What dangers lurk within that debit card

Bill Gephardt is a consumer advocate, founder and operator of Get Gephardt Approved Dot Com. The opinions stated in this article are his and not those of St. George News.

Bill Gephardt | Photo by Bry Cox, BryCox.com, courtesy of Bill Gephardt

OPINION – Do you use your debit card? Well, knock it off!

Or, at least consider the dangers you encounter every time you use your debit card over your credit card.

Debit cards, in my view, were created not so much for the purpose of convenience for customers, but for the benefit of the creators: the banks. Banks no longer have to spend millions of dollars flurrying checks all over the country to get them back to the issuing bank. And banks don’t have to hire rooms full of workers to spend time processing checks.  With debit cards, it’s all done instantly and electronically.

While banks benefit, however, certain dangers are set up for consumers that I have not once heard banks talk about. But I will.

When debit cards were created, the laws governing them were largely the laws that regulate credit cards. However, in practical use by consumers, there is a huge difference when it comes to security.

Consider an ordinary daily transaction:  purchasing gasoline for your car.

Let’s start using a credit card.  When you insert your credit card into the card reader at the pump, it says “processing,” or “authorizing.” The card reader is accessing your credit card information to see if you have an available credit balance of about $100  (the amount differs depending on the amount set by a gas station). That $100 is immediately suspended from your available credit. It is as if you charged that amount for your fuel. You are now permitted to pump a maximum of $100 worth of gasoline. Say, you then pump only $40 worth. That $40 is actually charged to your credit card. But what about the remaining $60 you had authorized but did not use? The bank does not have to immediately place that back in your credit.  It can remain in suspension for up to 10 days. It is something a consumer will not ever notice. The suspension is never noted on a credit card statement, and as long as the consumer never reaches the credit limit on the card, the suspension is never noticed.

Now, let’s try the same transaction with a debit card. This time, when you swipe your debit card, it says, “authorizing again.” But this time, the machine is peering into your “checking” account to see if you have $100 of your hard earned money available. That full $100 of actual money is suspended. When you pump that $40 worth, the remaining $60 in your account can also remain suspended up to 10 days by law. It is your money that you cannot spend until it is released.

I once told the story of a man whose wife was preparing for a short trip on a Sunday morning.  He woke up early and took her car down to the gas station to top it off with his debit card.  He pumped $15 worth.  When he returned home, he decided to top off his own car.  That was another $30 worth.  When his wife left, he decided to mow the lawn, but the gas can was empty. So, he went back to the gas station with this debit card and pumped another $5 worth.

The next morning (Monday), he began writing the monthly household checks:  the gas bill, the electric bill, mortgage payment, credit card bills (4), car payment, health club bill, phone bill, cable bill, and insurance bill. Two days later, he was stunned by notification from the bank that his checks began to bounce. Suddenly, he had fees mounting to over $300, and yet he had the money in the bank to cover those checks all along.

It was all because those three transactions that Sunday morning at the gas station amounted to $300 in suspended cash in his checking account. No one ever informed him of the suspension, it never appeared on his checking account statement, and no one was willing to forgive those perfectly legitimate bank overdraft charges, even though he had the money all along … but that money was suspended for up to 10 days.

All that would never have happened with a credit card.

Now, consider the very common issue of identity theft. Say someone steals your “credit card” information, and runs up a bill of  $1,000. When you find out about it, you won’t have to pay anything. You simply inform your credit card company that those are not your charges, fill out a form, get your credit card number changed, and that’s it.  You know you are certainly “not going” to pay any portion of that bill.  And, by law, the credit card company must replace that $1,000 back into your credit card.  They have 60 days to do it.

Now, consider if someone steals your debit card information and runs up the same bill of $1,000.  That is money that is taken out of your checking account.  The same rules kick into effect, but it becomes much more complicated. You see, that is your actual hard-earned money stolen from you, not your credit. So, when you inform your bank that the charges are fraudulent, you go through the same procedure but the trouble is you’ve in essence already paid the money, and now you’re trying to get it back. So, you might fill out the same paperwork, but the bank has 60 days to provisionally place that money back into your account. In the meantime, you don’t have access to that money.

That happened recently in Northern Utah when a gas station’s computer accidently charged consumers 10 to 100 times their actual gasoline purchase.  The gas station was very sorry for the error and worked to correct it. But in the days and weeks it took to straighten it out, consumers who had used their debit cards had to struggle with their landlords, gas companies, electric companies and so many others. Those merchants demanded on-time payments. Some consumers suffered overdraft penalties and late penalties. All the consumers could do was try to explain that they had the money, but it was taken away from them, with the promise it would soon be returned. Sure, it was returned eventually, but some consumers spent long hours month after month trying to straighten out someone else’s error, all because they used their debit cards.

For me, I never use my debit card. I always use my credit card.  They are all taken at the same places. Using my credit card faithfully, I get to use someone else’s money for a period of roughly 30 days always. But the key is I always pay my full balance on time, so there is never an interest rate charged. And, I almost always use credit cards that pay me cash back (Discover and Costco American Express, for example). I avoid the credit cards that promise points or airline miles. You see, I don’t know what an airline mile is. Sometimes, it can take 5,000 airline miles to travel the 1,200 miles to Los Angeles and back.

If everything is going just fine with your debit card today, good for you; but watch out if something goes wrong.

When the banks get around to providing me the same security I now get with my credit card for my debit card, I might start using my debit card. But for now, I consider debit cards an instrument that is good for the banks, but terrible for me, the consumer.

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Copyright 2012 St. George News.

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