Debit Cards are increasingly becoming the method of choice taking the place of cash, checks and credit cards. Thanks to technology Debit cards are now more convenient than cash and checks. The use of debit cards instead of credit cards is due to a variety of reasons. The recession has led to a general lack of credit. Large discretionary purchases usually done on a credit card have declined, while small nondiscretionary debit card purchases continue. Another reason is a personal choice to prevent overspending and the associated high interest rates incurred by credit cards. This is a laudable self-help solution that really works: You cannot spend more than is in your account or linked overdraft accounts. Of course if you have a credit card as your overdraft you are back to the original credit card problem, with an overdraft fee added to the mix.
What many people do not realize is that debit cards typically provide much less protection from fraud and unauthorized use than for credit cards. In the first row of the below table (Unauthorized Use) you can see that the federally mandated maximum liability for unauthorized credit or charge card use is $50. Both Mastercard and Visa have a Zero Liability program which reduces this to zero, with certain conditions.
| Risk | Debit Card | Credit Card | Charge Card |
| Unauthorized Use* | $50 w/in 2 days $500 w/in 60 days (CA $50 w/in 60) Unlimited > 60 day | $0 before used $50 if reported | $0 before used $50 if reported |
| Account Balance Risk | Primary & overdraft linked accounts | None | None |
| Overspending Risk | Up to account balance and overdraft | Up to credit limit | Up to credit limit |
| Credit Score | No impact | Balance impacts | No impact if paid each month |
Contrast that with a Debit Card. If you report an unauthorized debit card transaction within 2 days your maximum federally mandated liability is $50. If you report it within 60 days your maximum liability is $500, unless your state has additional regulations (In California the maximum is $50 if reported within 60 days). If not reported with 60 days you have unlimited liability. Mastercard and Visa’s Zero Liability programs again apply. These programs provide coverage if your ATM ‘check card’ is stolen and used as a credit card (i.e. without a PIN). However the fine print states that debit card transactions in which a PIN is used are not covered.
What this means is that if somebody drained your account by using your debit card number and PIN and you did not report it in 60 days, that money is gone. Compare that with a credit or charge card where you would be out a maximum of $50.
Now consider the case where you did report this Debit Card loss within 2 days. Your maximum liability is $50.
However remember that the funds were actually taken from your bank account. You will have to go through a claims process which will take some time to complete. Only then will your funds be reimbursed (possibly minus $50). Compare that with a credit card where you have lost no funds initially. After the claims process proceeds you may owe the credit card company up to $50.
Charge Cards
So far we have discussed debit and credit cards. But what about charge cards? These are cards like the American Express Green Card or Diners Club that function like a credit card but must be paid off every month. The fraudulent use protection is the same as for a credit card.
Credit Score
A positive attribute of a debit card is that it is not included in your credit score. It is your money so that only makes sense. A charge card also has no impact on your credit score unless you don’t pay it off every month. In contrast the balance on your credit cards is included in calculating your credit score.
Being Safe
If you always pay off your card at the end of the month the charge card is your safest card to use. A credit card is safe regarding liability. However you have the ability to rack up large balances and interest charges which is also reflected in you credit score.
While debit cards have risks, there are a few ways you can protect yourself. Keep the balance in your debit card bank account relatively small. This small balance includes the main account and any linked overdraft accounts.
You should also be very careful to protect your debit card PIN. If you only use your debit card for transactions where you slide the card and enter your PIN directly, you will limit the chances for somebody to get your debit card number and PIN.
To make a purchase online or over the telephone use a credit card if possible. In any case only give the number of any type of card to a merchant you trust. Never give your PIN over the phone or on the Internet.
When online only enter your personal information and credit card on a secure, SSL protect webpage. You will see “https” rather than “http” at the beginning of the webpage address in your browser. Another approach is to set up a Paypal account and use that account instead of your cards for online purchases.
No comments:
Post a Comment