You probably don’t think twice about swiping your debit card at the grocery store or ATM, but maybe you should. Debit card fraud at ATMs and merchant card readers is on the rise, up 10…
You probably don’t think twice about swiping your debit card at the grocery store or ATM, but maybe you should. Debit card fraud at ATMs and merchant card readers is on the rise, up 10 percent in 2017 over the year prior, according to FICO. In fact, experts recommend you avoid using your debit card when making purchases to avoid fraud.
What should you use instead? Your credit card is often the safer — and superior — option. Here’s why.
Credit Cards Offer the Best Protection Against Fraud
If your physical card or debit card information falls into the wrong hands, a criminal has direct access to all the money in your checking account. Whatever is spent fraudulently is immediately gone from your balance, and you’re out the cash until the situation is sorted out.
“If you have additional accounts linked to your debit account, such as a savings account for overdraft protection, these accounts would also be vulnerable,” says Dan Wilke, CEO and content creator for the personal finance blog Credit Liftoff.
Whether the situation is resolved in your favor depends largely on how quickly you’re able to catch and report the unauthorized charges. “There are strict timelines in place for fraud reporting, and if consumers do not catch it early, they may be liable for fraudulent charges,” Wilke says.
For example, if your card or PIN is lost or stolen, you must notify your bank within two business days of discovering the loss in order to limit your liability to $50 or less. However, if you notify your bank after two business days, you might be liable for up to $500 in fraudulent charges. These rules apply to the unauthorized use of your debit card as well as other electronic fund transfers, such as ATM transactions, some online bill payments and automatic payments.
In some cases, you might not realize that fraudulent use of your debit card has occurred until much later, like when you’re reviewing your account statements. If you notice fraudulent charges on your statement, you should contact your financial institution within 60 days. You’re still liable for up to $500 during the 60-day window but not for any additional charges as long as you report in time. If you wait more than 60 days to report the issue, you might be responsible for all transactions between the 60-day mark and the date you inform your bank, if it can be proven that notifying them earlier would have prevented those charges from occurring.
Wilke notes that recovery times for debit card fraud can take days or even weeks, during which time you do not have your money. However, “Most major debit card processors do have limitations on how long banks can wait before refunding money,” he says. “Visa, for instance, allows five days for banks to process debit fraud.”
Fraud on a debit card can have significant consequences, according to Jim Miller, vice president of banking and credit card practice at J.D. Power, since it could cause other payments not to go through. “It could be a minor inconvenience, like not being able to buy a Starbucks coffee, to something major, like missing a mortgage payment,” Miller says. There could also be late fees or returned check charges as a result, which harm your credit score. “That can have a ripple effect, including getting turned down for loans, and higher rates on loans and insurance, just to name a few.”
On the other hand, the Fair Credit Billing Act provides credit card users with extensive protections that are not available to debit card users, Wilke says. For example, if your credit card is lost or stolen, you are responsible for no more than $50 in unauthorized charges. Often, card issuers will not hold cardholders liable for any unauthorized charges at all. And if you have your physical credit card but the account number is stolen and used to make fraudulent charges, you aren’t liable at all.
Plus, since credit card purchases are made against a line of credit and don’t draw directly from any bank account, your personal funds aren’t put at risk if the card is used fraudulently. “Fraud investigation with credit cards can take time to process just like debit cards, but you will not be out any money during the investigation,” Wilke says.
The benefits of spending with a credit card instead of a debit card are pretty clear from a safety standpoint. Even so, there are a few other reasons why it can be beneficial to choose credit over debit. Credit cards allow you to:
Manage fluctuating income and expenses. Credit cards can make it easier to handle expenses of various sizes without worrying about when you’ll receive your next paycheck. Plus, Miller points out that vendors such as gas stations, hotels and rental car companies often put a hold on your account when you make a purchase, which may last several days. “This has little impact on a credit card,” Miller says, “but on a debit card, these funds are no longer available until the hold has cleared.”
By charging all purchases on a credit card and then paying the full balance on payday, you can ensure all expenses are covered, no matter the timing.
Earn rewards on spending. Some banks offer rewards, such as travel miles or cash back on debit card purchases. However, rewards debit cards are fairly rare and the rewards tend not to be too lucrative. Rewards credit cards, on the other hand, are more common and offer much more valuable rewards to a wide range of consumers. “Credit card rewards are far superior to debit card rewards,” Wilke says.
By spending with a rewards credit card, you can earn money back on purchases you have to make anyway. “Using a debit card when you could be using a credit card to earn rewards is essentially throwing away free money. Even the most basic reward cards earn 1 percent cash back,” Wilke says.
Enjoy other perks and benefits. In addition to rewards, credit card users can also take advantage of a number of other benefits that might go overlooked. For example, many credit cards offer perks such as rental car insurance, travel protection insurance and price protection. “These vary by card but can be very valuable in instances where they are required,” Wilke says.
Build credit. Responsible and regular use of a credit card is one of the best ways to build a strong credit history. “A debit card provides none of the credit history and credit score benefits provided by responsible credit card use,” Wilke says.
Of course, there is one major risk of doing all your spending with a credit card: racking up debt. If you make a habit of charging more than you can afford to repay in full each month, you could end up incurring interest charges, growing your balance and owing potentially thousands of dollars that you can’t afford to pay back. Maxing out your card and missing payments can have a major negative impact on your credit score.
If this sounds like a situation you’re trying to avoid, consider sticking with your debit card for daily purchases. “The primary advantage of using a debit card is that the funds come directly out of a checking account, so consumers are less likely to spend more or increase their debt,” Miller says. If you decide not to opt in to overdraft protection, you’ll be prevented from making purchases that exceed the balance in your checking account.
Miller says that, overall, if you can manage your spending wisely, credit cards are vastly superior to debit cards. However, if using a debit card means you spend less or just sleep better knowing you don’t have any debt, it might be the better option. Just keep in mind the safety risks you’re exposing yourself to by opting for debit over credit.
Another option? If you like the money management aspect of a debit card but are concerned about your liability in the event of fraud, consider setting up a separate bank account just for debit card transactions. “Pay all of your major bills out of a different account,” Miller says. “That way, if something happens to your debit card, the problem is contained and you can still pay the rest of your bills.”
And if you want the rewards and fraud protection of a credit card, but still want to avoid debt and manage your spending closely, consider paying your credit card balance off weekly rather than once a month, Miller suggests. You should also sign up for alerts that notify you once your balance goes over a certain level, as well as provide daily or weekly snapshots of your credit card balance. That way, if suspicious charges do occur, you can catch them right away.