How to Use Smartly Your Debit Card

Debit cards come with more risk than most payment methods, but we tend to use them because they're convenient. While they can be handy, they can also cause you a lot of trouble. Here's how to stay safe.
In general, credit cards are safest. If you have a credit card or charge card, you're better off using that for the majority—if not all—of your purchases. Credit and charge cards tend to come with better rewards and you don't have to worry about fees for exceeding your limit. They better protect your money because you aren't technically paying with your money until you've seen the charge, whereas your money is instantly removed when using a debit card. All of that said, there are many reasons why you might need or want to use a debit card. If you don't need to use your debit card, don't. If you have a good reason for using it, read on. We're going to talk a look at the rights you have and the risks you take as a debit card owner, as well as what you can do to stay safe and avoid fees from your bank and general fraud.

Know Your Changing Debit Card Rights

The Few Varying Rights You Have

You get very few rights, by default, when it comes to debit cards. Most of the "rights" you have come in the form of incentives from your bank. Banks will often offer fraud protection packages with their accounts and cards, so be sure to call your bank and find out what rights they're offering for your specific type of account. Generally these rights are pretty decent with major banks. What you need to be more concerned with are the ways they'll charge you fees for minor mistakes on your part. Overdraft feeds are now much more limited, cutting out a huge source of revenue for banks. Additionally, interchange rates are now being capped as of July 1st, 2011, meaning banks can only make so much money in merchant feeds every time you swipe your card. The more restrictions imposed on the banks means the more creative ways they need to find to start charging fees. While nothing is in place just yet, the Wall Street Journal points out that the following fees are likely to show up this year:

An annual fee of about $25 for debit card use
Higher withdrawal fees at ATM machines for non-customers
Limitations on the number of transactions you can make with your debit card, and potentially the amount as well.

Banks may also do away with debit card rewards programs, so you may want to consider cashing in your rewards points sooner than later. Bank of America, for example, is already testing some of these out by offering an Essentials checking account that comes with a debit card fee. Once account, called eBanking is already in place. If you get an eBanking account you get everything fee-free unless you see a teller. If you see a banking teller, you get hit with a fee. As a current Bank of America customer, I've noticed they're trying to keep me away from the teller window already and I have a regular checking account. If there's something I can do at the ATM but go to the teller because I have a question, I have, on multiple occasions, been walked over to the ATM machine and watched as I used it. This is just a taste of what's to come. As soon as next month, many banks are imposing new fees and restrictions on both your accounts and debit cards. Call your bank for more information, read any mail they send you, and be prepared to alter the way you use your debit card and bank account to avoid getting hit with surprise charges.

Overdraft Fees: When They're Allowed and How to Prevent Them

Debit cards are not credit cards, even though they operate in very similar ways, but sometimes it can be easy to see them as interchangeable tools. A debit card is really just a quicker means of writing a check. When you write a check, the funds are withdrawn from your account as soon as the check is cashed. The same goes for a debit card, only this happens much faster and is sometimes instantaneous. Anyone who's used a debit card is probably well aware of this, but it's not necessarily what we're aware of when we're actually using the card. It's so important to remember that using a debit card means your money is now gone. There isn't much wiggle room for error. If you pump too much gas and you cause an overdraft of your account—which is still a legal overdraft because of how gas stations charge your card—you're stuck with it. Even with new consumer protection laws preventing banks from allowing us to charge more on our debit cards than our balance can cover, there are still many ways overdrafts can happen.

Going back to the example of purchasing gas for your car, let's break down how this charge works and why you can receive an overdraft. If you pay at the pump, your card is initially charged $1 to ensure it will be approved after you finish pumping gas. This is because the gas station doesn't know the size of your tank, how much gas you're going to put in it, and, therefore, what the total cost of gas will be. Say you want to put $30 of gas in your car because that's all you've got in your bank account and you accidentally go over. Your account will overdraft because your bank has guaranteed the charge to the gas station, just like it would with a check. Because the amount is unknown, those overdrafts are still allowed. Your bank can't deny an amount it's unaware of, but it can honor the charge and assess a fee if you can't cover it. Any situation like this, where the final amount is unknown, will still cause overdrafts. There is nothing protecting you, and so you need to protect yourself. The easiest way is to simply pay up front so the charge will be denied if you can't cover it and so you won't be able to go over the pre-paid amount even if you try. While in an ideal situation you'd keep enough money in your account to avoid overdrafts entirely, you can always forget and always make a mistake so it's best to be careful in this situation.

