Why you should never pay with a debit card.

In a Michael Pollan tribute, if you don't want to read the whole article, here's the gist: credit cards protect you from liability. Debit cards expose you to it.

Debit cards look, feel, and superficially behave just like credit cards. But they operate quite differently. Credit cards allow one to borrow up to a pre-set spending limit, your "credit limit." (Some credit cards such as Citi's PremierPass or Diamond Preferred Rewards card, offer "no pre-set spending limit" akin to traditional charge cards, the most famous of which is American Express, but there's no effective difference.)

Not so with debit cards. Debit cards are a check book posing as a credit card. When you use your debit card, you are writing a check against your bank account. To many people, this represents the advantage of debit cards. Hey, I can't be financially irresponsible, if I don't have the money, I can't pay!

Would that it were so. Your bank wants you to be able to pay even if you don't have the money. If you make a charge using your debit card and the funds aren't in your bank account, the bank will honor the charge, but will charge you a fee, somewhere between $25 to $50, per transaction.

How does it happen? You expect a check to be deposited in your bank account. Or you don't expect a certain withdrawal to take place before a certain deposit. You have roughly calculated out your bank account, but remember, you don't have a checkbook to actually keep track of it anymore. So you go to Starbucks. You get a latte. Whoops! That's a $45 latte now. Then you buy a pack of gum. Whoops! That's a $41 pack of gum! And so on. Many people might use their debt cards a dozen times over the course of a weekend. And you won't know that you are getting overdraft fees until you check your bank account--maybe not even then if they don't post over the weekend. (Though if this happens, it is a bank error, and you can fight them to the death.)

I have personally accompanied two friends to banks to contest these overdraft fees. In one case, the bank eventually reversed the $500 in fees. In an entertaining turn of events, the bank manager, who was gay, took sympathy on my friend because he evidently thought we were partners. In the second case, the very heterosexual bank manager did not take pity on my then (female) romantic interest. Well, she's still female, as far as I know. She's just not a romantic interest. You will be lucky to get fees reversed. They are hugely profitable for banks and they have very little interest in reversing them.

But it gets worse. Your wallet gets stolen by two thieves working together. Thief A takes your credit card. Thief B takes your debit card. Thief A and you both got a better deal. Not only if thief A going to be able to charge more junk on your credit card, but you won't be liable for any of the charges. Ah, but thief B is hurt by this and observes that he can probably charge just as much junk on your debit card and you still won't be liable for the charges, because your bank will refund you the money. Well, thief B has a point. The bank will likely eventually reverse the charges. But in the case of A, the money was just theoretical as far as you were concerned. In the case of B, the money was very real and very in your bank account. And now its very gone, so good luck with your rent payment until your bank gets around to returning the money. The fact that Bank begins with a B is a pure coincidence.

In summary, credit cards protect you from liability. Debit cards expose you to it.

I understand the counter argument. It is great to demonstrate fiscal restrain and responsibility. But why behave differently with a credit card? If possible, you should always pay your credit card balance in full each and every month. (Unless you are enjoying a 0% promotional rate, in which case you should pay the credit card bill amount every month into an interest bearing account and then pay it when the terms of the promotional rate expire.) If you just know that you can't do that, get an American Express charge card which you will have to pay every month in full. (American Express has softened their views on this, to the detriment of the credit spartans amongst us, allowing people to pay over time or some such.)

Here's what you do: never use your debit card for purchases. Just use to withdraw money from your ATM. Don't sign the card. Can't do that? Sign your card: "Ask for ID and PIN." That way any thief will be unable to use your card. I understand that some people have difficulty getting credit cards. If so, get a co-signer, a card with a very low limit, or, at last resort a secured credit card that has an option to be converted into a regular credit card after some period of good behavior. (If there is interest in the comments, I will write a column about getting and maintaining good credit.)

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Comments

[Parkimedes]

I use a credit card, as if it was a debit card, and i pay in full each month. I do this so I can get about 1% back as cash. Most credit cards have some sort of program where they give you about that much back. I also use it, or I got started at least, so I could establish credit. This way when I'm ready to buy a house or need a big loan, I have an outstanding record of coming clean on my debt.

