The disaster of the Target hack is still fresh in everyone’s mind. To minimize the negative ramifications of such an event we’ll take a look at the difference between paying with your credit card versus your debit card when shopping online. There are many important nuances between the two and we aim to find out which one will protect you better. Let’s a take a look at who will win the credit card versus debit card showdown!
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Liability for Fraudulent ChargesNeither credit cards nor debit cards are fully protected from hackers, however, what happens after your account has been compromised can be drastically different. One of the most fundamental differences between credit cards and debit cards involves what happens if a hacker uses your information to make fraudulent charges. With credit cards, the legal protections ensure that you’ll never have to pay more than $50, even if the hacker has run up massive charges on your card. Most credit card issuers won't even make you pay the $50. In my own personal experience, I have never been charged for any fraudulent use of my credit card.
With debit cards, it's a whole different story. If your debit card number is stolen you may have to pay up to $500—depending on the circumstances—which is something you should take into account when you’re shopping online. Most major banking institutions have updated their fraud policies to help protect your debit cards similar to credit cards, but not all banks are required to provide fraud liability protection. A credit card is definitely cheaper if something does go wrong.
Is Your Checking Account Affected?Another crucial distinction between credit cards versus debit cards is what happens to your bank account if fraudulent charges are made. If the unauthorized charges were made on your credit card then usually the charge will be credited to your account as soon as you inform your bank. As such, your bank account isn’t affected at all. Since most credit cards are not connected to your checking account the hacker will only be able to access as much money as your credit limit allows, and that is if the fraud department doesn't catch the illegal activity before then.
Keep Reading: Do you actually need a credit card?
With your debit card a thief has access to your checking account, and possibly any savings account attached to it, especially if your overdraft settings allow money to be pulled from your savings account. Also, if your debit card is hacked you could have to wait a number of weeks until the investigation reaches a conclusion for you to get your money back. Even worse, since the false charges from a debit card come directly out of your bank account you may find yourself without enough cash to cover your daily expenses while the false charges are being investigated.
Is Your Credit History Affected?Whether charges are fraudulent or not the same rule applies: your credit score is negatively impacted if you don’t make a payment on time. Many fraudsters get away with their illegal purchases because card holders don’t check their statements. But the real concern is if your credit card information is hacked you face the prospect of someone trying to open another card in your name. To combat this take the simple step of contacting one of the three credit bureaus (Equifax, TransUnion, and Experian) and setting up a fraud alert. The fraud alert doesn’t monitor your card activity like a bank, but it does notify you if someone tries to open a credit account in your name. It’s a free service and must be updated every 90 days.
Take Preventative MeasuresThere is an element of risk involved whether you’re using a credit card or a debit card, and it is essential that you take defensive measures to protect your account. At the very least monitor your accounts for suspicious activity. Federal law stipulates that 60 days after a fraudulent transaction the bank is no longer liable. You may have to foot the entire bill! Also, update your fraud settings so that your bank has an easier time noticing and blocking criminal activity.
Major banks such as Bank of America and Citibank have great fraud protection programs for their customers that are proactive. It is not uncommon for these credit card issuers to catch fraudulent activity long before it hits your radar. These financial institutions use complex algorithms to determine if a purchase is out of the ordinary, and that is a major preventative measure against fraud (Warning! This can affect you even if fraudulent charges are not detected. Planning on purchasing a TV? Let the bank know ahead of time. Are you traveling to a foreign country? Then definitely let the bank know that it’s okay to allow charges in Costa Rica. The algorithm might determine that these transactions are fraudulent and shut your card down without you even knowing about it.)
Tip: When shopping online be on the lookout for merchants who are “Verified by Visa” or “MasterCard SecureCode” members. Most banks will cover your debit card for 100% of fraudulent charges if the merchant has one of these classifications.
Keep Reading: Is mobile banking safe?
Final Word: Who Wins the Showdown?Ultimately, more protections are offered to online shoppers who pay with their credit cards. Although debit cards have plenty of benefits in certain situations it’s best to keep it in your wallet when purchasing goods online.
The bottom line is this: A debit card has your cash in the account while a credit card company foots the bill until you pay for it. That means that if a fraudulent charge occurs on your debit card you have to fight to get your money back. If a fraudulent charge occurs on your credit card then the card issuer fights to get their money back.
The laws that govern debit cards and credit cards are different, and when it comes to fraud, they favor the credit card user. It’s a sad fact that in time we’ll likely all be the victim of fraud, so the main thing to keep in mind is to safeguard what’s yours.
Tip: Can’t qualify for a credit card? Try a prepaid credit card. While they behave more like a debit card in that you deposit money into the account, you can limit your liability by only putting in a little bit of money at a time. If this card is hacked you’re only putting what’s in the account at risk, and not your rent money for instance. Don’t feel comfortable with that? Open a second checking account and use the debit card from that account.