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Fraud Worries: Debit vs. Credit Cards

posted on 2015-05-20 by Karen Damato

Finding fraudulent purchases on your credit-card account is bad enough. Having a thief gain access to your bank balance is much worse.

Criminals are stealing card data from U.S. automated teller machines at the highest rate in two decades, preying on ATMs while merchants crack down on fraud at the checkout counter.

Meanwhile, the risk of unauthorized bank withdrawals is weighing on consumers deciding whether to make purchases with debit cards, which are connected to a bank account, versus credit cards, for which accountholders get a bill to pay later.

If fraudulent transactions are made on your credit-card account, there is no immediate financial hit while you straighten things out, notes Greg McBride, chief financial analyst at website Bankrate.com.

By contrast, if a thief is able to withdraw dollars from your bank account, “the horse is out of the barn,” he says. The money is gone from your account until you are able to get it restored.

Mr. McBride says he generally recommends credit cards over debit cards, but principally for benefits such as more-generous rewards programs.

Website CardHub.com says fraud concerns are one reason it suggests consumers use a credit card as their “primary spending vehicle.”

CardHub Chief Executive Odysseas Papadimitriou says he has personally experienced credit-card fraud and a fraudulent $3,000 withdrawal from his bank account. The credit-card problem was annoying but when money disappeared from his bank account, he says, “I got really, really stressed out. It was very painful to see that.”

Here’s a look at your fraud-related liability on credit and debit cards:

Credit cards

The Consumer Financial Protection Bureau says that if your credit-card number—not your physical credit card—is stolen, “you are not responsible for unauthorized charges under federal law.”

If the actual credit card is stolen, you are liable for no more than $50 in unauthorized charges as long as you report it to the card issuer. But “most card issuers don’t even hold you to the $50,” Mr. McBride says.

The Visa V -0.38% and MasterCard MA -0.25% networks and big issuers Discover Financial Services DFS -0.45% and American Express AXP -0.10% all have a zero-liability policy on fraudulent credit-card transactions, according to a recent study by CardHub.

Debit cards

Many banks have instituted a zero-liability policy on their debit cards, says Mr. McBride, because “they want people to use their debit cards.”

But issuing banks usually have some discretion to determine if the customer promptly reported the theft. And different types of debit-card transactions may be treated differently.

Federal rules allow significant liability for fraudulent debit-card transactions that aren’t reported in a timely manner.

With debit cards, the CFPB says that “if an unauthorized transaction appears on your statement (but your card or PIN has not been lost or stolen), under federal law you will not be liable for the debit if you report it within 60 days after your account statement is sent to you.”

The rules are different if the card or PIN has been lost or stolen: Report the problem within two business days and liability is limited to $50 of unauthorized charges. Then the maximum liability rises to $500.

“If any unauthorized charges go unreported for more than 60 days,” the CFPB says, “your money, and future charges by the same person, could be lost.”

While financial-industry policies can be more generous than the U.S. requires, that can also vary with the type of debit-card transactions involved, the CardHub report says.

For instance, CardHub says Visa and MasterCard both provide for zero liability on signature-based transactions on their debit cards. Also, there’s no liability on a PIN-based Visa debit-card transaction processed through the Visa network—and the same for MasterCard transactions on that network. (But a consumer “has no way of knowing what network transactions are processed on and therefore how much coverage they have,” the CardHub report says.)

Meanwhile, on ATM withdrawals, CardHub says coverage is at the discretion of the individual bank that issued the card.

The Federal Trade Commission has a handy summary of the rules and advice on how to report card fraud on its website.