Debit cards, which work like electronic checks, are becoming more widely used as an alternative to credit cards to pay for goods and services. In this two part series, we’ll help you better understand how the two types of cards work and the potential benefits and concerns. First let’s talk about debit cards, their potential benefits and drawbacks:

Potential Benefits

Convenience and Speed: As with credit cards, debit cards are a way to pay for purchases quickly, without writing checks or having to make sure you are carrying enough cash.

Limiting Your Costs: As long as you don’t overdraw your account (see the fees section below), debit cards are a good way to pay for purchases without borrowing money and paying interest. You also may avoid other costs associated with credit cards, such as annual fees.

Cash Back: You can use a debit card when you make a purchase at stores or to withdraw cash from your bank’s ATM (generally at no charge). In contrast, most credit cards charge fees and interest for cash advances.

Safety: You won’t need to carry large amounts of cash that can be lost or stolen.

Potential Concerns

Fees: Be especially aware of overdraft fees, which can occur if you don’t have enough funds in the account when you swipe your debit card but the transaction is still processed.

“You can avoid overdraft fees, which can be costly, by keeping track of your debit card purchases and other transactions and being aware of your balance,” warned Joni Creamean, Chief of the FDIC’s Consumer Response Center. If overdrafts are a problem for you, consider keeping a little extra in your account, as a cushion. Or, arrange with your bank to link your checking account to a savings account or line of credit. Even though your bank may charge for those services, normally they cost considerably less than overdraft fees.

New restrictions on overdraft fees also are coming. Under Federal Reserve Board rules that will take effect July 1, 2010, you can generally only be charged a fee for ATM and one-time debit card transactions that overdraw your account if you have opted in (agreed) to an overdraft service from your financial institution. Before you can opt in, your bank must provide you a written notice explaining its overdraft services and fees.

Dealing with Problem Transactions Can Be More Difficult: You do not have the right to withhold payment on damaged or defective merchandise, as you do in some instances with credit cards.

Beware of “Holds” on Funds: At the time of purchase, merchants immediately place a temporary hold or “block” on funds for the transaction as protection against fraud, errors or other losses. If the final purchase price is unknown when the card is swiped, the hold will likely be for more than you actually spend. One common situation involves a hotel putting a hold of perhaps as much as $250 or more for each day of an anticipated stay when you use a debit card (or credit card) to check into a room. Another example is when you use your debit card at the gas pump. The hold will be removed when the final transaction is processed, nearly immediately or perhaps a day or two later, but until then, you won’t have access to that amount in your account.

Next time we’ll talk about how federal law protects certain consumer debit card transactions.