Is Your Debit Card Putting You at Risk? What to Watch Out For

April 05, 2012

I recently read this Forbes article called “Why You Should Never Use Debit Cards.” One of my rules of thumb is that you should never say never (including now so it’s actually that you should rarely say never). However, the article makes a good point. The idea is that fraud protections are much weaker for debit cards than credit cards. That’s because if you dispute a charge on a credit card, you don’t have to pay it until the investigation is over. If the bank determines that the charge was indeed fraudulent, you may not need to pay anything at all.

On the other hand, with a debit card, those fraudulent charges come right out of your bank account until the investigation is resolved. If the bank decides in your favor, it will restore the money to your account but you lost the use of it for that time period. The investigation is supposed to take up to ten days but there are stories of people waiting weeks before getting their money back.

In addition, federal law limits your liability for fraudulent charges on a credit card to $50 regardless of whether you report the card missing or stolen. With a debit card, that $50 limit only applies if you notify your bank within 2 days of the fraud. If you notify the bank between 2 and 60 days after the fraud, your limit goes up to $500. After 60 days, you could lose the whole amount even if it’s your entire bank account.

So does this mean that you should never use a debit card? well, these risks need to be weighed against the advantages of using your debit card. For me, the biggest reason is to earn an interest rate of over 4% in my rewards checking account. For others, it may be because they want the convenience of using plastic without the temptation to build up debt or they can’t qualify for a credit card at all. The good news is that there are some things you can do to mitigate the risks of debit cards. Here are three things to watch out for:

Where You Use Them

I try not to use my debit card online, places like restaurants where someone walks away with my card, or at gas stations. The last one is because there’s been a rise in the use of machines attached to card readers at gas stations and ATMs that can steal your card information when you swipe it. I use my credit card for gas purchases since it has better fraud protection (and I get 3% cash back on gas). ATMS are tougher because you have to pay a cash advance fee if you use your credit card. Instead, inspect the ATM to see if there’s anything out of place or get your cash from a teller or as cash back at the grocery store.

What You Use Them For

Try not to use your debit cards for recurring payments, big ticket items, and deposits. I had a difficult time getting a gym and a cell phone company to cancel my monthly fees until I had my credit card reverse the charges. That’s harder to do with a debit card.

Buying big ticket items isn’t really about fraud but other risks. Credit cards often offer little known protections like dispute rights if there’s a problem with the product, extended warranties, and property insurance on rental cars. Debit cards generally don’t. You also get bigger rewards from your credit card with the big-ticket items while qualifying for the rewards checking accounts is usually more about the quantity of your debit cards transactions than the size of them.

When you use a debit card to reserve a hotel room or rental car, the company often takes a little extra out of your account for the security deposit. That money is returned to you when you check out or return the car but it can cause you to bounce a check in the meantime. I don’t worry about this because all of my deposits are for big-ticket items (see above) and I keep a healthy cushion in my checking account but be careful of using your debt card for deposits if your checking account margin is slim.

How You Use Them

When making a debit card transation, you might want to choose the signature rather than the PIN option. Visa and Mastercard offer zero-liability protections but only on signature transactions for both credit and debit cards. Your bank may extend those protections to PIN transactions but you have to ask. In any case, only signature transactions count for my rewards checking account so I try to choose the signature option anyway.

None of this can insulate you from the risk of fraud altogether. After all, there will always be risk in practically everything we do (I hate saying “always” as much as “never.”) But by following these guidelines, you can continue to get the benefits of debit cards while keeping your risk at a minimal level.