Debit cards - are they really a good payment method to use online?

Debit cards and credit cards are the two most popular methods of payment for online purchases. The main difference between a debit card and a credit card is quite simple: debit cards are usually directly tied to a checking account from where funds are withdrawn right away whereas credit cards allow consumers to spend money they may or may not have with the promise to repay later.

Many people who want to control their expenses prefer to use debit cards since debit cards won’t allow them to spend more money than they actually have in their bank account. I applaud that idea - it is great that there are still people concerned with their spending level. However, it is my opinion based on some research I did recently that debit cards, especially when used for online purchases or in places where you can’t directly see the person handling your card, may have some serious disadvantages when compared to credit cards.

1. Debit cards are not exactly without fees
Many people who use debit cards do so thinking that this way they’ll get away from the finance charges that accompany credit cards with running balances. Debit cards have their own fees that can sometimes catch people by surprise. One such fee would be the overdraft fee. Consumers sometimes wrongly assume that a debit card will not run into overdraft issues since it’s tied to a physical checking account. That’s only true though if you actually have overdraft protection on your bank account - a service that some banks actually charge for. If you don’t have that, then the bank will usually be more than happy to let a transaction go through even though you don’t have enough funds and then later they’ll hit you with the overdraft fee.

2. The problem with holds
When certain purchases are made, especially in the travel industry such as car rentals or hotel reservations, the merchant’s policy usually is to place holds or authorize enough funds on the card to make sure that the purchase can actually be covered. Sometimes these holds are for more funds than the actual final expense. As far as I can tell the same applies whether the payment is made via credit or debit but the problem can potentially be more severe for the consumer when debit cards are used. On a credit card, these holds or authorizations are made against the credit limit on the card - usually quite a large amount - but on a debit card they go directly against the real balance in the checking account. These holds can sometimes cause debit card users to run into the overdraft problem mentioned above.

3. Liability limits
Debit cards look so much like credit cards that it’s hard to imagine that the protection and liability rules are so different between them. Credit cards usually limit a card user’s liability to the first $50 of a fraudulent transaction and there are some card issuers who take that down to $0 liability in an effort to attract business. Well, that’s not true at all when it comes to debit cards. Remember, debit cards work directly with a checking account from where money is debited in real time, not based on a promise to pay in the future. Once the money is out of the account it’s much harder to get it back in there should there be a problem with the transaction. As a matter of fact liability limits on debit cards seem to increase with the length of time until a fraudulent transaction is reported. If such a transaction goes unnoticed for a few weeks you could be liable for $500 or even more.

There is a lot more to be said here on the subject of liability - if you’d like to read more on this it’s good to know that credit cards and debit cards are covered at the federal level under two separate pieces of legislation, thus the resulting differences - the Fair Credit Billing Act deals with credit cards while the Electronic Fund Transfer Act covers debit cards.

All this is not meant to scare and discourage people from using debit cards. When used properly and in the right circumstances they are a great payment method but remember this: just because something looks like a credit card and feels like a credit card it doesn’t mean it follows the same rules as a credit card. Be informed - check with your bank and see what their policies are on the debit card they issued you. If you don’t feel comfortable with their policies then stay away from debit cards - paying with a credit card can be just as good for controlling spending, assuming you’ll pay the balance in full each time.

If you’re disciplined enough to pay your credit cards in full each month then you should probably stay away from debit cards - they offer you no advantages and enough disadvantages to make you think twice about using them.

Filed under: Finance, Security