Question: A year ago, I made the decision to use my debit card more and credit cards less. I currently have no debt – good feeling! I recently heard a financial advisor on a radio show (maybe it was yours) say he only uses his debit card. He doesn’t have a credit card and says he can use his debit card. I am aware of certain protections that come with credit cards: limitation of loss if you report a lost card promptly or refund if say you purchase tickets for a cruise that gets cancelled. Does a debit card provide all the same protection to me that a credit card does? Are there any important differences between a debit and credit card that I need to be aware of? Thank you. Char, Bainbridge Island, WA
Answer: Going debit is popular. For the first time consumers are using their debit cards more than credit cards. It’s a good trend. I’d probably use my debit card 90% of the time whenever I pull a piece of plastic out of my wallet. But I’m skeptical of going all debit, at least for anyone that travels, shops online, and buys a big ticket item like a washing machine or refrigerator. In certain circumstances I prefer the greater legal protections of a credit card over a debit card. It’s a judgment call.
Like you, the driving force behind the widespread shift from credit cards to debit cards is the desire to stay out of debt. A debit card is really an electronic checkbook linked to your checking or savings account. A debit card offers the convenience of plastic and merchants welcome the card. The real issue with a debit card is not to overdraw your account. Banks have learned that it’s really profitable to let you overdraw your account and sock you with hefty overdraft fees.
Now, to your question about consumer protection: Credit cards have more legal protections than debit cards. But in practice Visa and Mastercard have a policy of insisting that their issuing banks voluntarily extend credit card protections to debit cards. To ensure that you get the “zero-liability” policy protections when you use your debit card press the “credit” button and sign for the transaction.
Here are the rules. By law, if your credit card is lost or stolen and you tell the card company before any unauthorized charges are posted to your account you’re not on the hook at all. But if the unauthorized charges do show up on your bill–and that’s how we usually find out about unauthorized charges–your liability is limited at most to first $50 of charges. It’s good protection. The debit card rules offer up a tired security system. Your liability is limited to $50 if you tell the issuer within two days of finding the unauthorized charges. Between 2 and 60 days, your potential liability rises to $500. After that you could be on the hook for even more.
However, if your debit card has the Visa or MasterCard logo you don’t have to report fraudulent activity within two business days. The policy of the two giants of the industry is that you won’t be held liable for fraudulent transactions made over their networks. (That’s why you hit credit and sign for the transaction.) But it’s a policy, not the law.
In practical terms I’m comfortable with the Visa and Mastercard pledge most of the time. For everyday use around town, going to the grocery store and the dry cleaner, debit cards are safe. It’s a sound habit to develop for not taking on debt and spending more than you earn. However, I prefer the deeper legal protections of a credit card when I travel. It’s easier to book and protest with credit cards with rental cars, airfares, hotels, and the like. I’m a cautious with the wild west of the Internet so I’ll use my credit card for shopping online. If I buy an expensive item I’d rather make sure everything is okay before paying off the bill in full.
So yes, you can go fully debit. But I recommend being a debiter most of the time, just not all the time.