The Debit Card Danger You're Probably Forgetting
As the American economy sunk in the wake of the Great Recession, many Americans were forced to rethink their spending habits and tossed their credit cards overboard, reaching instead for the perceived safety of their debit cards.
It's easy to see why, too.
Debit cards protect you from yourself by limiting your spending to what you have in the bank -- and in a time of high unemployment and financial instability, that held far more allure for many people than credit cards did.
That was especially true for millennials, and data shows it is still true today. A Bankrate.com survey of more than 1,100 U.S. adults this year found that 63 percent of Americans ages 18 to 29 don't have a credit card. And a CreditCards.com survey released in August found that age group prefers debit cards over credit cards 3-to-1 when it comes to making purchases under $5.
Unfortunately, however, what makes debit cards so appealing is also what makes them riskier than credit cards.
Here's what I mean ...
Say that one day, when routinely checking your credit card statement online, you notice several strange charges: $200 at Target, $25 at Chipotle and $40 at the local Chevron station. Alarmed, you immediately call and tell your card issuer that you didn't make the purchases. Typically, you will be asked a few questions, and then the charges will be temporarily removed from your statement until the investigation is resolved, your card canceled and a new one mailed to you.
Of course, it's not always that easy, but by and large, the process is usually quick and painless. And most importantly, you won't be held responsible for those charges.
Next, still unnerved by these mysterious charges, you decide to check your checking account. There's trouble there, too: a mysterious $250 purchase at the Apple store.
As was the case with the credit card, your debit card hasn't been stolen. It's still in your wallet. However, unlike the fraudulent credit card charges, the $250 debit card purchase drew real money from your bank account. That's money that you can't use to make a rent payment or car payment or to buy new shoes for your kid.
But you shouldn't be too worried, right? Sure, the money's gone, but it won't be for long. Once you report the fraudulent charges, the bank should replace the funds the same day and then look into what happened. Meanwhile, all will return to normal.
Think again.
For one, there's no guarantee that your money will ever be replaced -- especially if you wait too long to report the fraud. Federal law says you are only liable for $50 in fraudulent charges if you tell your bank within two business days of learning about them. Wait more than those two days, but fewer than 60 calendar days after you receive your statement, and you can be liable for up to $500 in losses. Beyond that length of time, there are no limits.
That's not all. Even if you do get all your money back, it probably won't happen that same day. It might not even be that week.
Generally, after you tell the bank about a fraudulent transaction, it has 10 business days to look into it. If the investigation determines that the transaction was, in fact, fraudulent, the bank must replace the funds within one business day of making that determination. (It can have more time if needed, but the law requires the disputed amount be put back into your account after 10 business days have passed -- minus a charge of up to $50 -- as the investigation continues.)
That means you could end up waiting 11 business days, or more than two weeks, to get your money back.
That's the dirty little secret about debit cards and fraud that too many people forget, and it can put people at real risk, especially those who live paycheck to paycheck.
Yes, many banks have policies that allow for money to be returned sooner, even within 24 to 48 hours. Still, even waiting that short amount of time for the missing money to be replaced can cause a real hardship. The larger the amount of money, the bigger the headache.
So how can you protect your bank account?
1. Use credit cards. There are plenty of reasons to like debit cards more than credit, and credit cards aren't for everyone, but when it comes to fraud protection, there's no contest. Credit cards are safer. Just be sure you pay that card off on time and in full every month.
2. Check your bank statement often. You check Facebook or Instagram or email several times a day, right? Mix in one visit to check your bank account online every day -- or at least once or twice a week. It will just take a moment, and it can help you discover problems as soon as possible.
3. Find out your bank's debit card liability policy. Will your bank replace fraudulently acquired funds within 24 to 48 hours of you reporting the problem, or will it make you wait until the investigation is complete? If it's the latter, consider opening a second, unconnected account with some "in case of emergency" money to cover you if disaster strikes.
It all comes down to the fact that no one cares as much about the safety of your money as you do. Whichever form of payment you use, be smart, be watchful and be diligent. Otherwise, you could be putting your finances at risk.
Matt Schulz is the senior industry analyst at CreditCards.com, a site dedicated to helping people make smart decisions about obtaining and using credit. You can follow him on Twitter at @matthewschulz.
