I have a checking account that I keep very little money in. I use a debit card as a credit card at shops, and at the ATM. I have turned off overdraft protection on the checking account.
I've heard that using a debit card is dangerous. Given my situation, is it still dangerous? No overdraft and a low balance? I've also talked to my bank (USAA) and they've indicated there is fraud protection on my card, if it should be stolen and used to make purchases.
The "danger" of using a debit card is that what backs it is your real money. If there is a fraudulent transaction, the money that is used to settle the transaction is yours. Yes there is a dispute and fraud protection policy offered by your bank, and should you qualify for it you'll get your money back.
If you use a credit card and there's a fraudulent transaction, the money that settles that transaction belongs to the credit card issuer. Yes you're obligated to pay it (or dispute it as fraud,) but it's a debt you owe, not your money that's been used.
So is it dangerous to use the debit card in the situation you've outlined? You've mitigated the risk by keeping your exposure low, but it would still be lower by not using the debit card in the first place.
Todd has a great answer. Just building on that there is also the danger when you want to hire a car, stay in hotel etc. that you need to put down your real money. Instead what typically happens is the hire company does a transaction whereby it ensures you will have the funds to pay the damages if anything goes wrong, without you necessarily having enough cash to do so. This happened to me when I was travelling as I also don't have a credit card. Some hire car companies are very reluctant to lend you a car if you do not have a credit card.
The dangers are:
Credit card people have it a bit easier. Funds don't disappear from their account, their amount of available credit just goes down. They still have access to funds in their account via a debit card, they just might not be able to use their credit card for additional funds beyond that. So it's likely to be resolved before it affects them, as long as they have funds in their account. That mitigates the danger for them.
I don't have a credit card. My solution is to carry a separate debit card for another account. If my primary gets compromised, I have my backup to last until it's resolved and vice-versa.
My credit union is actually very good about proactively detecting and blocking fraud, though it's gotten past them a couple times. In those cases it only took a few days to get my money back, but it could take much longer - would you be ok if your account was empty for a month while you waited? I can also get a new card on the first business day that I can get into a branch - can you get yours that quickly or do you have to wait a couple weeks for them to mail you one? Even if you can, if weekends and holidays and travel and weather intervene and make it take awhile before you can get in, would you be ok without your card?
Using a debit card isn't dangerous in itself, but you'll be in for a tough time if you're not prepared to deal without it for a bit. I recommend keeping a backup from a second account. That mitigates the danger.
Many years ago, I used a Visa debit card for all purchases. Then there was a fraudulent charge on the card; luckily, my bank spotted it and refunded it immediately.
I asked them what I could do to protect myself in future: the bank said I should use a credit card instead, as that had much greater protection. (As other answers have pointed out, you have an opportunity to contest a charge on a credit card before you've paid it. Credit card companies have a greater incentive to resolve any problems, as it's their own money at stake! I believe there are other advantages, too.)
One other advantage to using a credit card is that you build up a credit score — especially if you pay it off in full every month (as I do). Had I not started using a credit card back then, I might have had much more trouble getting a mortgage.
Federal law in the United States (as the OP mentions USAA) sets different requirements and limits on a user for reporting fraudulent use of a credit card versus a debit card. While as a matter of good customer service, a bank or card may hold you to $0 for the report of a fraudulent charge for either type of account, what they are required to do by federal law is different for each. In general the maximum liability a credit user has is $50. The maximum liability a debit card user can be unlimited.
From the Federal Trade Commission
Under the FCBA, your liability for unauthorized use of your credit card tops out at $50.
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If someone uses your ATM or debit card before you report it lost or stolen, your liability depends on how quickly you report it:
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More than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you, $500
More than 60 calendar days after your statement is sent to you. All the money taken from your ATM/debit card acount, and possibly more; for example, money in accounts linked to your debit account.
No overdraft and a low balance?
You have to be very careful to make sure that you don't hit zero with this account.
In theory if you do hit zero, they shouldn't allow the transaction to go through. But it still might.
Also remember that the holds put on your card if you use it to buy gas, or buy a plane ticket can cause the balance to appear to be much lower. If you then try to use the money in the account, such as when you write a check, or when a charge actually hits the account, then a transaction can be denied, even though you know you have plenty of money.
The issue is timing. The money should be deducted immediately, but I have seen it take days for the debit to actually occur. Recently I used an ATM card at a machine to get cash on a Saturday, but it didn't show up as a withdrawal until Tuesday.
