by Lori Deschene
 I pull out my debit card for everything from toothpaste to airfare. My worn checkbook chronicles the many unnecessary purchases I make throughout the day—$8.99 for two magazines and a Snapple, $5.25 for duck-shaped soap, $8.25 for cute child-size flippers, even though I don’t have children. The thing about spending with cards is that it doesn’t feel like real money—and small purchases don’t seem like actual transactions. However, I realized something yesterday when a 7-Eleven worker added a $.50 fee to my slinky and pixie stick purchase: my debit obsession is costing me.
So I decided to do a little digging. Why have we forsaken cash? How do debit cards affect our spending habits? Is it worth the potential for fees and fraud?
What’s wrong with cash?
Cornell economics professor Robert Frank explains that parting with cash is a more vivid sensation than the abstract act of signing money away. Granted, his NPR podcast centers on the credit-versus-cash debate, but this translates for debit, as well. Just because you have it in the bank, that doesn’t mean you want to spend it. ABC recently did a special on a family that switched entirely to cash and saved 24 percent over 30 days totaling $1,800. They sacrificed the simplicity of the digital era, but the plastic-to-cash conversation gave them a simpler framework for acceptable spending: if it’s not green and in my wallet, I can’t spend it.
Is debit really better than credit?
Many financial experts recommend using credit cards, so long as you can do it wisely. If you only use your card to spend within your means and pay your entire balance monthly:
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The money in your account gains interest.
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It will be easier to debate fraud because you haven’t spent actual money yet.
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You’ll likely have access to a more generous reward program than your bank might offer.
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You’ll build a credit history, which you can’t do with debit.
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You can profit from 0% balance transfer credit card offers. Fivecentnickel.com outlines this nicely.
What are the disadvantages of using debit cards?
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Fees can add up. If you enter your pin number at the register—which you generally have to do for a small purchase—both the merchant and your bank can charge you a fee. If it's under $10, you probably shouldn't go with debit.
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It’s easier to overdraw with debit than with checks. When you write a check, you have a window of time before it’s processed. That gives you some leeway if you have inadequate funds in your account. Debit transactions are processed far more quickly, giving you little time to compensate for an error in judgment.
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Debit transactions can block funds in your account. Oftentimes a merchant will block an amount in excess of what you owe before you even process the transaction to protect themselves against fraud and other losses. Hotels do this frequently when you reserve a room. This means you may have less available money than you think you do, making it really easy to overdraw your account. Whenever making a reservation, it's best to hold it with a credit card.
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Fraud is a growing problem. Even if you never lose possession of your card, you still could be at risk for debit card fraud. According to Aurelia Cardamone, an FDIC Senior Technology Specialist, “…someone who learns your account number, security code and PIN may be able to use that information to access your account and create counterfeit cards.” Beyond the potential for an isolated identity theft incident, we also have to contend with computer insecurity. Just recently on August 5 th the United States Justice Department charged 11 individuals for hacking over 40 million credit and debit card numbers from 9 major retailers. In the US, the Electronic Fund Transfers Act protects you against these losses. Still, it could take your financial institution up to 10 days to refund your account—and your landlord might not be willing to wait. Also, if you don’t notify the bank within 48 hours your liability could be as much as $500.
How can you reign in debit spending?
Blogger Ramit Sedhi, who maintains the site I Will Teach You to Be Rich, suggests using two debit accounts: one for bills, and one for discretionary purchases. At the beginning of the month, transfer a set amount into the discretionary spending account. When it’s gone, it’s gone. Then any excess in your bill account can be easily transferred to your savings.
I personally find Sedhi’s idea more appealing than quitting my debit habit cold-turkey, as I’m not quite ready to part with my shiny, Master-Card branded friend. But I can deal with using it a little smarter.
posted @ Thursday, September 04, 2008 2:44 PM
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