Debit card fraud, in which thieves actually steal money from your bank account, is on the rise, highlighting one of the biggest weaknesses of using that form of payment. Recently, Michaels Stores reported its checkout-line PIN pads were tampered with in 20 states. Some of its customers reported fraudulent cash machine withdrawals, each totaling hundreds of dollars. A similar incident happened last year with debit card customers of discount grocer Aldi in 11 states. Debit card information can be stolen by any retail clerk who handles your card. Or the theft can be more complex. T hieves can secretly install “skimmer” devices that fraudulently collect bank information from cards inserted or swiped at checkout counters, gas station pumps and bank cash machines. “Representing many targets, and due to well-known vulnerabilities, point-of-sale systems continue to be the easiest method for criminals to obtain the data necessary to commit payment card fraud,” said a report by information security firm Trustwave.
Here is the lowdown on debit cards, also called check cards, compared with alternative payment methods:
DEBIT VS. CREDIT CARDS: Credit cards are often blamed for helping people incur high-interest debt, but their consumer protections compared with debit cards cannot be denied. A stolen credit card number is usually not a big deal. When a thief makes a fraudulent purchase, you simply notify your credit card company. It issues you a new card, and you probably don’t pay a dime. You’re never poorer for it, except for the hassle of changing some accounts that are automatically charged to that card. A stolen debit card number can be more serious. A thief can make purchases or, with access to the PIN code, withdraw money at a cash machine, and money will be taken from your account. At that point, you have to fight with your bank to put money back in your account. “Debit cards open up your checking account to being completely drained,” said Paul Stephens, director of policy and advocacy at the nonprofit consumer organization Privacy Rights Clearinghouse, which recommends against using or carrying debit cards. “With a credit card, it’s not a direct pipeline to your checking account.” By federal law, you’re at most liable for $50 in a credit card fraud, but major cards hold you liable for nothing. However, debit card users have a limited time to report a loss or unauthorized use. Even if reported within two business days of discovering the theft, a customer can be liable for up to $50 of the fraud amount. If reported after two days, the customer can be liable for up to $500. If reported later than 60 days after the date of your bank statement that contains the fraud, a customer is in danger of losing all the money. Maybe more important than all that, a bank can take up to 10 business days — two weeks — to reinstate stolen money. “How many people can be without that money in their account when they have to pay their mortgage or rent?” Stephens said. “If banks take two weeks to restore funds, what do you do for money during that two-week period?” Banks and card networks may decide to be more generous than the federal law limits and hold you liable for nothing, especially if you are an obvious victim in a high-profile fraud, like the Michaels breach. For some, it’s their standing policy to offer “zero liability.” Still, policies can change. Federal law is stronger protection. The important point is that using a credit card puts the bank’s money at risk in the transaction; using a debit card puts your money at risk.
DEBIT SWIPE VS. DEBIT PIN: Many consumers have theories about which is safer: Paying with debit by signing, like a credit card, or typing your personal identification number into a keypad. Checkout clerks will ask, “Debit or credit?” although both are debit transactions. Banks would like you to swipe and sign, because they make more money from signature transactions than PIN transactions. Merchants like you to type a PIN because it is cheaper for them. But from a consumer standpoint, it doesn’t much matter. If a thief uses your account information, money will be gone from your account either way. One consideration, however, is that some card issuers offer more consumer-friendly fraud policies for signature-based transactions because they want to encourage that more-profitable payment method. And most debit card rewards require you to sign. Check your card’s policy.
PERSONAL CHECKS VS. DEBIT CARDS: Personal checks don’t have the same electronic fraud hazards as debit cards, but they have their own. Identity thieves can garner a lot of information from a paper check: usually a name, address, phone number, bank name, bank account number, electronic routing number and signature. Sometimes, checkout clerks ask for a driver’s license and write the number on the check. That’s a lot of information for an identity thief. Checks are also vulnerable to “washing,” in which a thief chemically erases whatever you wrote on the check then fills it out, making it payable to himself.
CASH VS. DEBIT CARDS: Cash can be a good way to pay. Like debit cards, consumers won’t incur finance charges. Its drawbacks are that if cash is lost or stolen, it’s probably gone for good with no recourse — no bank to complain to. And cash is unwieldy to use for expensive purchases.
DEBIT CARD VS. ATM-ONLY CARD: Consumer advocate Clark Howard for years has called debit cards “piece-of-trash fake Visa and fake MasterCards.” There’s a little-known alternative. Banks won’t publicize it, but most will issue you an old-fashioned ATM-only card, without the Visa or MasterCard logo. ATM-only cards allow you to withdraw cash from an ATM but aren’t as risky as debit cards that can operate on credit card networks. If lost or stolen, an ATM-only card is useless to a thief who doesn’t also have your PIN code. All payment methods have drawbacks. But from a fraud standpoint, credit cards are the safest way to pay. One strategy is to apply for a new credit card with a relatively low limit and use it as a debit card for everyday purchases, resolving to pay it off every month without exception, Stephens said. “There’s no question about it, a credit card is the way to go,” Stephens said. “It’s just a question of a consumer having the discipline to use a credit card in a responsible manner.”