Submitted by Jen Jones on Sat, 08/15/2009 - 3:45pm
Debit cards are one of the many spending tools that can be good for a person rebuilding after bankruptcy. For the most part, anything that is backed directly by actual cash is the best way to ensure that you don't get too deep again shortly after things are back in order.
There are some drawbacks to using a debit card though. Mainly, it won't do much to re-establish your credit because it does not rely on credit and therefore won't have any affect on your credit score. Debit cards are backed by a checking account with actual cash that gets debited according to what you spend. Therefore, a number of folks in this position choose to combine a debit card with a secured credit card to practice safe spending and proactive credit building.
Since debit card usage is not reported to a credit bureau, they are best used for everyday items, like gas and shopping. This way, you can measure accurately what you are spending on both and how to reduce those expenses if needed.
Another issue with debit cards is that if they are stolen, most likely a thief is accessing the money you need for those everyday items just mentioned. For a lot of people, all they have is what's in their checking accounts, so if that goes missing, things can turn ugly quickly.
Thankfully, a number of banks today have recognized that risk, as it is becoming a common facet of identity theft, and typically won't hold you responsible if you are able to quickly report that its missing. Be diligent though, don't sit around waiting for someone to use it so you can track them down via an online account. Call the bank right away, even if five minutes later you find it under a couch cushion.
Debit cards can be tied to checking accounts that have automatic overdraft protection so that if you go over your limit, you can be protected to a certain amount. However, if you are just coming out of bankruptcy, that protection may come with a fee and sometimes is tied to a line of credit that you may not be eligible for until your credit rating improves. Be very clear with your bank in regard to this rule because overdraft fees are becoming more unreasonable every day and can really do some damage if allowed to pile up.
Because of the financial industry collapse, banks are using smaller fess, like ATM transaction fees and teller access costs, to bombard their bottom line with countless surprise line items. Ask if your debit card can be backed by your savings account, if you have one. This will ensure that any money you accidentally spend will still be yours and the bank won't ding you as much for accessing it.
Debit cards are indeed useful and can help you monitor your funds. However, if the point is to rebuild your credit after a bankruptcy, combine the use of a debit card with some other form of credit.
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