I’m sure you’re familiar with debit cards, the bank issued cards that look just like a credit card but make direct withdrawals from your checking account to cover your purchases as you make them. On the surface, debit cards would appear to be a great convenience to pay for your day to day purchases. You can avoid carrying cash, you don’t run up a big credit card balance because the money is deducted directly from your checking account, and you don’t have to write a large number of checks and later spend hours balancing your checking account. What’s not to like? Quite a bit actually.

The problem with Debit cards is largely what makes them most convenient, they are tied directly to your checking account. Unlike credit cards, if you get into a dispute about a transaction, the bank will usually hold the disputed amount aside until the issue is resolved. For example if you inadvertently tip a nice waiter $100 instead of the $10 you intended, the $100 will be immediately deducted from your account and remain deducted until you straighten the problem out. With a credit card you have time to correct the tip before you actually pay the bill. The same thing is true for any mail or online ordering you may do. If you paid by credit card you can effectively hold off paying if there is a dispute with the vendor. With a debit card the vendor may not get paid but the bank usually won’t let you have access to the money either until the issue is resolved.

My biggest concern with using debit cards is not with legitimate transactions but with the fact that they are rapidly becoming the target of choice for thieves. Your liability for the fraudulent use of your credit card is normally limited to $50 provided you alert the credit card company as soon as you discover the theft. In the case of debit cards it’s up to the bank to decide the extent of your liability and it might just be whatever happens to be available in your account. Even more worrisome is that banks generally don’t monitor activity in debit accounts as closely as your credit card company does so it may take you longer to discover there is a problem, especially if you tend to carry large balances in your checking account. Recently, thieves have begun to surreptitiously replace the keypad card swipe devices at retail establishments with identical looking devices that record your card data and PIN as you use your card. Once armed with that data these thieves, known as "Skimmers," are pretty much free to drain your account at will. If this happens with a credit card you’ll only later have to pay the portion of your liability, if you have any. With a debit card, not only will your checking account be inaccessible, but you’ll have to work hard to resolve the issue quickly as unlike with credit cards, you most likely don’t have multiple checking accounts.

Personally, I’m happy to continue to use my plain old credit card and just pay off the balance in full every month. Given the recent rise in debit card related fraud, I’ll happy to have the credit card company share my concern in resolving any problems I may some day have. In the long run it think it’s safer to keep your debit card in the drawer.

Randy Gridley

April, 2007