The dangers of debit cards

Your checking account can be wiped out in minutes; a much better option is a debit card on a secondary account without much money in it

Pixabay |

For 20 years, one of the most frequent questions I get is why I’m not a fan of debit cards.

Without a doubt, you’re asking for trouble if you have a debit card linked to your primary checking account. If you really want a debit card because you can’t qualify for a credit card, or because you prefer a debit card for budgeting purposes, then you at least should strongly consider getting the debit card on a secondary checking account that isn’t where you get your direct deposits or use to pay your important bills. 

Remember that debit cards are a fairly new phenomena in the marketplace. They shot to stardom with the emergence of Visa Check Card in 1995. Banks persuaded debit cards were the best invention since money itself. Debit cards were easy to use. Widely accepted. No worries about credit card debt. Just amazing. 

By 2009, debit cards became the most popular form of payment for consumers, surpassing blew credit cards, cash and checks.

Today, debit cards have lost some of their shimmer as many consumers have had their checking accounts raided by fraudsters. Credit cards have again became the most popular form of payment (preferred by 40 percent of consumers), followed by debit cards (35 percent) and cash (11 percent).

At the same time, banks stopped pushing debit cards as zealously after changes in federal law in 2010 and 2011 caused debit cards to be less profitable for banks. New laws prohibited banks from charging customers overdraft fees on one-time debit card transactions and ATM withdrawals unless customers agreed to pay these fees ahead of time. This 2010 change stopped an $18 billion-a-year source of revenue for banks.

In addition, regulators restricted how much banks could charge merchants when consumers used their debit cards. The new “interchange fee” law in 2011 shut off a $16 billion-a-year faucet.

If you’re still using a debit card on your primary checking account, here’s what you need to know about debit cards and credit cards:

  • If you have a problem with a credit card transaction, such as fraud, you don’t have to pay the amount in dispute while it’s being investigated. With a debit card, the money is already gone from your checking account, and you’re trying to get your own money back.
  • Debit cards are more vulnerable to fraud than credit cards, according to the Identity Theft Resource Center in California, a nonprofit consumer education organization. The reason: Account monitoring isn’t as thorough for debit cards because the transactions are processed through different networks. Credit card networks have more thorough histories on individuals so they can better detect suspicious transactions. The debit card network, however, can rely only on a person’s transaction history with that specific bank — not the entire MasterCard and Visa system.
  • Banks are less likely to freeze debit cards (vs. credit cards) when they do notice something suspicious. The reason: The bar is higher to block people from using their own money.
  • If your card is hit by fraud, your protection under federal law stinks with a debit card, compared with the protection offered by credit cards. With a credit card, your liability in case of fraud or errors is limited to $50 if you notify the card issuer within 60 days after the statement listing the transaction is mailed. With a debit card, the $50 liability limit expires two days after the fraud. Then your potential liability goes up to $500.
  • Credit cards offer protection under the federal Fair Credit Billing Act. This means you can refuse to pay for products or services that you didn’t get or that are defective. There’s no such protection with a debit card.
  • Debit card authorizations can tie up your money. Gas stations, hotels, rental car companies and other merchants may put a three-day hold on more money than you will actually be spending on a particular transaction. You can’t use that money until the hold ends.
  • This temporary hold on your own money could cause other payments to bounce even though you really have enough money in your account. You have no recourse for this.
  • You don’t necessarily have protection against errors with debit cards. In many cases, banks regard errors by a merchant as a “billing dispute,” not fraud. You may be on your own to get it resolved.
  • If you use a debit card, and a fraudulent charge or a billing error causes other payments to bounce (like your mortgage or cell phone payment), you will be hit with hefty overdraft fees (maybe $35 each) and will probably have difficulty getting the fees refunded.
  • With billing disputes, the banks sometimes tell you to get the merchant that made an error to pay the overdraft fees. Who are they kidding?
  • While many consumers get most of their money back in debit card fraud cases, they generally have to wait seven to 10 days while the bank investigates. What if you need that money in the interim?
  • Banks desperately want you to believe that debit cards are safe. However, that “zero liability” promise is voluntary, not the law. It can change any time. Protections with credit cards are the law.
  • About one in 14 consumers has been hit by debit card fraud in the past five years.
  • In the typical case of debit card fraud, consumers spend 28 hours making phone calls, dealing with their bank, filing police reports, getting a new debit card, changing automatic payments to the new card, etc.
  • In one study, the typical case of debit card fraud amount exceeded $2,500, and consumers ended up with $800 out of pocket that they didn’t get back.
  • Debit cards are often a bigger target for thieves because they can mean cash since they are linked to someone’s bank account. While getting money from an ATM or getting cash back from a transaction at a store requires a PIN, fraudsters are getting more sophisticated, according to the American Bankers Association, and are getting cash.
  • And these incidents of fraud involving cash are becoming more common following security breaches by several major retailers in recent years. In some cases, thieves have figured out how to tamper with checkout-line PIN pads and install skimming equipment to capture information. Using a card with an EMV chip in a terminal with a chip reader reduces your risk.
  • Most banks and credit unions say the best way you can protect yourself is to monitor your account daily for suspicious activity or sign up for text or email alerts for activity or balance thresholds. And that’s true. Banks rely heavily on customers — you — to flag problems.

If you ask your bank, I mean really press the branch manager, he or she will acknowledge the bank can’t completely protect you from debit card fraud that wipes out your accounts, leaves you without cash or causes other transactions to bounce.

If they say they can absolutely protect you from ever encountering debit card fraud, have them call me at 216-758-5370 or email me at [email protected].

The pros and cons of various ways to pay:  Credit cards, debit cards, cash, P2P, checks and more



Teresa Murray

Consumer Watchdog, U.S. PIRG Education Fund

Teresa directs the Consumer Watchdog office, which looks out for consumers’ health, safety and financial security. Previously, she worked as a journalist covering consumer issues and personal finance for two decades for Ohio’s largest daily newspaper. She received dozens of state and national journalism awards, including Best Columnist in Ohio, a National Headliner Award for coverage of the 2008-09 financial crisis, and a journalism public service award for exposing improper billing practices by Verizon that affected 15 million customers nationwide. Teresa and her husband live in Greater Cleveland and have two sons. She enjoys biking, house projects and music, and serves on her church missions team and stewardship board.