By Jesse B. Jurgenson
Whether it is better to use a debit card linked directly to a consumer’s checking account or a traditional credit card for most purchases is a common question that I have received over the last decade. It has mostly came from individuals whose concern lies not as much with their ability to pay for the purchases (low or interrupted income) as it does with a desire to make the most of the present consumer protection laws and continue down the path to meet their own long-term financial goals.
Assuming that you are one of the estimated 62% of the population who do not carry a balance on a credit card by paying the amount owed in full each and every month by the due date and show financial maturity by not spending beyond your true financial ability, choosing between using a debit card or a credit card for most purchases may come down to a “what is in it for me?” question.
Some benefits of using a debit/ATM card are:
- Saving yourself from yourself. A debit card increases the chances you will stay within budget since you are limited by the balance available in your account which lowers the risk of accumulating debt.
- Access to your own money. Easily get cash from cash machines or cash back from purchases.
- A built-in password. Having a Personal Identification Number (PIN) is an extra layer of security if the debit card is lost or stolen.
- Ease of transactions. Debit cards are certainly safer and more convenient than carrying cash or checks and are accepted at a large majority of retailers.
A few benefits of using a traditional credit card are:
- Credit reporting. Credit card activity is commonly reported to the credit bureaus and work to build a positive credit history (assuming you make at least the minimum payment by the due date) which will come in handy when you look to borrow money for larger purchases such as a house or a new-to-you vehicle. Generally speaking, debit card activity is not reported to the credit reporting agencies.
- Universal acceptance. On top of being accepted at a large majority of merchants, certain transactions such as renting a car or hotel room require a credit card rather than a debit card to protect the merchant against damage you may cause to the vehicle or room.
- Rewards and perks. Many credit cards offer benefits that you don’t see with debit cards such as cash back, airline miles, extended warranties, rental car insurance, travel insurance, purchase protection, roadside assistance, specific store discounts, or exclusive coupons.
However, there is one other difference between the two payment options that you may also want to consider. The concern over identity theft, unauthorized purchases, and retailer errors have garnered national and worldwide news recently with the massive payment data breaches from corporations such as Target and The Home Depot. Having shopped at both of those retailers during the suspected vulnerable times, I decided it was best for me to be proactive in protecting myself. I requested a new account number from my financial institution in addition to performing due diligence on my monthly statement. I was fortunate to not run into any issues, but what if an unauthorized payment had been made on my account and I had not noticed? Let us explore how the existing consumer protection laws, the Fair Credit Billing Act (FCBA) and the Electronic Funds Transfer Act (EFTA) may factor into making a decision to use the product that is best for you and your household.
Credit Card Loss or Fraudulent Charges
Under the FCBA, your liability for unauthorized use of your credit card tops out at $50. However, if you report the loss before your credit card is used, the FCBA says you are not responsible for any charges you didn’t authorize. If your credit card number is stolen, but not the card, you are not liable for unauthorized use. This means that if the thief uses your card by phone or the Internet, you have no liability.
Call the card issuer as soon as you realize your card has been lost or stolen. Many companies have toll-free numbers and 24 hour service to deal with this. Once you report the loss or theft, the law says you have no additional responsibility for charges you didn’t make; in any case, your liability for each card lost or stolen is $50. If you suspect that the card was used fraudulently, you may have to sign a statement under oath that you didn’t make the purchases in question
ATM or Debit Card Loss or Fraudulent Transfers
If you report an ATM or debit card missing before someone uses it, the EFTA says you are not responsible for any unauthorized transactions. If someone uses your ATM or debit card before you report it lost or stolen, your liability depends on how quickly you report it:
|If you report:||Your maximum loss:|
|Before any unauthorized charges are made.||$0|
|Within 2 business days after you learn about the loss or theft.||$50|
|More than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you,||$500|
|More than 60 calendar days after your statement is sent to you.||All the money taken from
your ATM/debit card account, and possibly more; for example, money in accounts linked to your debit account.
If someone makes unauthorized transactions with your debit card number, but your card is not lost, you are not liable for those transactions if you report them within 60 days of your statement being sent to you. If you can convince the bank that your notification failure was due to extenuating circumstances, it must extend the notification timeline for a “reasonable period6.”
Under the EFTA, a bank has 10 business days to investigate the matter (20 business days if your account is new) and report back to you with its results. If the bank needs additional time, it may, under certain circumstances, temporarily give you some or all of the disputed amount until it finishes its investigation.
The consumer protections currently provided by the EFTA and FCBA are very similar for both credit cards and ATM/debit cards as long as an individual notices the disputed item and informs their bank, credit union, or credit card issuer within a very short amount of time. Where we start to see a difference are when someone may not be spending the time to inspect their account transactions. The potential for unlimited loss is present with an ATM/debit card where that potential is not present with a credit card transaction. If you are an individual who uses a debit card for most purchases and does not keep a careful watch over their account transactions on a regular basis, you are increasing your risk of potentially losing money to errors and fraud.
Guest contributor Jesse Jurgenson is an AFCPE Accredited Financial Counselor and past Financial Counseling Supervisor with an NFCC certified non-profit family service organization. He is also a current Ph.D. student and Graduate Instructor in the Personal Financial Planning Department.