Here’s Why You Should Never Use A Debit Card When Traveling
“John, I know you like credit cards more than you like debit cards. I don’t agree with you but that’s another argument for another day. You also talk about how it’s not smart to use a debit card when you travel because of what you call “holds.” Can you explain what you mean by “holds?”
How about that…someone who disagrees with me but does so in a polite and professional manner. Few and far between. Anyhow, yes I do often write about how it’s a bad idea to use your debit card for travel expenses. There are actually two reasons. One is the “hold” that the reader asks about above. The second is the fact that fraud protections on debit cards are not nearly as strong as those on credit cards. But, since the reader asked about holds…we’ll leave it at that.
A hold is an action taken by the merchant when you use a debit card (and a credit card). Not all merchants hold funds from your debit card but MOST merchants that you’ll run into when traveling do hold funds. A hold is a fancy way of saying that they will preauthorize some amount of money from your card even before you are ready to make the final payment.
A great example of a hold is when you rent a car or stay at a hotel. Most rental car companies will preauthorize the entire cost of your rental up front, well before you return their car. And, many hotel chains will hold the entire cost of your stay (and then some) well before you check out. The holding of funds guarantees them that when it’s time to check out or return the car that there will be sufficient money in your account to pay them what you owe them.
If you have a ton of money in your checking account then A) you’re not very smart and B) the hold won’t be a problem. Most experts advise that you don’t keep large amounts of money in a checking account because of the paltry amount of interest earned on those accounts. You will earn considerably more in a money market account and can simply transfer funds between accounts in order to cover checks or debit card transactions.
But, if you try to use a debit card for a hotel stay and the hold wipes out your balance then you may bounce checks or go overdraft on another debit card transaction. And, that means overdraft fees or declined transactions. Of course none of this is a problem if you were to use a credit card unless you used a card that was close to being maxed out.
I was in St. Louis last week for FinCon13 and I stayed at the Hyatt downtown by the Arch and Busch Stadium. Here is their debit card disclosure posted right at the registration desk (if you click on the image it will enlarge and will be easier to read). I commend them for disclosing this because I don’t think a lot of people understand what happens to their debit cards when they use them at hotels. You can see that this Hyatt holds the entire room fee for each day PLUS $50 per day thus freezing these funds in your debit card account. The hold is in place for 7-10 business days, which is really two weeks. This is why I always advise against using a debit card for travel.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.