In my last column “Debt—Part two,” I mentioned if debtors must use a charge card at all let it be a debit card. Since then however, I delved deeper into the matter thanks to one reader’s comments and discovered that in certain circumstances a debit card can cost you even more than your credit card.

The debit card was supposed to be the solution to free-spending consumers; the conveniences of plastic without the temptation of spending more than you actually have in your bank account. Other credit card-like benefits include not carrying wads of cash around with you and a limit on the amount you can be held liable for if they are stolen. You can also earn points and other cash back incentives from issuers who promote the advantages of this type of card. And, as the commercials point out, they are accepted just about everywhere.

There are some obvious drawbacks, for example, if there is a dispute or problem with what you purchased chances are the bank won’t take your side. It will be up to you to resolve it. In fact, in many cases, the bank will come after you if there is an unauthorized charge on your account unless you notify them within two days. Your pin number is also critically important. If a thief manages to obtain your number he or she can pick your bank account clean. In the event that you want to reserve a hotel stay on your card or leave a deposit when renting or leasing large equipment, merchants may put a hold on a large chunk of money in your account until the bill clears.

Yet the largest problem by far is in the fine print of your agreement. Most consumers are automatically enrolled in what is called the “overdraft option” which is a fee-based, overdraft loan program without your express consent when you first open a checking account. Under this agreement, the bank or credit union will usually pay your checks, debit card transactions and ATM withdrawals when you account lacks sufficient funds. Then when you make your next deposit the bank debits the amount of the overdrafts, plus a fee which now averages $34 per incident.
Not a big deal, right, but consider this scenario. Today is pay day and you are living month to month. You aren’t quite sure how much is in your account (later you discover there is $15 in your checking account) but you need to do some errands on the way home. You use your debit card to buy gas ($50), go to the supermarket ($60) and buy an ice cream sundae at Friendly’s ($6) on your way home. Guess what, you just wracked up three checking account overages costing you $34 each. To make matters worse, the bank that issued your debit card won’t tell you. Instead, they will continue to charge you for every little overage until the end of the month when they mail you your statement. How does it feel to be paying over $40 for an ice cream sundae?

According to a new survey by the Opinion Research Corporation, overdrafts are increasing and are triggered by small purchases of about $20. For those consumers who are already suffering from increasing debt burdens, the chances of an overdraft are high. To make matters worse, banks are offering debit cards to consumers regardless of the amount in their bank account. For many Americans, these debit cards then function as extremely high-cost credit cards. That same survey indicated that consumers are paying $17.5 billion in overdraft fees for $15.8 billion extended to them in credit every year.

So how can you avoid this debit card trap? Keep track of what you are spending at all times. Don’t be fooled by your online statements (because some transactions may not have shown up yet) and by the time your purchases and charges finally appear on your statement it may be too late. Start balancing that check book now and be aware of those little fees like the two bucks banks charge you for using an ATM.

Finally, try to keep a cushion in your checking account, say $100, and if you spend it make sure you reestablish this emergency fund immediately. Remember also that some merchants may put a hold on money in your account for some purchases; even gas stations sometimes do it, so be aware and read the fine print.