pay using my debit card. As for restaurants, is it any safer to use a credit card instead (due to the longer grace period)?

  2. I believe using a credit card is a better idea because of the protection afforded by law. I always use a credit card and my wife is starting to come around to my way of thinking. But, you have to decide what is better for you.

  3. I also prefer using a credit card. Not because I can acquire the things I need before paying for them. But because it is so handy that I don’t need to carry that much cash. But of course I make sure that I pay them full at the end of the months to avoid debt.

  4. Great article. Thanks for the priceless advise.
    I use my credit card most of the time because i get rewards points which i can exchange for cash. However i am forced to use my debit card sometimes because credit cards or electronic checks are all some merchants accept

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