Written by Hollis Colquhoun, Accredited Financial Counselor and author of Women Empowering Themselves: A Financial Survival Guide.
Many banks are offering higher-yielding accounts if you use your debit card frequently each month. The higher yield is obviously good, however there are possible dangers when using a debit card versus a credit card. Usually, your debit card carries a “Mastercard” or “Visa” logo, so you have a choice of functions each time you use it.
Except when you are at a bank ATM, it is a good idea to press the “credit” function of your card for several reasons. When you use it as a debit card at retailers it’s a “cash” transaction and your money will be immediately taken out of your account. If your information is obtained by an identity thief, he/she then has the ability to take out all of the money from your checking account and anything that is attached to it like a savings account or line of credit. Even if you catch the theft within a day or two, the money is gone and you have to fight to get it back. With a credit card there is a “float” where you can spend money before you have to pay it, so if there is theft you can dispute the charge or charges before any money has been removed from your account. There are protections in either case- if reported in time your liability will usually only be $50, depending upon your bank. But it makes more sense to press the charge button when using your debit/charge card, particularly with the holidays coming and stores getting busier.
When you offer your debit card at gas stations and restaurants in advance of the final bill, the merchant will typically freeze an amount on your card that can be above the actual amount spent, to cover the anticipated cost for a tank of gas or the extra tip amount for the meal. This can cause an overdraft in your bank account if your balance is low. In addition, according to Consumer Reports, the likelihood of having your information stolen using high-tech equipment, called “skimming,” is greater at gas stations and convenience stores so at these places it’s better to use your credit function.
People who don’t have much of a credit history can use the credit function of a debit card from a major bank and it will be reported on your credit report as a credit transaction. Making monthly payments on a timely basis will help you establish good credit.
Debit cards are certainly helpful in promoting good money management behavior – only spending money that you have – but be mindful of their dangers and limitations. Likewise understand the potential downside of using credit cards – very high interest rates on any balances, and fees, So check you bank account activity daily, recognize your own financial behavior, understand the risks in using debit and credit cards and ultimately decide what works best for you and your finances.
Written by Hollis Colquhoun, Accredited Financial Counselor and author of Women Empowering Themselves: A Financial Survival Guide. Contact her at womemempoweringthemselves.wordpress.com