Another common way of over-drafting your account is when certain kinds of other charges don't show up immediately and you forget about them. Let's say you do not have a credit card that you can use to pay your bills and you only have your checking account and the debit card associated with that account. If you pay your bills using automatic withdrawal (ACH electronic funds transfer), these charges are not protected from overdrafts. Whenever you can, pay your bills with your debit card instead of using automatic withdrawal. This will shift your worst-case scenario from ending up with overdraft charges to simply failing to pay your bill on time. Generally, if a bill is not paid on time, the late fee is considerably less than the overdraft fee and you may not even have to pay that late fee if you can manage to pay your bill within the next few days. You want to avoid automatic withdrawal whenever possible for this reason. Try to reserve wire transfers for money going into your account (e.g., direct deposit for your paycheck).

How to Lower Your Chances of Debit Card Fraud

Avoiding Fraud

There are many ways you can become a victim of debit card fraud, but it's a lot easier online. While it helps to be aware of common scams,you can't be on top of everything at all times. Despite your best efforts, being a victim of fraud is still a possibility. If you can't use a credit card in place of your debit card when shopping online, check with your bank to see if disposable/virtual credit cards are available to you. If you're not familiar, these are basically single-use numbers, often with set limits, that expire after use. While these virtual, disposable numbers may work the same as your debit card and withdraw money immediately, you don't have to worry about someone else finding that number, using it, and draining your bank account.

When you're out making purchases in the real world, there are still a number of risks. For example, many businesses—particularly restaurants—still print credit and debit card receipts with your entire number on them. This is particularly bad because your number is exposed to anyone who sees that receipt. Check your receipts when you make purchases to ensure the full number is not included. If it is, use the pen you're signing with to black out all but the first or last four numbers of your card.
In the event your card is lost or stolen, you need to be prepared to handle the situation as quickly as possible . Be prepared to call your bank and the credit processor (VISA, Mastercard, AMEX, Discover, etc.). It's best if you compile the necessary information, such as numbers you'll need to call and information you'll need to provide. Once you do, print it Evernote or Simplenote so you have it easily available on your smartphone or computer. If you're still using a regular cellphone, most have a notes feature where you can store small amounts of text, so it may help to keep the information there as well. If not, you can always store important numbers in your phone's address book, assigning the business name as the first name and something like CARDFRAUD for the surname. This will keep the numbers together and easily accessible in case of a problem. Generally the numbers you'll need will be on the back of your card.

Fraud Protection Dissolves with Time

If a fraudulent charge of any kind may have been made to your debit card, you're generally pretty well protected. While banks only have to cover resulting damages past $500 on your credit card, many offer better protection ($50, and sometimes less) as an incentive. Be sure to check with your bank to know how protected you really are in the event someone steals and uses your debit card. If debit card fraud could cost you quite a bit, it may be time to find a new bank.
Even if you are well-protected by your bank, they'll only help you out for so long. Good protection may be contingent on your reporting possible fraud within 48 hours, and your bank is not required to help you at all 60 days after receiving your monthly statement. Again, be sure to call and find out your bank's specific policies, but the important takeaway is this: check the charges on your account regularly and call your bank if something is unfamiliar. It may not be fraud and it may just be a charge you'd forgotten about, but you're protecting yourself simply by calling to ask about it. Often times your bank can help you get more information on the charge and figure out what it is. You're better safe than sorry in this situation, since all you're doing is spending a few extra minutes on the phone. If waiting on hold sounds horribly tedious, consider using a tool like LucyPhone to avoid waiting on hold altogether.
Even if it isn't necessarily fraud, it's always worth double-checking your statement because sometimes you can get overcharged by small amounts. Sometimes tips on restaurant bills get misread (or intentionally increased), companies accidentally process certain transactions twice, or the cashier forgot to close out the previous transaction and it got added to your bill by accident. You should get into the habit of checking your statements regularly to help avoid these more common issues as well.
All this information points to one thing: increased awareness. Pretty much every debit card problem you could encounter can be prevented by simply staying aware of how you're using your card, the restrictions imposed on your card, and what fun new things your bank is dreaming up. Stay informed and aware and you'll be able to avoid getting screwed.