Money Girl reviews risky situations when you should never use a debit card—plus, your liability and consumer rights for both debit and credit cards.
While it might seem like using credit cards could hurt your finances because of the potential to rack up a huge amount of debt, you might be surprised that using debit cards can also be risky—but for different reasons.
In this episode, you’ll learn 6 risky situations when you should never use a debit card. I’ll review your liability and consumer rights for using debit and credit cards so you know the right way to use each one to stay safe..
The Differences Between Debit and Credit Cards
Although debit and credit cards may look the same, they’re completely different financial tools. I’m sure you’re familiar with how they work:
- A credit card allows you to make purchases using borrowed money that you have to pay back with interest over time.
- A debit card allows you to make purchases using your own money that’s linked to a bank checking or savings account.
But what you may not know is that credit and debit cards offer very different levels of legal and financial protection. Debit cards give you fewer rights than a credit card, so it’s important to understand your potential liability. In just a moment, I’ll explain six of the riskiest situations to use a debit card.
What’s the Risk of Using a Credit Card?
First, let’s cover what happens if someone steals your credit card. Fortunately, you get some really nice protection thanks to a federal law called the Fair Credit Billing Act (FCBA).
This law is one of the reasons why I prefer using credit instead of debit. The FCBA says that if a thief takes your card or even just steals the card number and takes off on a shopping spree, you’re responsible for no more than $50.
It doesn’t matter if a cyber criminal hacks your credit card number online and then uses it to kick back in a 5-star hotel in Maui for a week, you won’t have to pay more than $50. Plus, many credit card issuers offer fraud protection that completely eliminates your liability.
The protection gets even better if you become aware that your credit card is lost or stolen and report it before unauthorized charges are made. In that case, you’re not even responsible for $50—you’re completely off the hook!
The FCBA protects you from unauthorized charges on revolving accounts, including credit cards, charge cards, retail store cards, gas cards, and lines of credit. The law also protects you against other issues like being charged for unaccepted goods, undelivered goods, or other formal disputes you make.
These are terrific protections that should make you feel confident about using a credit card in stores or online.
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What’s the Risk of Using an ATM or Debit Card?
Now, let’s review what happens if someone steals your ATM or debit card. These cards are regulated by a federal law called the Electronic Fund Transfer Act.
Many people mistakenly believe that because their bank is FDIC-insured, their money is protected from theft. This is dead wrong. The FDIC reimburses you up to a certain amount if your bank goes out of business, but not if a criminal accesses your bank accounts and steals your money.
Your liability for fraudulent charges on a debit card depends on how quickly you report it lost or stolen. Unlike a credit card, your liability with a debit card is not capped at $50—it’s unlimited. Here’s how it works:
Unlike a credit card, your liability with a debit card is not capped at $50—it’s unlimited.
If you report a missing debit card before a thief uses it, you’re not responsible for any unauthorized transactions, just like with a credit card.
If you report your debit card as lost or stolen within 2 business days, you’re responsible for up to $50 only. However, if it takes you 60 days after you receive a bank statement to report unauthorized debit card charges, you’re on the hook for up to $500.
If just your debit card number is stolen while you still have the card in your possession, you have a little more protection. In that case, you’re not liable for fraudulent activity if you report it within 60 days of your statement date.
However, if it takes you more than 60 days to report fraudulent charges, you have unlimited liability. That means a thief could completely drain your bank account and get away with stealing your entire balance, plus you’ll probably have bank overdraft fees.
I use my bank’s iPhone app to check my bank accounts at least once a day. I would catch any unauthorized use immediately, report it within 2 business days, and only get stuck with a $50 liability.
But if you’re not in the habit of reviewing your bank accounts on a daily basis, please think twice about using a debit card. Or consider switching to a better bank that offers tools to make it easy to stay on top of your transactions.
In 3 Top Online Banks and 8 Banking Security Tips, I review my favorite bank accounts, so you can see how yours stacks up. I also created the Online Bank Comparison Chart (PDF), a resouce you can download for free to see a detailed review of seven of the best banks.
Now, let's talk about when you should avoid using a debit card.