[Bart Motes - Huffpost Blogger]

Parkimedes, you are on to a greater truth about the merits of debit cards. In this post, I focused on the downside of debit cards. I will write another post about the tremendous merits of well managed, disciplined credit card use. It is a game with credit cards, but judiciously playing the game reaps tremendous benefits. Thanks for the comment.

[LeftRight]

Bart,

I gotta disagree with you in all but one respect. Using the debit card is just fine (as long as you are aware of your account, which is easy in these days of online account access!) except in cases of hotel or rental cars, or something similar. In the case of a hotel or a rental car, they will hold funds equal to the expected amount, plus a security deposit. This means that although you may have the money for the rental, you may very well overdraw yourself without being aware of it, especially over a weekend.

That's about the only time that I would recommend using a credit card, as the hold that they place doesn't actually show up until AFTER the transaction is cleared!

[Bart Motes - Huffpost Blogger]

Thanks for the comment. But I don't think you make a good case for debit cards. You concede that debit cards present problems with car rentals. Can you think of any respect in which debit cards are superior to credit cards? I think for most people they are a moderately to hugely bad idea.

[LeftRight]

Well, there's one major point. In the case of Credit cards you must pay interest. In the case of your debit card, the only charges that apply are potential overdrafts. Since interest is usually more than overdrafts (in the long run) I would say right there that debit cards are the way to go in most circumstances!

[Arithrianos]

I only use a pre-paid credit card. I got mine from ACE cash express, but there are other places. It costs $60 a year, has NO overdraft fees, offers theft protection, and you can use it for direct deposit. Works great for me. As for now, I never want another checking account again ever.

[Bart Motes - Huffpost Blogger]

Thanks for the insightful comment! Again, some would wince at the notion of paying for a credit card at all, but your solution beats the problems that debit cards present.

[Arithrianos]

I consider it a replacement for a checking account, since you don't have any actual credit, you only have access to the amount on the card, so the $60 a year to me is just one bounced check fee or two overlimit fees from a bank.,which to me was an average month. Also you don't pay interest since you don't have any credit, and you have to option of moving money between a savings account and your card very easily, even just using text messages if you want. I have bad credit, so the only actual credit cards i could get were not worth having, one was charging 30% interest!

[zizyphus]

Better yet, go to the bank, to the teller, and get your cash. When you spend your greenbacks, you tend to spend more conservatively than when you use a credit or debit card. Don't use any cards unless you absolutely have to. They are trying to move us to a cashless society, and using cards just accelerates this process.

[Bart Motes - Huffpost Blogger]

Thanks for the comment. I am afraid I am a fully actualized card user to the core at this point. But I respect your viewpoint. Credit cards reflect a 3% tax on the economy that goes straight into bankers' pockets. But they are so darn convenient! And I get miles and gift cards! Doh!

[camb94]

I agree with all that you say and rarely use my debit card (except to get cash at ATMs and sometimes to pay at the grocery store). I don't worry about fees because we keep a hefty cushion in our account (plus we are at a very "homey" credit union who pretty much waives the fees for everything that they have power over). The main reason that I don't use it, and what I warn people about is that there are theiving rings, at least according to an LA Times article I read about a year or two ago, that steal the magnetic code off of debit cards and then copy them. Worse, they (usually in conjunction with certain gas stations) have tricks where they steal your pin -- i.e. cameras on the pin pad, etc. The bank then argues that since you "gave" away your pin number, it is your fault and you are responsible for the theft. The bank will not replace the money, or even reverse any charges. I tell everyone that, especially at gas stations, you should always use a credit card or cash.

[Bart Motes - Huffpost Blogger]

Wow, its worse than I thought. Thanks very much for the insightful comment. I have been boring my friends to death with this topic so I thought I'd save time and energy and write about it here. Thanks!

[Danny]

Very interesting. I have been careless in using credit card and debit card. I will share this with my similarly careless friends. Keep writing on topics like this!

[Bart Motes - Huffpost Blogger]

Thanks very much!

[leftcoastindy]

Ask for ID" works fine, and I wish I had seen this info a couple years ago.

