The $38 cup of coffee? The Top 5 risks of using your debit card

credit cardsConsider this case: a man miscalculates how much money is in his checking account, uses it seven times in a day with no single charge more than $12 and ends up charged with $234 in overdraft fees. Welcome to the dangers of debit cards.

The plight of Peter Means, 59, of Colorado and how he came to be facing all these fees -- which in one instance cost him more than $38 for a cup of coffee at Starbucks ($4.14 for the coffee, $34 for the overdraft) -- was chronicled in the New York Times. Means' situation is just an example of how big a profit center these fees have become for banks, how important they are for banks and how consumer outrage over them have pushed lawmakers to try to rein them in.

In concept, there's a lot of good about using debit cards -- you don't have to carry cash, you're spending money you already have instead of borrowing and it is just about universally accepted.

But with this convenience comes risks that aren't always so obvious. And with more and more people relying on debit cards as their primary means of spending, it is more important than ever to understand the risks.

Debit cards are not credit cards and are not afforded the same protection as credit cards when it comes to theft. Debit cards are, however, attached to your bank account, which means a mistake could be costly.

Here are the top five risks of using debit cards you need to keep in mind:
  1. You are using your checking account and transactions are real-time, so when you buy something the money changes hands immediately.
  2. Because your checking account is the source of funds, you are subject to overdraft charges and could cause checks to bounce if you don't keep track of spending.
  3. You are not afforded the same protections as credit cards in the case of theft.
  4. When using debit cards for certain purchases, such as gas, a temporary hold in an amount greater than the purchase can be placed on your bank account -- making it seem as though you have less money that you really do and denying you access to that cash.
  5. You do not have the same protection a credit card affords if you have a problem with a purchase.
A woman wrote me a few months ago about her son using his debit card for a series of small purchases without realizing his account had hit zero. So, he used the card four times -- believing he had enough in the account to cover the less than $11 he rang up. Instead of rejecting the empty card, many banks allow you -- even want you -- to overdraw your account. The price tag for the $11 in spending: $140 in penalties.

Banks are using these errors as a source of profit. Beware. (For that matter, also be wary of a bunch of new enticements banks are offering to get people to open savings account. They are not always what they're made out to be.)

Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, offers advice for those intent on using debit cards.

"If you must use debit cards, despite the risks, at least avoid the chance of bounced overdraft fees by keeping an extra $200 buffer in your account at all times," he advises. "If the ATM screen or computer screen or your statement says $300, pretend you only have $100. If it says $200 or less, don't use the card."

The situation gets still dicier if you consider the rules that apply to debit cards that are stolen.

Your losses are capped at $50 for unauthorized charges on a credit card. With a debit card it's more of a race to see how quickly you realize it's gone.

Report the card is gone within two days and you're limited to a $50 loss, which is in addition to straightening out any potential overdrafts and other pesky inconveniences experienced by having someone spending money from your bank account. Wait more than two days and your loss is now capped at $500. Wait more than 60 days after a statement is mailed to your home with unauthorized charges and it's all on you.

That is in addition to also not getting the same protection for purchases, since the store already has your money. That means you don't have the credit card company as your mediator in a dispute.

"And don't ever use the cards on the Internet -- that's a gamble," Mierzwinski said. "But I also strongly believe that with the increased number of security breaches, coupled with the fact that you're out your own money until and if the bank refunds you after a fraud, it isn't worth the risk to use one of these cards anywhere."
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