Pros and Cons of Debit Cards

How often do you use a debit card? Today debit cards are widely used, but are often not the optimal method for payments. When opening a checking account, banks and credit unions usually issue a debit card with the new account. The card allows the card holder to make purchases using the funds in the account without writing a check. Because debit cards have the backing of banks, they are accepted and processed by most retailers that accept credit cards.

A debit card offers convenience, flexibility, a measure of security, and the ability to use the card almost anywhere. They can also be used online to make purchases or to pay bills (utilities, phone services, streaming providers). Debit cards can be easily swiped at the counter, inserted to process via chip or "tap" technology. Debit cards can also be added as a payment method for a digital wallet like Apple Pay or Google Pay, and stored inside payment accounts for recurring monthly bill payments.

Debit Card Benefits

A key benefit of debit cards is managing spending and tracking how each dollar is spent every day. Debit cards present an opportunity for consumers who want to stay out of debt, and most debit cards have no annual fees. If you worry about maintaining a budget, you may choose to pay in cash or with a debit card to avoid overspending. Every debit card purchase is recorded electronically by the bank card issuer. By logging on to the bank’s website or app, it is easy to get an overview of purchases that were made. Not only does this work well with some electronic budgeting apps and software services, but it can alert the cardholder to unauthorized purchases or pricing errors.

Debit cards offer a more secure payment process using chip technology, PINS, and other safety features. They are more secure than carrying cash and offer a flexible way to obtain cash through an ATM. Many retailers offer extra cash back with a debit card when making a purchase, although sometimes with a fee to get the cash. This can save time by avoiding an extra trip to the bank ATM. As long as you follow the bank's terms for requesting cash and using an in-network ATM, there should be minimal fees, if any, to get cash. And unlike when cash is lost, debit cards are not gone forever. Their loss can be reported to the bank and replaced.

Debit Card Drawbacks

When making a debit card purchase, the purchase amount is immediately authorized, held, and sent for processing to your bank account. However, some purchase types (e.g., hotel stays, gasoline purchases) pre-authorize purchases by holding amounts much larger than the purchase. Using a debit card can temporarily tie up the funds in your checking account. These holds drop off after a few days or even a few hours, but they keep you from spending that amount while the charge settles. Rental car companies and hotels may put a hold on the entire amount in advance and add extra hidden fees and potential incidental charges “just in case.”

This will limit access to your funds and can lead to overdrafts or bounced checks if you are not careful. For example, a hotel stay may hold an extra $200 or more until the stay is over and paid for, then release the funds a few days later. This means a $500 hotel stay can cost $700 or more

until those additional held funds are released back into the accountholder’s control. For someone who does not have an additional $200 to spare, this can be a problem. Gas stations can now pre-authorize up to $175 on a debit card each time gas is pumped,] making it initially very expensive if someone needs to fill up several times during a road trip.

Most debit cards have daily spending limits which vary by account type, and can be as low as $200. Upon reaching the spending limit, the cardholder cannot use the debit card again until the next day. Credit cards do not have these lower limits. Depending on the credit card account, an accountholder can spend their entire credit limit in one purchase. This can make using a debit card for large purchases or shopping at several places in one day challenging.

Debit cards have limited fraud protections so there is a much higher risk of losing money, while credit cards offer robust fraud protection. Using a debit card can put your bank account at risk. When a debit card is used fraudulently, your personal funds can be drained before you even realize your card has been compromised. Setting up auto-payment for bank accounts to pay bills, rent and mortgage payments can be risky. This is why many advisors recommend only using a debit card to withdraw money from your bank or an ATM.

Debit cards offer fewer features when compared to credit cards. Many credit cards offer the chance to earn valuable points, miles, or cash back on eligible purchases. They might feature money-saving benefits: extended warranties, price protection, travel insurance, or primary rental car insurance. These benefits can add up to meaningful savings if you take advantage of them.

The biggest disadvantage to using a debit card is that it does not help build credit history or establish a better credit score. Securing a credit card, making punctual payments and paying down balances builds your credit history and can boost your credit score. This offers future financial advantages: lower interest rates, more loan options, higher credit limits and more.

Debit cards are useful - for making smaller daily purchases and carrying less cash. If debt is a concern, they offer peace of mind and a secure way to pay. Consider your use of debit cards carefully and take time to understand their benefits and drawbacks. Want to schedule a quick call with me? Click HERE

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.