The Debit Card Debate

A card that offers speed and convenience also has many consumers unsure about costs and safety. Here are answers to common questions.

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 Specialist.

"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 debit cards?

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 fee.

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 transaction?

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 deposit.

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 matter?

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 debits.

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 card fraud?

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 Specialist.

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 information.
• 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 fraud specialist.
• 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 Internet. 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 thief.

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 theft.

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.

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.

Source: FDIC Consumer News