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There is no doubt that a debit card has its benefits. Because it's tied to your checking account, a debit card is easy to get, safer to carry than cash, and accepted pretty much everywhere. And unlike credit cards, a debit card doesn't lead to interest payments. It's the convenience of a debit card that makes it so easy to overlook its faults. Here, we'll discuss the dark side of taking on a debit card and what you can do to avoid debit card traps.

It's easy to overspend

There's something about having cash in your pocket that makes you think twice before parting with it. Say you're at a farmers market or county fair. You've set aside a specific amount of cash you're willing to spend and are determined to stick to your budget. 

Chances are, you'll think long and hard about a purchase before handing your money over to a merchant. Debit cards are different. They don't feel like you're spending money because they lead to cashless transactions. If you're an impulse buyer, a debit card can lead to spending more than you plan.

Avoid the trap by looking at your checking account before you go anywhere you might be tempted to spend money. Make sure you have enough in your account to pay your fixed bills for the month, then determine how much you can afford to spend at the event. If you don't plan to spend much and it's safe to carry cash, do so. If not, keep a running tally of your debit purchases. When you reach your spending limit, you're done for the day.

Overdraft fees can add up

Generally, your bank will decline a debit transaction if you don't have the funds in your account to cover the purchase. If you've already received a service, like a haircut or a tire repair, a merchant may ding you with a fee for the declined debit transaction. But that's not where the hefty fees come in. You're hit with those when you fail to keep accurate records of your debit purchases and you overdraft your account.

Let's say you used your debit card six times at the county fair and stuffed the purchase receipts into your pocket, intending to record them later. You arrive home late and fall into bed. The next day, you're busy and forget all about withdrawing your debit purchases from your checking account ledger. Later in the week, you sit down to pay bills, forgetting about the six purchases you made the weekend before. By the time the next week rolls around, you've received several overdraft notices, and your checking account has been debited expensive overdraft fees.

Avoid the trap in one of two ways:

  1. If you're going somewhere with your significant other or a friend, enlist them as an accountability partner. It's their job to keep any receipts you get from debit purchases and to bug the living daylights out of you to jot down what you spent the moment you arrive home. Better yet, write everything down before you leave the parking lot after an event.
  2. Balance your checkbook just as you would if you were still writing checks. The quickest way to get into trouble with a debit card is to guess how much you have in your checking account without balancing the account.

Debit cards don't improve your credit score

Payments made to lenders (like auto loans, personal loans, or credit cards) get reported to credit reporting agencies. Each time you make an on-time payment, your credit score is enhanced a bit. Purchases made on a debit card do not get reported, meaning they will do nothing to help you build a positive credit history.

Avoid the trap by mixing it up. Use your debit card for some purchases and a credit card for others. Make sure you pay the credit card off in full each month to avoid expensive interest payments.

They may have limited protection

According to the Federal Trade Commission if your debit card is stolen or lost, the maximum amount of money you can lose depends on when you report the incident. For example, if you report the card missing before someone has a chance to make unauthorized charges, you are 100% protected against loss. If it takes you two business days to realize the card is missing, you could be out up to $50 if the card is used. Report the card missing more than two days after learning it's gone, but less than 60 days after your last statement was sent, and the loss could cost you up to $500. If it's been more than 60 calendar days since your last statement, reporting it won't do much good. Any money taken from your account is likely lost.

The exception is if the debit card is not lost, but someone makes unauthorized transactions with your card. Let's say you have a roommate who knows where you keep your debit card and begins using it to make online purchases. As long as you report them within 60 days of your last statement, you are not liable for those purchases.

Avoid the trap by knowing where your debit card is at all times, securing it in a safe place, and contacting your debit card issuer the moment you realize it's missing or that someone has used it in an unauthorized manner.

Correctly used, a debit card can be a handy tool to keep in your financial arsenal. Used carelessly, it can make you long for the days when the only way to pay for purchases was with cash.