Store-branded Debit Cards: Bad Idea

It seems like almost every major retailer offers a store credit card these days.

What you don’t see very often is a store debit card, linked to your checking account.

We researched dozens of the country’s largest retailers, but the only stores we found that currently offer them are Target and Nordstrom.

Store debit cards typically come with the same perks as store credit cards, such as cash-back rewards. But since they’re linked to a bank account, you can’t rack up a balance on which you’ll later pay interest.

That doesn’t mean they’re a good deal.

In fact, store debit cards are fundamentally different from your bank debit card, and they don’t offer the same security that even store credit cards offer.

These cards:

  • Open you up to costly overdraft fees because of the way purchases are processed.
  • Can negatively impact your credit score, unlike typical bank-issued debit cards.
  • Lack the protection against billing disputes and fraud that credit cards offer.

Overdraft Fee Danger

When you make a purchase, there is a lag of a couple of days before the amount is subtracted from your account, says Mitchell Weiss, adjunct professor of finance at the University of Hartford’s Barney School of Business and co-founder of the university’s Center for Personal Financial Responsibility.

The delay — because the purchase is processed as an electronic funds transfer, similar to an online bill payment — could set you up for bounced payments and overdraft fees from both the retailer and your bank if you’re not paying close attention.

Nordstrom says it might charge a $25 returned payment fee. Target’s fee is $25 or $30 in most states.

What’s more, Weiss says your bank might allow the transaction to go through, even if you’ve declined overdraft protection and you don’t have enough money in your checking account.

This is because the federal law requiring consumers to opt in to overdraft protection of ATM and everyday debit card transactions also lets banks choose to cover such things as recurring online bill payments without consent. Weiss says store-issued debit card transactions fall into this category.

Credit Score Impact

If you have insufficient funds, you’ll still be responsible for the amount owed, and if you don’t pay, your account will be sent to collection.

When your account goes to collection, it can hurt your credit score.

Target’s application says, “we may report information about your Target Debit Card application, transactions, our experiences with you and how you have handled the Target Debit Card to consumer reporting agencies.”

And you thought this type of plastic never affected your credit report.

Consumer Protection Lacking

Credit cards give you what’s called charge-back rights that you don’t get with any debit card.

“When the merchandise fails to arrive, isn’t as ordered or when the charge wasn’t authorized in the first place, credit card users have the right to demand that the charge be removed from their bill pending dispute resolution,” Weiss says. “Not so with debit cards. Once swiped, the money’s on its way out of the consumer’s checking account.”

Then there’s the fraud issue.

With credit cards, you have zero fraud liability; you also have plenty of time to dispute fraudulent charges before your bill comes due.

Debit cards cap your risk at $50 in liability for unauthorized charges as long as you notify your bank within two business days of discovering the loss.

Wait longer than two business days, and you could be liable for up to $500 in fraudulent transactions. Wait more than 60 days and your liability could be unlimited.

It can also take a long time for your bank to refund the missing money.

Rewards Programs

For this risk, you get 5% off all purchases at the point of sale in store and online at Target and free shipping with no minimum purchase at (the same benefit as with Target’s branded credit card).

The card linked to your checking account also lets you get up to $40 cash back when you make an in-store purchase, which could help some people cut their ATM fees. But you can’t use the card at ATMs or at other stores.

Nordstrom has two options for consumers: a store-only card and a co-branded Visa check card.

You’ll earn 2 points in Fashion Rewards per $1 spent, just like with the store credit card. The co-branded Visa card also offers 1 point per $1 spent on all other purchases.

When you earn 2,000 points, you’ll get a coupon worth $20 at Nordstrom — the equivalent of 2% back, at best.

The Nordstrom store debit card is like Target’s store card in that it withdraws funds from your checking account at your own bank, and you can’t use it at ATMs or other stores. There’s no option to get cash back at the register, however.

But the retailer’s co-branded Visa debit card can be linked to a Nordstrom Bank FDIC-insured checking account, giving you all the privileges associated with bank debit cards.

The Nordstrom checking account has no minimum balance requirement, but it stipulates a $50 minimum opening deposit and has a $5 monthly fee (unless you meet certain conditions).

But there are no special features and terrible interest rates — balances under $5,000 earn just 0.10% APY.