“You should never use your debit card because it is not as safe as your credit card!”
This is a myth that needs to be busted, and sadly I will probably be fighting this myth for the rest of my life. There is a false narrative that credit cards are safer than debit cards when it comes to fraud and identity theft.
In this post, we are going to explore the two different types of cards and the protections that are afforded in the event of fraud and identity theft.
All credit cards have a processing company (such as Visa or Mastercard), as well as a member bank, who is the creditor for the account and line of credit.
Depending on the credit card processing company, there may be protections against credit card fraud and theft. While consumer laws limit consumer liability on credit card fraud and theft to $50, Visa and Mastercard (the two largest credit card issuers) require member banks to uphold a “zero liability policy.”
What does this mean for you? If your credit card has the Visa or Mastercard logo, you have absolutely no liability in situations of theft and/or fraud. If your credit card is stolen or skimmed, you are not responsible for any transactions that you did not authorize.
Debit cards are a bit tricky, and this is where a lot of “financial experts” are completely off-base. The common myth is that debit cards do not have protections against fraud and/or theft.
The reality is that debit cards do have protections in place, but it depends on the type of transaction that is used. Think about when you swipe your debit card to make a purchase; you often have a choice between “credit” and “debit.”
A “credit” transaction on a debit card is the most common and does not require PIN verification. Instead, a signature is (sometimes) required. Once the transaction is approved, it is run through the applicable Visa or Mastercard issuing system (look at whatever logo is on your card). After two business days, the transaction will post to the associated checking account.
Visa and Mastercard require that member banks provide their “zero liability policy” in the event of fraud and/or theft. As a result, all “credit” transactions on debit cards are subject to zero liability.
A “debit” transaction on a debit card is when you swipe, choose debit, enter a PIN for verification, and have the possibility of getting cash back. This type of transaction is rare these days (I rarely, if ever, use it). A debit transaction is run through an “electronic funds transfer” system and is run directly through your bank.
Visa and Mastercard have absolutely no involvement in these types of transactions, thus their “zero liability policy” does not apply.
Debit transactions are regulated by the Electronic Funds Transfer Act (EFTA), which is a federal act. This act limits liability due to theft and fraud by the following:
- $50 maximum liability if the theft/fraud is reported within 2 business days of the occurrence
- $500 maximum liability if the theft/fraud is reported past 2 business days of the occurrence, but within 60 days of the bank statement that shows the fraud
- $500 plus any fraudulent charges after the 60 day “grace period” if the theft/fraud is not reported until after 60 days after the bank statement with the fraud was sent by the bank.
Think about this from an identity thief’s perspective for a moment…
If you have stolen (or skimmed) someone’s debit card, which type of transaction are you likely to use? Probably credit, right? Think about it. Signatures are only sometimes required, identification is rarely requested, and a PIN is not needed.
Fraudsters and identity thieves are much more likely to use credit transactions on stolen debit cards. If it was your debit card that was stolen or skimmed, you will not owe anything since you did not authorize the transaction. Fraudsters and identity thieves are not likely to use debit transactions because it is unlikely that they will know the PIN. In the off chance that they do learn your PIN, then you will need to report the fraud immediately.
Debit cards offer virtually the same protections as credit cards. The one key difference is this:
If your debit card is stolen and charged up, you will be out the money until the bank replenishes your account. This means that you could be out of money for a few days. This could be an inconvenience, unless you have an insane amount of money in your account.
If your credit card is stolen, then you are not out any money. You are simply out the “credit limit” for a short period of time.
I hope this all makes sense!