The Downside of Debit Cards

Here is the fine print on debit cards that may make you think twice.

Thanks to the credit crunch, many of us are mending our spendthrift ways by swiping a debit card to pay for that morning cup of coffee and other routine expenses. Last year, Americans used their debit cards 28.4 billion times (compared with 21 billion credit-card purchases) and spent a record $1.1 trillion, according to The Nilson Report, an industry newsletter.

But debit cards pose their own set of risks. If, for example, hackers get hold of your credit-card information, you are not liable for any unauthorized charges over $50. But if your debit-card number is stolen, the onus is on you.

You must report any misuse within two days to get the same $50 limited liability. Miss that deadline but report your loss within 60 days and you could be liable for up to $500. After 60 days, your liability is unlimited.

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Visa and MasterCard advertise a zero-liability policy for unauthorized debit transactions, but it applies only to transactions processed by their networks. So if you sign for your purchase, you’re fine. But if you use a PIN, it could be processed by another network and the policy would not apply. Paul Stephens, director of policy and advocacy for the Privacy Rights Clearinghouse, recommends “getting away from using your debit card.” Rather, ask your bank to replace it with an ATM card, and take out cash to pay for small purchases.

Or use your credit card. If you’re afraid you’ll run up a balance, get a second card to make purchases you previously made with the debit card and pay off the new card each month. And to ensure you have enough in your account to pay the balance, use your checkbook register to deduct the amount of each transaction.

Senior Reporter, Kiplinger's Personal Finance