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The Truth Behind Your Debit Card

By Jeff Brown
Are debit cards really the best thing since … well, credit cards?

Millions of people think so. Visa (Stock Quote: V) reported at the end of April that debit card transactions had exceeded credit card charges in the last quarter of 2008, for the first time.

Visa attributes most of the debit gains to consumers’ growing desire for better financial control. While a credit card purchase is a loan that can carry whopping interest charges, the debit card draws cash from the customer’s checking account. That means there’s no chance of racking up huge balances and interest costs.

Growing use of debit cards seems to be part of a swelling keep-it-simple financial philosophy, especially the urge to avoid interest payments. The Minimum CC Payment calculator shows how big those can be. However, it’s worth remembering that there are risks to debit card use, though most are easily overcome.

The most often cited is the slightly weaker protection for unauthorized use, if your card is lost or stolen, than with credit cards.

Under federal law, the consumer is liable for no more than $50 in unauthorized transactions on a credit card. With a debit card, the $50 limit holds only if you report the card missing within two business days. If you don’t, you could be liable for up to $500 in losses, or for unlimited losses if you get a statement showing the unauthorized transaction and wait more than 60 days longer to alert the bank.

Solution: guard your debit card as if it were cash.

Because a debit charge is not a loan, using the card does not help you build a credit history. Of course, many people build solid credit by paying their mortgages and car loans on time, but it can make sense to continue using a credit card for a few charges, to build a good payment record. Some merchants, such as rental car companies, don’t accept debit cards, so it pays to keep a credit card.

Using a debit card to keep your credit card use well below the limit will actually enhance your credit record. The Payoff Credit Card calculator shows how to clear away your credit card debt.

It is often said that debit cards are not as good if the consumer gets into a dispute with a merchant, because the merchant already has the consumer’s money. With a credit card you can fight a charge, and the card company will intervene, giving you more leverage.

Before you make this a factor in your card use, think about how often you’ve actually needed this help. You can always use a credit card for expenses more likely to involve disagreements, like home or car repairs, and rely on the debit card for ordinary things like groceries, gasoline and utilities bills.

While some debit cards do come with rewards programs, they tend to be less generous than credit card rewards. This is worth considering if you are a big card user who racks up lots of airline miles or other rewards. Use the shopping tool to find the best reward credit cards. But for many people, the value of rewards doesn’t offset the annual fees, interest charges and late fees that credit cards can incur.

You won’t get rich with a checking account and its linked debit card. Even if the account pays interest, it’s small, averaging just 0.15 percent, according to the survey.

But the real value of a checking account with a debit card is convenience and safety. Search for the best checking and debit card deals with the shopping tool.

As with any kind of financial account, scrutinize the fine print for traps and hidden charges. For example, many debit cards come with overdraft protection that allows you to spend more than you have in the account, but there’s often a hefty fee.

Since one of the debit card’s chief uses is to withdraw cash from ATMs, use a bank that has plenty of machines in your area. Be sure to know what you’ll be charged for using another bank’s ATMs.

—For more ways to save, spend, invest and borrow, visit

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