[Bart Motes - Huffpost Blogger]

Thanks for the comment! Good luck!

[2008debate]

Actually, a merchant who sees "Ask for ID" written on a card is supposed to get you to sign it in their presence, then compare the signature with your govt ID. See http://usa.visa.com/merchants/risk_management/card_present.html#anchor_6 It's possible this Visa policy is only for their credit cards and not for their check cards, but I doubt it.

[ksyellowdog]

I use my debit card regularly for everyday purchases. It is a matter of convenience since my wife keeps the checkbook with her. I do keep a very close eye on our balance in our checking account and hence know whether I can make that next purchase or not. However, that requires one to have a modicum of self-discipline. Credit cards are for emergency use. I even prepay our vacations or we don’t go.

[Bart Motes - Huffpost Blogger]

I agree 100% with the financial self-discipline, but understand that the feeling of control you have over your bankcard is an illusion. Every time you hand it over, you are putting your bank account into the world. I prefer to play with the credit card companies' money. Since you are already keeping a tight reign on your finances, it wouldn't be hard to simply use a credit card and pay it in full every month. Write DEBIT on it with a sharpie if it helps you maintain your discipline.

[2008debate]

"I even prepay our vacations or we don"t go."

But then you have no protection! I don't understand this. When I pay for a flight, my credit card will help me out if my baggage is lost; it will also allow me to decline the rental car company's insurance. If I pay with a credit card but do not receive the proper service (ex: I pay for a luxury room but when I get there they put me in a standard double), the credit card company will help me out. And if I must cancel my plans, I am not out for the whole amount, just any nonrefundable deposits.

[GeologyRocks]

If you have your credit card account through your normal bank, you can simply transfer funds online from your checking account directly into the credit card account any time you wish. That way, you never have to mail out a bill payment, never have to pay interest, and you earn enough rewards points to get a free pin cushion. Since I would rather buy a new shirt than sew on a button, I give the pin cushion to the cats to play with (assuming there are no pins). Unfortunately, the cats tend to rip them up, and since I can’t sew, I have to throw the pin cushion away, which forces me to buy enough stuff to earn the necessary points needed to get another one. This is a win-win for me, the cats, and the economy.

[Bart Motes - Huffpost Blogger]

Right, this is a great approach if you are nervy about credit cards. You can keep a negative balance on your credit card. Of course, finance people will scream because you are cheating yourself out of interest and the "float" of a credit card, but relative to using a debit card, you are ahead of the game.

And you keep the kitties happy! Thanks for the great comment.

[ConstitutionFirst]

You maintain that telling every cashier, and anyone else in line, the PIN for a debit card is a good idea? I disagree.

[Bart Motes - Huffpost Blogger]

That would be stupid. How would the cashier know if your PIN was accurate? That must be why it never happens and you are instead given a key pad to key your PIN in. However, your comment raises another question, "what if the merchant doesn't have a keypad"? Better question and maybe a dealbreaker for that piece of advice. Thanks for the comment.

[ksyellowdog]

We have Visa check cards. We can use them as either debit our credit. but either way, the money comes out of our checking account. If the transaction is credit, then our account is debited when the merchant settles the transaction.

[DarkWitch]

When they don't have a key pad they just run it as a credit card.

[cktirumalai]

I have been using my Debit Card exactly as you recommend: solely to withdraw money from my ATM. But it comes as news to me that for that purpose it need not be signed. The PIN protects the Debit Card in a way that Credit Cards are not protected, except that you are not responsible for fraudulent charges on the latter. And a Credit Card need not be produced in ordering something over the telephone, merely its number given. I must say, however, that Credit Card companies are taking more and more elaborate measures to protect against fraud. I read the other day that one of my Credit Cards will not be honored beyond a radius of 100 miles, except perhaps by prior agreement.

[Bart Motes - Huffpost Blogger]

Thanks for the comment. Wow, it is interesting what we tend to believe about our cards and technology? The PIN is the method of authentication. I have never signed my current debit cards and never had a problem getting money out of ATMs. Unless of course you count the outrageous fees! Thanks.

[2008debate]

I've never signed my ATM card, either. Why would you--no one else ever touches it!