Credit or debit? Leaving the credit card at home could have some hidden costs

NEW YORK — Your new frugal lifestyle is about to get tested by the biggest consumer challenge of the year — holiday shopping.

Even if you’re among the thriftiest who have pared back spending and paid off debt this year, it’s likely you’ll open your wallet to decorate a bit and buy a few gifts in the weeks ahead. The National Retail Federation expects people to spend an average $683 on the festivities this season. That’s down 3 percent from last year’s $705, but it’s still a substantial sum.

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 before heading out to the stores with debit card in hand, make sure you understand the risks. Relying on a card that links directly to your bank accounts, and has less protection than credit, could create more financial problems than high interest rates if the debit card is lost or stolen.

At the very least, you should know when and where it’s not a good idea to use such a card.

Will it be easier to stick to a budget?

You might think that, 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 that yes, you can overspend with debit purchases. The median overdraft penalty is $35, and while some banks have stopped the practice, many still allow multiple overdrafts to pile up in a single day.

Moreover, even if you don’t rack up fees, it’s not clear that using a debit card will help you stick to your budget. Several studies have found that carrying cash — especially large bills — helps curtail spending, but there’s little evidence that translates to debit.

“It’s harder to hand over bills than it is to hand over a piece of plastic,” said Patricia Seaman of the National Endowment for Financial Education.

Which means that it will still take self control and planning to make sure you don’t overspend.

Is there a bigger risk if it is stolen?

Given their widespread use, it may be hard to believe debit cards generate controversy. But some advocates for the victims of identity theft warn against ever using them. That’s because if you lose the card or your account is otherwise compromised, thieves could have access to your entire bank balance.

Both debit and credit cards offer protections against unauthorized use, but legally and in common practice there are more safeguards for credit card holders.

Card-related theft is hard to measure because banks often combine the amount with other losses.

The larger problem of identity theft is likewise difficult to estimate, because of inconsistent reporting.

What is clear is that both are widespread and consumers can be victimized no matter where they use their cards — in person or online.

If you decide to use a debit card for holiday spending, it’s important to keep close tabs on your card and your accounts to reduce the chances that you’ll become a victim — or to catch a problem early.

Keep these tips in mind:

Empty your wallet. Pickpocketing increases during the holidays. Make sure you aren’t carrying any cards you don’t need, and keep those at home in a secure location, like a locked desk drawer or a home safe.

Don’t let your card out of your sight. Don’t use your debit card in places like restaurants or bars, where it’s taken away to process the transaction, said Jennifer Leuer, general manager of ProtectMyID.com. There’s a bigger chance that it could be put through a “skimmer,” a device thieves use to read the information on the card, if you can’t see what’s happening, she said.

Even when a purchase is handled in front of you, make sure you keep a close eye on the clerk and be alert for unusual behavior like multiple swipes of your card.

Also, make sure you take your card back before leaving the register, and check to confirm the one you’re handed is your own.

Be cautious when using ATMs. Freestanding, nonbank ATMs are more vulnerable than those at bank branches, especially those that are not in major chain stores. And even bank machines can have skimming devices attached. These devices vary from plastic gadgets slipped on top of the card slot to fake keypads that are almost impossible to detect. Thieves may also plant tiny cameras in hard-to-notice spots to record your PIN number as you punch it in. If something seems unusual, don’t use the machine.

Protect your PIN. Take a look around to make sure no one is watching before using an ATM or entering your PIN, said Gregory Meyer of Meriwest Credit Union in San Jose, Calif. Cover your hand if you must. Guarding a PIN is particularly important with debit cards, because if a thief uses it, any spending or withdrawals that result may not be covered.

Be on guard online. Experts are mixed on whether shopping online is safe.

If you haven’t updated your computer’s security lately, you’re definitely taking unnecessary chances, Meyer said. Make sure your security software is up-to-date, and avoid shopping on sites that don’t have a bright green banner in the address bar when you’re checking out. That green banner indicates the site meets the industry standard for online safety.

Check your account balances frequently. It’s hard to prevent fraud from occurring, but vigilance can catch a problem before it balloons out of control, said Robert Reh, chief information officer for Nassau Financial Federal Credit Union in Westbury, N.Y. If there are suspect transactions, contact your bank or credit union right away. You’re more likely to be covered for any fraudulent activity if you report it quickly.