When you go to pay at a store, you likely reach into your pocket and grab a plastic card to swipe or dip and pay the balance. Most people don’t put much thought into the card they use every day, but it can have a big impact on your finances in the event of fraud.
According to data from the Federal Reserve, for non-cash payments debit outnumbers credit roughly two to one, with 33.8 billion credit cards payments in 2015 compared to 69.5 billion debit payments. But is it smart to use a debit card? Let’s look at the risks of debit when compared to credit as a payment method.
Fraud protection and liability
Most banks offer liability protection when you are a victim of fraud. This includes both debit and credit cards, but each has its own limits and debit cards open you up to far greater losses than credit cards.
Debit cards are regulated by the Electronic Funds Transfer Act (EFTA). According to the EFTA, you have up to 60 days to report a lost or stolen card. If you report the lost card within two days, your losses are capped at $50. If you report within 60 days, you can lose up to $500. After 60 days, you lose everything and have no protection from losses.
Credit cards are regulated by the Fair Credit Billing Act (FCBA). If your credit card is stolen, your maximum liability is $50 in almost all circumstances. Most banks cover this $50 for you and reimburse all losses from credit card fraud. Keep in mind that credit card fraud and identity theft and different in the eyes of both banks and the law.
If you know when your card is lost or stolen, the results are the same. But you don’t always know, and if your debit information is stolen and you are unaware, you could lose everything in your bank account with no recourse. That is simply not the case with credit cards.
Debit cards can drain your bank account
Liability aside, there is a big difference in how fraud impacts you in the short term. With credit card fraud, you simply call the bank, complete a form, and get a new credit card number. You never have to pay for fraudulent transactions. Your bank account balance stays intact.
With debit cards, fraud takes money right from your checking account. I rely on my checking account for regular monthly bills and credit card payments, and if that balance went to zero I’d be forced to take from savings to cover monthly costs. Could you afford to go a few months without the money in your bank account?
Because debit cards draw directly on your bank account balance, fraudsters steal money right from your bank. When the money isn’t there, it takes a lot of work to get back on track and get reimbursed for the stolen funds, if you reported it fast enough and can get reimbursed at all.
It’s easy to get a new credit card number
When your credit card is stolen, the cleanup steps are quite simple. You get a new credit card number and have to update any monthly recurring credit card charges with the new account number. Once that happens, you’re all set and can move forward.
With bank accounts, it can be a bit trickier. Hopefully your bank can simply issue you a new debit card attached to the same bank account, and you can fix the issue with a similar checklist you would use with a credit card. But it isn’t always that simple.
Some skilled criminals can find your bank account information with a stolen debit card, in which case you would need to close your bank account, open a new one, and update all bills to use your new bank account. Most of us have more automatic payments from our bank accounts than credit cards, so this can be quite a bit of work. It also means new checkbooks in addition to new debit cards and account numbers.
Banks pay for credit card fraud
We already touched on it briefly, but this is a very important point to understand and hammer home. When you are a victim of debit card fraud, your bank account may be drained and you may not have any recourse to get your money back. This can be devastating to anyone living paycheck to paycheck, and even those who have more stable finances.
With credit card fraud, your liability is capped at $50 by law but is more likely $0. I have been a victim of credit card fraud multiple times, and I know several relatives and friends who have gone through the experience. In all cases, we owed nothing for fraudulent transactions.
The first time my credit card number was stolen, it was a Chase card and likely happened online. Someone in Puerto Rico used my credit card number at Walmart. Chase detected the unusual transaction, contacted me, and shut off the card immediately. I had a new card the next day, signed an affidavit that it wasn’t me spending the money at Walmart in Puerto Rico (I was in Denver, so that would have been quite a skill), and the Walmart transaction was removed from my account. Case closed.
If it had been a debit card, I would have seen my bank account balance drop from the Walmart transaction. Even if my bank detected it and prevented future fraud, it often takes months to get reimbursed for debit card fraud losses. I didn’t have to go a day without my money because I used my credit card instead of a debit card.
Don’t risk your bank account with your debit card
You bank account balance is too important to risk. For me, that means I never use a debit card online, I never use a debit card at a restaurant, and I am very careful with my debit card when I do use it at an occasional gas station or ATM. I know my credit card protects me, so it is my go-to option for any purchase.