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Debit card dangers
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July 11, 2001: 7:18 a.m. ET
If something goes wrong with a debit card, you may not get your money back
By Lucy Lazarony
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NEW YORK (Bankrate) - When you're making a big purchase, think twice about using a debit card in place of a credit card.
If something goes wrong, you may have a tough time getting your money back with a debit card, if you get the money back at all.
Or, because many merchants treat a debit card purchase as they would a personal check or cash, you may get stuck with several hundred dollars in store credit instead of a refund.
Debit cards, such as the Visa Check Card and MasterCard Money, are linked to a cardholder's checking account and can be used to make purchases just about anywhere credit cards are accepted.
But don't let the word "Visa" on the front of the card fool you. You don't have the same consumer protections with a debit card as you do with a credit card. It's not even close.
Credit-card cushion
Credit cards are protected under the Fair Credit Billing Act. This law gives the consumer the right to withhold payment on poor-quality or damaged merchandise purchased with a credit card.
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Debit cards offer less protection than credit cards | |
"It's wonderful. It's a great law there," said E. Thomas Garman, distinguished scholar at The InCharge Institute and author of more than 20 books on personal finance. "You've got Visa on your side."
Under the law, you do need to make a real effort at resolving the dispute with a merchant before you can ask your issuer to stop a credit card payment. There are a few other catches as well.
The sale must be for more than $50 and have taken place in your home state or within 100 miles of your home address. Few issuers enforce the $50 or 100-mile rule on purchases made in the United States.
"No one's following that rule. That's crazy," Garman said. "I've heard of no one ever using that."
So with a credit card you have the option of withholding payment should you be unsatisfied with the quality of an item. Ditto for an item purchased with a personal check. You simply call your bank and ask them to stop payment before the check clears.
A different money matter
With a debit card, which yanks money from your bank account almost immediately, there's a good chance the merchant already has your money by the time you realize something is wrong with a purchase. So you have a lot less leverage.
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The merchant may want to make some other arrangement like a store credit or a gift certificate or some other thing. That isn't exactly putting money back in your account.
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Jeanne Hogarth |
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As long as you have your receipt, you may have a case under your state's unfair trade practices law. But pursuing that course could prove costly and time-consuming.
So you're pretty much stuck trying to resolve the dispute with a merchant on your own. It could go on for weeks, and when it's all said and done you may not get your money back.
"The merchant may want to make some other arrangement like a store credit or a gift certificate or some other thing," said Jeanne Hogarth, program manager in consumer policies at the Federal Reserve Board. "That isn't exactly putting money back in your account."
What kind of federal protections do you have with a debit card? Under the Electronic Fund Transfer Act, you have the right to dispute an error on your bank statement, and you have some protections if your debit card is lost or stolen.
Don't delay reporting debt fraud
It's not so bad if you act fast. Your liability is capped at $50 if you notify your bank within two days of finding out your debit card is missing. Wait more than two days and you could lose as much as $500.
If you discover an unauthorized charge on a bank statement, you may be on the hook for as much as $500, provided you contact your bank within 60 days.
If you wait longer than 60 days, you're stuck paying every cent of a thief's spending spree. You could lose everything in your checking and overdraft accounts.
The banking industry has stepped forward and capped consumer liability on unauthorized, signature-based debit card purchases to $50, the same limit that exists under federal law for credit cards. While a voluntary cap is certainly nice, an ironclad law would be better.
"The industry is doing that out of a sense of fair play, out of the goodness of their hearts," Hogarth said. "They could change that policy tomorrow."
Spend smart, simple
Because of more limited consumer protections, a debit card may be the best choice for smaller, routine purchases such as gas or groceries. Paying by debit card is quick and convenient, and you won't pay a penny of interest.
You also won't enjoy the float you have when you write a check or pay by credit card. With a debit card purchase, the money gets yanked out of your account almost immediately. So it's important to keep good records.
Forget to write a debit card purchase or two in your checkbook and you could end up paying some hefty account fees.
"It's deducted almost instantaneously. So there better be sufficient funds in that account," said Gwen Reichbach, executive director of the National Institute for Consumer Education.
If you decide to make a larger purchase on a debit card, it's best to do it at a store that lets you inspect the merchandise thoroughly before buying.
Credit cards are the best choice for purchases made on the Internet or by phone.
"If you're ordering merchandise I would almost always encourage people to use the credit card, because if something goes wrong you have more recourse," Hogarth said. 
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