Debit Card 101 With Mellody Hobson

Sept. 18, 2009— -- No doubt about it, debit cards have fast become a favorite way for Americans to pay for purchases. In 2008, more than 28 billion purchases were made with debit cards, beating out credit cards by more than 7 billion.

But are debit cards a better way to spend money than credit cards or even cash? The answer is yes, and no. "GMA" financial contributor Mellody Hobson has some basic guidelines.

On the plus side, debit cards are safer than carrying cash.

"The pros are pretty obvious," Hobson said. "It's definitely safer than walking around with a wad of cash in your pocket."

And on the most fundamental level, debit cards can be a good form of financial discipline, because they can keep you from spending more than you have in your account.

"It helps you limit your spending and stay on budget," Hobson said. "You don't rack up a ton of debt" and have to pay subsequent interest and fees.

According to Hobson, another debit card benefit is liability protection in case your card falls into the wrong hands. If a thief gets hold of your debit card and goes on a spending spree, don't worry. Federal law requires that you're only responsible for the first $50 of fraudulent charges as long as you report the loss within two business days.

The key is to report any lost or stolen cards right away, because after two days you could be liable for up to $500. The bottom line is, the sooner you report, the lower your potential liability, according to Hobson.

Another important factor to consider is whether your card offers any liability protection for fraudulent purchases made with your information -- without physically using your card -- or if there's a "breach of information" at a retailer. And if your PIN number is used, zero liability policies will probably not apply, according to Hobson. You should check with your bank to determine what their liability protection policy is.

So what are debit card drawbacks?

Hobson says that whether conscious or not, people tend to spend more money with a debit card than they would with cash. Studies have shown that people spend between 12 percent and 18 percent more. It's a lot easier to swipe a little plastic card than it is to hand over those bills.

It's "absolutely clear ... we spend more with plastic than when we have cold hard cash," she said.