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'Debit or Credit' When it Comes to Fraud?

|Includes: Bank of America Corporation (BAC), C, JPM, WFC

Last year, for the first time, spending on VISA debit cards surpassed spending on VISA credit cards – not just by the total number of transactions, but also by the total number of dollars spent.   With the ubiquity of debit card use, and given that there are certain misconceptions about fraud coverage on both debit and credit cards, I thought consumers should be offered a comparison centered around the level of protection and convenience both types of accounts provide to consumers who have been exposed to fraud.

According to the FTC, consumer liability for fraudulent debit and credit card charges is limited to $50.  VISA and MasterCard, who control 100 percent of the U.S. debit card market, as well as most of the major credit card networks, have gone beyond what the law requires, and mandated that credit card issuers like Bank of America (BAC), Wells Fargo (NYSE:WFC), Chase (JPM) and Citibank (C) adhere to a zero percent liability rate for their customers, and that they grant immediate refunds on disputed charges. 

By law and in practice, the level of protection offered by debit cards versus the level of protection offered by credit cards is identical, but this is not to say that the level of convenience is too.  Both types of cards offer zero percent liability, providing all consumers who are victims of card fraud with the same end results.  But because of the way the two products are structured, the means to that end are entirely different.  Unauthorized debit card use can have a huge impact on the consumer’s wallet and his or her psyche. 

Most people are aware that when they purchase something with a debit card, the funds for that purchase are withdrawn immediately and in cash.  So, let’s imagine your checking account is wiped out due to fraud on the debit card associated with it.  Now imagine your mortgage is due tomorrow.  If you’ve already sent the check for your mortgage, you’re in jeopardy of having it bounce.  If you haven’t, you won’t be able to pay your mortgage, nor pay for daily living expenses like gas and food, until the fraud issue is resolved with your bank.  Besides the fact that most people simply can’t afford for something like that to happen right now, the scenario described above could cause one to undergo a considerable amount of stress. 

Comparatively, because the line of credit on a traditional credit card represents borrowed money, when fraud is committed against an account of this kind, the consumer doesn’t loose anything directly.  Additionally there is usually between 25-55 days before he or she even becomes responsible for the debt.  In this amount of time the fraud is usually detected, reported and resolved.   If you’re able to manage your credit card responsibly, paying off your balance in full each month, using it in lieu of a debit card will make you less vulnerable to the repercussions of fraud. 

Credit cards should be the first choice for consumers who want maximum convenience and minimum hassle should they become the victims of fraud.  But in the case that you have no choice but to use a debit card, report any unauthorized transactions you notice immediately.  And if your bank is slow to move or tells you that they can’t issue you a refund for whatever reason, you may want to remind them of the agreement they made with VISA or MasterCard in order to be able you to issue you your debit card in the first place.  If this doesn’t work get in touch with the network in question and ask that they investigate.  They were pretty quick to respond to me. 

Disclosure: No positions