Alex Thomas Salder, clarkhoward.com
A lot of people stick with a debit card as a way to control their spending and avoid racking up big credit card debt — since with debit, you can’t spend what you don’t have. And in the aftermath of the Great Recession, that strategy became a very popular one as many people had to rethink their spending routine.
When you only use a debit card, it forces you to limit your spending to however much is sitting in your checking account.
But debit cards are full of hidden dangers — and these dangers are often the same aspects that them an appealing alternative to credit cards — like only being able to spend what’s in your account.
Here’s the problem: If a fraudulent charge is made on your credit card, there’s no immediate financial hit while you get things sorted out — since credit card bills are paid later, no money actually leaves your hands. But if thieves get a hold of your debit card or debit card number, they gain access to your entire bank account and everything in it.
Debit and credit card fraud in the U.S.
Credit and debit card fraud is expected to reach a record $4.5 billion this year, according to a recent report by iovation, a provider of digital intelligence for fraud prevention. And that number is expected to get even worse before it gets any better — with fraudulent transactions costing an estimated $7.5 billion by the end of 2020.
But what about those new chip cards that are meant to prevent fraud? Well, that’s the idea, but the transition won’t happen overnight. And even when every card in the U.S. does have the chip technology, the payment process also has to be carried out effectively at checkout in order to prevent the risk of fraud.
The laws vary when it comes to debit fraud vs. credit fraud
If your credit card is compromised, the potential harm to you is relatively small. You contact the issuer to report any false charges and you may have to do some paperwork, but no money leaves your hands. With debit card fraud, however, there is money that leaves your hands. And you have to fight, typically very hard, to get your own money back. And unfortunately, it’s now taking longer and longer to get that money back — if you ever do.
Here’s a look at the basic protections and consequences of debit card fraud vs. credit card fraud.
Debit card fraud:
- If you report the card as lost or stolen within two business days, you won’t be responsible for more than $50 of unauthorized transactions.
- According to the CFPB, “if an unauthorized transaction appears on your statement (but your card or PIN has not been lost or stolen), under federal law you will not be liable for the debit if you report it within 60 days after your account statement is sent to you.”
- If someone uses your physical ATM or debit card without your permission (meaning it was stolen) and you report the fraudulent charges within 60 days after your statement is mailed to you, you could lose as much as, but no more than, $500.
- If someone uses your ATM or debit card without your permission and you don’t report it within 60 days after your statement is mailed to you, the potential damage is unlimited. You could lose all the money in that account, the unused portion of your maximum line of credit established for overdrafts, and even more.
Credit card fraud:
- If your credit card number is stolen, not the physical card, “you are not responsible for unauthorized charges under federal law,” according to the Consumer Financial Protection Bureau.
- If the actual card is stolen, you are liable for no more than $50 in authorized charges — as long as you report it to your card issuer. Some issuers won’t even charge you the $50.
10 places to never use a debit card
The idea of only being able to spend what you have can be appealing, but actually, using a debit card is riskier than carrying cash. It’s not great if someone steals your cash, but if someone steals your debit card, they can get to every cent in your bank account.
If you have to use a debit card, one way to limit the potential damage of theft is by setting up separate accounts. Put only enough money you need for the card in one account and keep the rest of your money — for savings and other expenses like mortgage or rent, car payment, loans etc. — in a separate account, or accounts, so it can’t be compromised.
And if you must carry a debit card, here are some common hotspots for fraud — places and situations where you should avoid using debit whenever possible. (And if you do use a debit card in these situations, make sure to check your account daily!)
1. Pay at the pump
Skimmers aren’t the only danger to your wallet. The gas station will put a big hold on your account, typically for 4 days, that could cause your checks to bounce. If you must pay with debit at gas station, go inside and pay at the cashier.
2. When you’re buying online
Credit card is a much better option. If you don’t get your merchandise, you can do a chargeback during a 60-day window.
3. At the supermarket
A couple of years ago, Save Mart supermarkets were hit by criminal rings that put skimmers on the credit/debit card readers at self-check lanes in 20 Save Mart and Lucky branded locations throughout California. Very often, this particular kind of scam will be perpetrated by a crook dressed in the counterfeit uniform of the technology company that does regular routine maintenance on credit/debit card readers at a business!
4. At the car rental counter
Pamela Yip of The Dallas Morning News found that it’s standard practice (and completely legal) in the industry for car rental companies to do a hard inquiry on your credit report, often without your knowledge or consent. They’re trying to protect themselves against auto thieves that love to use debit cards as a low-risk method to get rentals that they can steal. But that inquiry can drastically lower your credit score in the process. The simple solution is to use a real credit card instead.
