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.

Mellody Hobson's Debit Card Tips

Another downside to debit cards? If you're not careful, you can incur overdraft fees. In the past, banks just wouldn't allow you to spend more than you had in your account. According to Hobson, many banks now automatically enroll their debit card holders in overdraft protection, which works like a line of credit and allows you to spend more money than you have in the bank.

This policy is one of Hobson's "real pet peeves" about debit cards and banks.

"They allow us to buy something that exceeds the amount of money we have in our account" for a fee.

Most banks charge high fees for any overdrafts, making it easy to rack up a big negative balance, said Hobson.

Hobson provided the example of Bank of America, which charges $35 for each overdraft. This means that a $5 burger could end up costing you $40.

"Last year banks racked up $27 billion in fees just from overdraft protection in debit cards," Hobson said.

She recommends doing some homework to find a bank whose debit card does not have overdraft protection, or tell the bank you don't want it when you open your account. This way, you can't purchase things when you don't have the money for them, and you won't be charged huge fees for doing so.

"Having a charge declined is better than paying fee after fee after fee," she said.

If you already have a debit card at a bank you like, Hobson suggests calling the bank and asking to opt out of overdraft protection.

Or, make sure to "keep a cash cushion in your account."

According to Hobson, consumers should also beware of usage fees. Banks will sometimes charge as much as a dollar for a single debit card transaction. And they might be tempting, but debit-card rewards programs -- like credit card rewards programs -- usually just encourage you to buy more than you need, with little in the way of real rewards.

ABCNews.com's Katie Escherich contributed to this report.