In the wake of the Target store data breach I felt it was necessary to write about the difference between using debit and credit cards. Using the wrong one could end up costing you a lot of time and money.
There are two types of debit cards. The first one is the traditional ATM card. This type of debit card, also known as an ATM card, can only be used to withdraw money from the bank via an Automated Teller Machine, an ATM. ATM cards cannot be used to make purchases at stores or online.
The other type of debit card can be used as an ATM card but it can also be used for making purchases at stores and online. This type of card bears the “Visa” or “MasterCard” logo. You also have the option to have your transaction processed as a “debit” or a “credit.” So which should you choose and does it make a difference? One difference is when you use it as a debit card you will also have to enter your PIN to process the transaction. Another difference is that if you choose “credit” then your transaction is supposed to be protected under credit card laws. While this may sound like a better option you still need to take into consideration the fact that the money is still taken directly out of your bank account. In the event of a fraudulent transaction the bank will be required to replace the money. However they bank does not have to do so immediately. Further, if the fraudulent transaction resulted in your account being over drawn the bank is not required to replace the overdraft fees. Some of which could be as high as per transaction.
Credit cards are a much safer option. When you make a purchase using a credit card the money is not automatically drafted from any of your bank accounts. Instead a debt is created and you are required to repay the borrowed money. So are credit cards a better option? When there is a fraudulent transaction you simply dispute the charge and wait. At no time is any money taken from your bank account. The debt is simply put on hold. Once the credit card company verifies the transaction as fraudulent they simply remove the debt. That is it. Your money remains safely tucked away in your bank account.
Credit cards are safer than debit cards due to statutory limitations. The Fair Credit Billing Act, FCBA, protects consumers from fraudulent charges. To gain the benefits of the FCBA there are a few things you are required to do. Discrepancies must be reported in writing to the credit card company. Reporting a discrepancy over the telephone is not sufficient to trigger the protections of the FCBA. You are also required to send the written notice within sixty days of the statement date. Some credit card companies allow you to dispute charges in writing electronically using either the credit card company’s website or by sending an email. Make sure you verify with your credit card company which method or methods are acceptable.
Let’s look at a real life example, the Target data breach. A man that shopped at Target with his debit card was compromised by the breach. The man observed $1,600 worth of fraudulent charges in his bank account which caused his account to have a negative balance. This resulted in approximately $200 worth of overdraft charges. The bank, after many weeks, returned the original $1,600 to his bank account. However the bank did not return the $200 in overdraft fees. Another point to consider is that during the weeks the man waited for the bank to refund the money he was unable to pay his bills on time which resulted in numerous late fees. Another man shopped at Target using his credit card. This was not a credit/debit card. It was a good old fashioned credit only credit card. The man observed fraudulent charges on his statement. He contacted the credit card company, in writing, about the fraudulent charges. The credit card replaced his credit card with a new one and removed the fraudulent charges from his account. At no time did this many lose any money. His problem was resolved with minimal effort.
So the moral of this story is to only use a credit card when shopping. This is especially true when shopping online. Debit cards should be used for ATM’s only. Otherwise you are sacrificing your privacy and financial security for convenience.