5. When booking advanced travel
If you have concerns about the solvency of a company you’re buying future travel from, you’re better off using a credit card. This holds true particularly during an economic downturn when leisure travel businesses like cruises and some airlines can go bust. Paying with credit card ensures you can do a chargeback if you don’t get the travel you paid for.
While we’re at it, have you considered trip insurance if you’re taking a cruise, a tour, or traveling on a trip that requires pre-payment of thousands of dollars?
6. When buying furniture and major appliances
If you are ordering furniture or appliances and waiting on delivery, pay only by credit card. You reduce your risk if the store goes bust by doing that, which we saw a lot of during the housing slump when furniture and appliance retailers really took it on the chin. If you do not have your delivery within 50 days, put the credit card charge in dispute. You lose all right to any dispute after the 60th day.
7. When setting up automatic drafts and/or recurring bill payments
Auto drafts are a favorite way of utility companies, cable companies, health clubs, burglar alarm companies, and even mortgage lenders to get their money from you each month. But that business may continue to make monthly automated clearing house (ACH) debits from your account once your contract with them ends. That is illegal and you can get it to stop by citing what’s called “Regulation E” and using Clark’s sample letter to stop automatic payments.
8. Independent ATMs
You run the risk of skimmers. While skimmers can be found on bank ATMs, they’re less likely because there are often security cameras in place.
9. At a restaurant
Because there is such high turnover at restaurants, you don’t want a dishonest employee to get hold of your digits.
10. Anywhere you are a new customer
If you’re making a purchase somewhere you’ve never done business before, you’re better off using a credit card or cash. Until you know more about the company and trust that any potential issues will be resolved, you shouldn’t use your debit card — because if a fraudulent charge does occur from there, it could make the process of getting your money back, and protecting your identity, much more difficult for you.
Debit card zero-liability policies: How much protection do they really offer?
Federal laws limit your liability for fraudulent charges under different circumstances, and those protections differ for credit cards vs. debit cards (which are outlined above). And under federal law, credit cards provide much better fraud protection than debit cards.
But many card issuers now offer “zero-liability” policies for debit cards, which are meant to offer more protections for you in the case of fraud.
But there’s a catch. Since these are voluntary protections provided by the card issuer — additional to what’s required by federal law — many of these policies have quite a few exceptions
So while these protection policies can more generous than what the U.S. government requires, they also vary depending on the type of fraudulent debit-card transactions that are made.
According to a report from CardHub, both Visa and MasterCard provide zero liability coverage on signature-based transactions on their debit cards. There’s also zero liability for the consumer on PIN-based Visa debit-card transactions processed through the Visa network — same goes for PIN-based MasterCard transactions processed through MasterCard’s network.
But if the fraudulent transactions are not made through the specific card issuer’s network, then there is no fraud protection above federal law, according to CardHub. When it comes to fraudulent ATM withdrawals, the coverage varies for individual card issuers.
On top of that, CardHub points out that the “consumer has no way of knowing what network transactions are processed on and therefore how much coverage they have.”
Other exceptions to zero liability policies may include: failure on your part to exercise “reasonable care” in protecting your card and PIN, you aren’t wiling to file a police report, you wait to long to file the claim — and there may be more depending on your card issuer’s specific policy.
How to protect yourself!
Ideally, you should only use a debit card when you absolutely have to — like to get money out of the ATM. And even when doing that, you need to take some extra precautions.
Here are some ways to protect yourself when using a debit card:
- Only use bank-affiliated ATMs — they offer a higher level of security, which means they’re less likely to be compromised by scammers. Never use independent ATMs, like those at gas stations or in other less-monitored areas.
- When using an ATM, cover the keypad when entering your information — a criminal could be watching.
- Don’t share your debit card PIN, don’t write it on the card and don’t write it down anywhere that someone could access.
- Always sign for debit-card transactions when possible.
- If there’s a “tip” field/line on a receipt that doesn’t require a tip or you aren’t giving a tip, take the extra precaution of writing in $0.00 on that line.
More ways to prevent and spot debit card fraud:
- Check your accounts and statements daily.
- Report any fraudulent transactions immediately.
- Don’t pay any bill associated with fraudulent charges.
- Never share your banking or other personal/sensitive information via email, text or phone (unless you call the bank directly). Even if the email or text looks legitimate — with the bank’s logo etc. — it could very easily be a scam!
If you want to protect your money, your best bet is using a credit card as your primary method of spending. It not only offers more protections for you, but it also gives you more peace of mind about the security of your accounts. Plus, credit cards typically offer better rewards programs!