As the issues on credit card rate increases surface, consumers are thinking of switching to debit cards to help manage their finances. However, there are risks involved in using this payment method that may cost card holders more money.
"Early Show" Financial Contributor, Vera Gibbons, reveals the surprising drawbacks of using debit cards that some consumers might not expect.
Gibbons says, a lot of Americans do not want to wait for the credit card reform to take effect next year, and are thus making the big switch to debit cards. Banks are also grabbing this chance to boost profits, thereby offering new reward programs and other perks for new debit card holders.
This idea worked for debit cards now account for half of the card transactions. One of the pitfalls of debit cards is overdraft fees. Gibson says that banks will collect about $40 billion of overdraft fees this year which largely comes from debit card purchases.
Debit cards are considered a great way to manage one's finances because there are no charges and other fees, but one will be faced with sky-high interest when he goes over the limit.
Gibbons uses a study conducted by the Federal Deposit Insurance Corporation (FDIC) which found out that a $27 overdraft fee that a customer repays on a $20 debit purchase would incur an annual percentage rate of 3,520 percent. Penalty for interest rates on credit cards also run about 30 percent.
Debit card reward offers are fewer and less valuable than the rewards offered by credit cards. To receive a $100 reward on his credit card, one must spend $10,000. For debit cards however, the holder has to spend $20,000.
Credit cards also give customers leverage when inevitable billing or charging errors occur. There are ways to have these charges waived. With a debit card, however, the liability will depend on when the loss is reported. If an error is reported within two days, the loss is capped at $50; if within 60 days, $500; and if beyond 60, there is no limit. The loss would all be charged on the consumer.
Reloadable prepaid debit cards are also practical. Gibbons says these are useful for those who have little or no access to bank accounts. Just last year, consumers loaded about $9 of these cards, but a huge chunk of the money just went to banks. This is because activation fees, ATM withdrawal fees, balance inquiries, and purchasing fees accumulate fast.
There is also little to no maintenance and customer service for debit cards and an inactivity fee will be charged if the holder does not use it for sixty days. The average cost per month would be $39 to $79.