A card that offers speed and convenience
also has many consumers unsure about costs
and safety. Here are answers to common
The bottom line? "Since a debit card payment
is just like writing a check, you should
always keep track of how much money you have
left in your account to avoid overdrawing
the account and incurring fees," said Joni
Creamean, an FDIC Senior Consumer Affairs
"And how would you like to pay for that?"
More and more, consumers are answering that
question, "By debit card." But even though
debit cards are becoming more common and
more popular, many consumers are still
unsure about how debit cards work, their
pros and cons, and how to use them safely.
What is a debit card?
A debit card looks like a credit card but
works like an electronic check. Why? Because
the payment is deducted directly from a
checking or savings account. If you use a
debit card at a retail store, you or the
cashier can run your card through a scanner
that enables your financial institution to
verify electronically that the funds are
available and approve the transaction. Most
debit cards also can be used to withdraw
cash at ATMs (automated teller machines).
Why do people use debit cards?
For many people, it is more convenient to
carry a small, plastic card instead of a
bulky checkbook or a large amount of cash.
Using a debit card is also easier and faster
than writing a check. It's a good way to pay
for purchases without having to pay
interest, as you would if using a credit
card with an outstanding balance. You can
even use your debit card to get cash when
you make purchases at a store.
What kinds of costs are associated with
There may be fees for using your debit card.
You may trigger a fee if you
overdraw your account using your debit card,
just as you would if you "bounced" a check.
Or, there could be a charge if you use your
debit card as an ATM card at a machine that
is not operated by your financial
institution. As with other bank products,
your financial institution must provide
disclosures explaining the possible fees
associated with a debit card. Be sure to
read the disclosures to avoid an unexpected
Some debit cards come with "rewards" or
other incentives for using them. How can I
know which one is a good deal?
As with similar financial products,
rewards-linked debit cards are designed to
encourage people to use a certain bank and
its services. Start by reading the
disclosures that explain the account terms
and fees to understand the potential
benefits as well as the costs.
How can I overdraw my account if my bank or
bank network must approve a debit card
First, because the payments are electronic,
they are deducted from accounts more quickly
than when using a paper check. Often, a
debit card purchase is posted within 24
hours instead of days, as may be the case
with a paper check. That means there would
be little time to make a deposit to cover a
purchase, if necessary. In addition, even
though a transaction was approved, you may
overdraw your account because the bank won't
know what other withdrawals you have made
that day until it settles all transactions
later that day.
Or, suppose you don't realize you have only
$100 in your bank account and you want to
use your debit card to buy a $200 item.
Depending on the terms of your account or
the rules of the card network, the bank
might approve the $200 purchase as a
convenience, but it also might assess an
overdraft fee for that transaction and
subsequent ones until you make a sufficient
If I use a debit card to make a purchase can
the merchant put a temporary "block" or
"hold" on other funds in my account?
Yes, in certain circumstances, merchants can
take these steps as protection against
fraud, errors or other losses. One common
situation involves a hotel putting a hold on
a certain amount when you use a debit card
(or credit card) to reserve a room. Another
example is when you use your debit card at
the gas pump. Typically, the gas station
will create two transactions — the first to
get approval from your bank for an estimated
purchase amount (let's say $50) when you
swipe your card before pumping gas, the
second for the actual charges when you're
done. Until the first ($50) transaction is
cancelled by the bank, usually within 48
hours, you wouldn't have access to that
amount in your account.
Sometimes you're asked to enter a PIN to
approve a debit card transaction, other
times you can sign your name. Does it
Yes, it could. Examples: If you use a PIN at
a merchant's sales counter, you also may be
able to get cash back, and that can save you
a trip to the ATM. There also may be
differences in how quickly the transaction
is posted to your account, depending on how
your bank processes PIN vs. signature
Also, here's how to select each option.
If you want to sign for a debit card
transaction, you generally swipe your card through the reader and choose
"credit" — even though you are authorizing a
debit (withdrawal) from your account, not a
credit card transaction.
To use your PIN instead of signing, select "debit."
What more do I need to know to prevent debit
Protect your debit card as well as the
account number, expiration date, security
code on the back, and the PIN. "Even if you
never lose possession of your card, someone
who learns your account number, security
code and PIN may be able to use that
information to access your account and
create counterfeit cards," said Aurelia
Cardamone, an FDIC Senior Technology
While in many cases you are not responsible
for unauthorized transactions (see federal
protections described later), it can be a
hassle resolving the situation. Here's how
to avoid becoming a victim:
Never write your PIN on or near your card.
Memorize it instead.
Don't give out bank account information over the
phone or the Internet unless you have
initiated the contact or you know the
person is who he or she claims to be.
For example, beware of deceptive calls
or e-mails from crooks claiming to be
from your bank asking you to "verify"
(divulge) your account information.
"Don't fall for it," said Cardamone. "A
true representative of your bank will
never need to ask for your PIN because
your bank already has your account
Don't share your debit card PIN, security code
and other account information with
friends or relatives who aren't
co-owners of your account. Likewise,
never reveal this information to new
"friends" you meet over the Internet.
"Common scams start with a job offer or
an Internet friendship or romance that
leads to pleas for money transfers and
secrecy," said David Nelson, an FDIC
Take precautions at the checkout counter, ATM and
gas pump. Always stand so that no one
can see the keypad where you enter your
PIN. At retail establishments, it's best
to use do-it-yourself scanners. If you
give your card to a clerk, be on guard
against a dishonest employee who runs
your card through two scanners instead
of one. The second scanner could be
capturing your account information to
make a counterfeit card. In general, be
alert for suspicious-looking devices
that may be used to "skim" information
from your card.
If you use your debit card to shop online,
consider extra precautions with your
personal computer. Experts advise
installing and periodically updating
virus and spyware protection and a
"personal firewall" to stop thieves from
secretly installing malicious software
on your personal computer remotely that
can be used to spy on your computer use
and obtain account information.
Look at your bank statements as soon as they
arrive. Or, better yet, review your
account each week by phone or the
Promptly report any discrepancy, such as
a missing payment or an unauthorized
transaction, to your bank. Your quick
attention to the problem may help limit
your liability and give law enforcement
authorities a head start on stopping the
What federal protections cover consumers who
use debit cards?
The federal Electronic Fund Transfer Act
(EFTA) protects you from errors, loss or
theft of your debit card. However, unlike
the Truth in Lending Act protections for
credit cards, which cap a consumer's
liability for unauthorized transactions at
$50, the law limits liability to $50 if the
debit cardholder notifies the bank within
two business days after discovering the
The good news is that many banks don't hold
a consumer responsible for unauthorized
transactions if he or she notifies the
institution in a timely fashion.
Under the EFTA, a bank has 10 business days
to investigate the matter (20 business days
if your account is new) and report back to
you with its results. If the bank needs
additional time, it may, under certain
give you some or all of the disputed amount
until it finishes its investigation.
Generally, a bank is allowed up to 45 days
of additional investigation time (90 days
for certain transactions). "But until the
dispute is resolved," said Creamean, "you
should be prepared to pay your mortgage, car
payment, credit card bill and any other
obligations that may come due."
First Federal provides this information as a
convenience to its customers. It is not
intended to be professional advice. First
Federal encourages you to consult with a
qualified advisor before making any
decisions based on this information.
FDIC Consumer News