For the frugal, a debit card seems like the best choice, but think twice
Your new frugal lifestyle is about to be tested by the biggest consumer challenge of the year: holiday shopping. For many, part of the strategy for keeping on budget includes a plan to leave the credit cards at home and use a debit card at the checkout.
But make sure you understand the risks. Relying on a card that is linked directly to your bank accounts, and has less protection than a credit card, could create problems if the card is lost or stolen.
About 65 percent of all credit cards have had their credit limit lowered or interest rate increased, said Brian Riley, of TowerGroup, a Needham consulting firm. That has angered cardholders, and many may avoid using credit cards out of rebellion.
You might think a debit card will help you stay on budget, since you can’t spend money you don’t have in the account. But the $35 billion banks collected in overdraft fees last year should serve as a warning. The median overdraft penalty is $35, and many banks still allow multiple overdrafts to pile up in a single day.
Moreover, several studies have found that carrying cash - especially large bills - helps curtail spending, but there’s little evidence that translates to debit cards.
Given their widespread use, it may be hard to believe debit cards generate controversy. But some advocates for victims of identity theft warn against ever using them. If you lose the card or your account is otherwise compromised, thieves could access your entire bank balance.
Both debit and credit cards offer protection against unauthorized use, but legally and in common practice there are more safeguards for credit cardholders. And even when debit card users are protected, it could take nearly two weeks to get the account balance restored.
MasterCard and Visa pledge that customers with debit cards bearing their logos have zero liability if their accounts are misused. But those promises do not apply in all cases. MasterCard does not cover transactions that involve the use of PIN numbers, and Visa does not cover any ATM withdrawals, or transactions not processed by its own network.
Javelin Research estimated that in 2008, 72 percent of financial institutions made funds available for consumers with compromised accounts the next day, up from 40 percent in 2007. Still, banks have 10 days to investigate fraud cases.
If you decide to use a debit card, keep these tips in mind:
■ Empty your wallet. Pickpocketing increases during the holidays. Make sure you aren’t carrying cards you don’t need.
■ Don’t let your debit card out of your sight. Don’t use it where it’s taken away to process the transaction.
■ Protect your PIN. Take a look around to make sure no one is watching before entering your PIN.
■ Be on guard online. Update your computer’s security software.
Eileen AJ Connelly is an Associated Press writer. 
