Is Your Debit Card REALLY That Fabulous?

Plastic is becoming the trend. And I don’t mean credit cards. I’m talking about the debit card. According to the Federal Reserve and the American Bankers Association, 33 percent of purchases are made with debit card. That ties with cash for the #1 method of paying for stuff. I was surprised at first that credit cards are only 19 percent. Then I thought about it.

Why we love the debit card

We are constantly being told that credit cards are the root of all evil, and to avoid them. But we love the convenience of doing nothing more than swiping a piece of plastic. The debit card offers us the best of both worlds: it’s not credit — it takes the money from the checking account — and it is very convenient. But it could be costing you.

A debit card has some drawbacks when making purchases, such as liability (you are), disputes with merchants, and the practice of “blocking” (which is reserving $100 for your $35 gas purchase to make sure the money is there). And the latest practice? Letting you overdraw your account.

Another way for banks to charge fees

The debit card has now presented a new way for banks to charge more fees. Remember a couple of years ago when you didn’t have enough in your checking account to cover that purchase? Denied, right? Just like a credit card. Not anymore.

Now, many banks are allowing you to overdraw. And then hitting you with the fees. It’s becoming a rather big source of revenue for them because many people don’t record the small purchases that they make everyday. The lattes and the bagels don’t get entered into the personal finance software. They are such small amounts, we don’t think about them. And the “blocking” can also result in an overdraw (and further fees) — even though you may not know about it!

The solution? Keep track of ALL of your purchases made with debit card. And consider carefully using a good credit card or two. Tomorrow, we will look at how responsible credit card use can actually help you build wealth.