25/01/2018The Benefits and Drawbacks of Debit Cards
Many people use a debit card when they pay for goods and services. Introduced in Canada in 1994, debit has already surpassed cash as the preferred payment method. A debit card is linked to your bank account through the Interac system and used like currency. Debit is accepted by many merchants because the processing fee associated with the Interac system is lower than that of credit cards.
The key advantage of using debit is the safety and convenience of not having to visit the ATM or bank branch to withdraw funds regularly. You can pay at more places in person using debit over credit, as debit is offered by more merchants, including for very small amounts. Additionally, the Interac system enables you to track your account balance right away, as the funds are immediately transferred from your bank account. If a large transaction occurs, you can get an automatic notification of such from your financial institution. You can also automatically set up for notification if your account balance is below a certain amount that you decide, which provides you with a warning system if you are about to spend beyond your available balance.
Another key benefit of paying by debit is that it avoids the costs associated with credit card fees. So many Canadians are in more debt than they can handle, so using debit over credit is more likely to help you be disciplined in your purchases.
Nevertheless, it is still easy to get caught up in spending, especially if you don’t think much about how you will pay. When you use debit instead of cash, small purchases can add up quickly, and you can end up spending more than you planned. The transactions that accumulated might not have had you been paying with cash.
Perhaps the greatest drawback of using debit is that your loss could be unlimited if you become a victim of theft or fraud. There is no intermediary responsible for transactions between you and the retailer like the way there is with credit cards. While security measures such as the use of micro-chip technology (also known as smart card technology) have been highly effective in reducing fraud, if someone uses your card fraudulently, you could be immediately responsible unless the loss can be shown to result from circumstances beyond your control and you cooperate in any subsequent investigation. Situations in which you could be found liable for debit card losses resulting from unauthorized use include:
- Selecting a PIN from your name, telephone number, date of birth, address, or social insurance number
- Writing your PIN on or near your card, keeping a poorly disguised copy of your PIN on or near your card (e.g., writing “bank-3492”)
- Giving your PIN to someone who subsequently contributes to the fraud
- Failing to notify your financial institution, as soon as you are aware, that your card has been lost, stolen or misused or that your PIN may have become known to someone else
- Failing to cooperate in the investigation of the loss
Another consideration about debit cards is that they have some limitations for practical use. Perhaps because debit cards have financial loss risks, there is resultantly a daily withdrawal limit of $1,000, $2,000 or $3,000, depending on the financial institution. This low daily maximum makes debit unusable for large transactions and impractical to use for large purchases. Because debit cards have low daily limits, they are often used solely as an alternative to credit cards for small day-to-day spending purchases. It is possible to overspend if you fail to monitor your transactions, knowing the limits are low and that the information can be accessed online anytime. Additionally, debit cards are not always accepted for online purchases, and they are not accepted internationally like the way credit cards are, though some debit cards can be used cross-border for shopping in the U.S.
A further drawback of debit cards is they are not without costs. While they do not have annual fees, late fees or interest charges like credit cards, financial institutions charge fees for debit transactions (e.g., $.50 -$1.50) in their basic bank plans. Some charge only if you exceed a basic amount (e.g., 5-10 transactions) or they charge a flat monthly fee (e.g., $10-$20/month) for unlimited transactions. Some merchants also charge a convenience fee or surcharge when you use your debit card to make a purchase or they require that you make a purchase above a set amount (e.g., $10) in order to waive the fee.
There are additional fees associated with using debit regularly, such as having to pay for a monthly paper bank statement that lists your transactions since the information is otherwise available free online (for at least the last year of transactions). Further, if you go into overdraft from using your debit card, you will need to pay an overdraft charge if you don’t have overdraft protection on your account and pay the interest charges until the overdraft is resolved with a positive balance. Using a debit card does not prevent you from going into an overdraft position in most cases anymore.
A further downside with using debit over credit is that there is no credit history to report to the credit bureau, and therefore using debit does not build your credit score. While there are no annual cardholder fees, there are also are no extra warranties, incentives or rewards points when using debit cards, as there are when shopping on credit.
If you choose to use debit, it helps to be informed about what’s involved, including the benefits and risks. At Harris & Partners in Barrie (and 9 other locations in Ontario), we aim to provide helpful information that will help you to resolve financial difficulties. We offer credit counselling services and debt solutions, such as debt consolidation and consumer proposals to help avoid bankruptcy. We have offices throughout Markham, Barrie, Brantford, Hamilton, Oshawa, Pickering, St. Catharines, Brampton, Toronto and North York.