Debit Indebted

Next year, Bank of America (among others) will begin charging debit card customers a $5 monthly fee.

Banks are making the change because revenue from lucrative interchange fees paid by merchants (a.k.a “swipe fees”) is being cut in half by a new rule issued by the Federal Reserve Board that takes effect Oct. 1st. So, instead of an average of 44¢ per transaction, banks will only be earning 24¢. Bank of America estimates that it will lose $2 billion annually because of the change. So, what’s a poor bank to do? Well, they’ll negate their losses by shifting their costs onto consumers, of course.

Even beyond avoiding the aggravating new monthly fee, using a credit card has distinct advantages.

Federal laws protect credit card users from fraud much better. The Fair Credit Billing Act ensures that you bear no liability for fraudulent purchases, damaged goods, and products that were never delivered. And you generally have 60-90 days to report fraudulent or erroneous charges to the bank.

credit card mouse trapThe Electronic Transfer Act does provide debit card users some protection during a dispute or error but only if you catch and act upon the issue quickly. If you notify your bank within 2 days of a questionable charge, your liability is limited to $50. However, between 2 – 6 days your liability could increase to $500. Beyond 6 days, you may have no coverage. And to dispute a debit card transaction, you may be required to prove that the card has never been used online on an unsecured network.

And remember that with a credit card dispute, you’re questioning fraudulent or erroneous transactions before you’ve paid the bill. With a debit card, the money has already been withdrawn, so recovery is going to be much more difficult.

Given that debit cards are directly linked to your bank account, a thief who obtains or clones your debit card along with its PIN may be able to clean out your bank account, and you’d have little or no recourse.

By the way, many banks claim that their debit cards can also be used as a credit card. While it’s true that these transactions may take slightly longer to post to your checking account, they’re still a debit transaction. So, using your debit card in this manner does not afford you the same protections or deferred payment opportunity as a “real” dedicated credit card.

The biggest disadvantage of using a credit card over a debit card is self-control. You have to make sure that you’ve saved enough money to cover your purchases when the credit card bill arrives in order to avoid finance charges. Since the money is not being taken out of your bank account immediately as you make purchases, there’s a high risk of overspending and accumulating interest-bearing debt. But with a little self-discipline you can actually avoid the finance charges and earn money on your purchases.

So, do you use debit cards? And if so, will these needless new fees affect your debit card usage?

6 Comments

  1. We paid a visit to our bank this morning. So far they have no plans to initiate this but were told that could change next month, or within months. I’m watching it closely, and if it is started at our bank, I’ll be looking into alternatives.

  2. I use a credit card for almost everything. The balance gets paid off each month. I rack up points. So they loose money on me. That will teach them.

  3. We do the same thing. We use our credit cards for practically every purchase we make to rack up the cash-back dividends. And we pay the balance each month. So we’re kinda gaming the system legally.

  4. Apparently, I’m a dinosaur because I don’t do debit cards. I only write like 10 checks a year, so I’m still doing that. Otherwise, I use my credit card & we pay it off every month. Since it is a Southwest Airlines card, I get perks, which works for me…


  5. Rob:

    We do the same thing. We use our credit cards for practically every purchase we make to rack up the cash-back dividends. And we pay the balance each month. So we’re kinda gaming the system legally.

    Gaming the system? It’s their system, their rules. You just aren’t one of the mindless hamsters paying forever on interest rates.

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