Credit Cards vs. Debit Cards: Which One is Safer Against Fraud?
Fraud is a serious threat to consumers who use plastic cards for online or offline purchases. According to the Federal Trade Commission, consumers reported losing approximately $8.8 billion to fraud in 2022, which is up 30% over the previous year1. One of the most common types of fraud is unauthorized charges on credit or debit cards, which can happen when hackers steal card information, or when cards are lost or stolen.
However, not all cards are created equal. Credit cards can provide the user a safer option when it comes to fraud protection, because they are not directly linked to your bank account2. If your credit card is compromised, you can report the fraud to the credit card issuer to obtain a credit on your statement. On the other hand, if your debit card or debit card information falls into the wrong hands, a bad actor can obtain direct access to all the money in your checking account.
PLEASE NOTE: USE OF DEBIT CARDS: If you are using debit cards (which SOL does not advocate), it remains your responsibility to closely monitor your account statements on an ongoing and continuous basis to detect (and immediately report) potential fraudulent transactions.
To help explain the differences between using credit cards versus debit cards, we sat down with Sergio Contijoch, SOL client relationship manager, for his thoughts.
The Differences Between Credit and Debit Cards
Credit cards and debit cards are both convenient ways to pay for goods and services, but they work differently. A credit card is a form of borrowing money from a bank or a card issuer. When you use a credit card, you are using the issuer’s money to pay for your purchase, and you have to pay it back later, in some cases with interest. Conversely, a debit card is a form of spending money from your own bank account. When you use a debit card, you are using your own money to pay for your purchase, and the amount is deducted from your account immediately.
Because of these differences, credit cards and debit cards have different laws and regulations that govern their use and protect consumers from fraud. For credit cards, the primary law is the Fair Credit Billing Act (FCBA), which limits your liability for unauthorized charges to $503. For debit cards, the primary law is the Electronic Funds Transfer Act (EFTA), which limits your liability for unauthorized charges depending on how quickly you report them4.
The Benefits of Credit Cards
Credit cards offer several advantages over debit cards when it comes to fraud protection. Here are some of them:
- Zero liability: Many credit cards promise zero liability for all fraudulent transactions, meaning you won’t have to pay anything if someone uses your card without your permission5. This is a voluntary policy offered by most major card issuers, such as Visa, Mastercard, American Express, and Discover5. Even if your card issuer doesn’t offer zero liability, the FCBA limits your liability to $50 as long as you report the fraud within 60 days of receiving your statement3.
- Chargebacks: If you are unhappy with a purchase made with your credit card, such as receiving a defective product or not receiving the product at all, you can dispute the charge with your card issuer and request a chargeback6. A chargeback is a reversal of the transaction that credits back the amount to your account. This can be useful if the merchant refuses to refund or exchange the product, or if the merchant goes out of business. Debit cards do not offer chargebacks, so you have to rely on the merchant’s goodwill or legal action to get your money back7.
- Credit score: Using a credit card responsibly can help you build or improve your credit score, which is a measure of your creditworthiness and financial health. A good credit score can help you qualify for better interest rates and terms on loans and mortgages, as well as other benefits such as lower insurance premiums and higher credit limits. Debit cards do not affect your credit score at all, since they are not a form of borrowing money8.
The Drawbacks of Credit Cards
Credit cards are not without their drawbacks, however. Here are some of them:
- Interest: If you do not pay off your credit card balance in full every month, you will have to pay interest on the remaining amount. Interest rates vary depending on the card issuer and your credit score, but they can be quite high compared to other forms of borrowing money9. If you only make the minimum payment every month, it can take you a long time and cost you a lot of money to pay off your debt.
- Fees: Credit cards may charge various fees for different services or situations, such as annual fees, late fees, over-the-limit fees, balance transfer fees, cash advance fees, foreign transaction fees, and more7 9. These fees can add up quickly and reduce the value of your rewards or benefits. Debit cards usually have fewer or lower fees than credit cards.
- Overspending: Credit cards can tempt you to spend more than you can afford or need, especially if you have a high credit limit or a rewards program that encourages you to make more purchases9. This can lead to debt, interest, fees, and a lower credit score. Debit cards can help you control your spending, since you can only spend the money that you have in your account.
How to Protect Yourself From Fraud
Whether you use a credit card or a debit card, you should take some precautions to protect yourself from fraud. Here are some tips:
- Monitor your accounts: Check your statements regularly and look for any suspicious or unauthorized charges. Report them to your card issuer or bank as soon as possible. You can also sign up for alerts or notifications that inform you of any transactions or changes in your account10.
- Use secure websites: When shopping online, make sure the website is secure and trustworthy. Look for a padlock icon and “https” in the address bar, which indicate that the website encrypts your information. Avoid clicking on links or attachments in emails or messages that claim to be from your card issuer or bank, as they may be phishing attempts to steal your information10.
- Protect your information: Do not share your card number, PIN, security code, or password with anyone, unless you initiate the contact and trust the recipient. Do not write down or store your information in an insecure place, such as a piece of paper or a computer file. Use strong and unique passwords for your online accounts and change them regularly10.
- Be careful with your card: Do not let anyone else use your card or see your information when you make a purchase. Use chip-enabled terminals or contactless payments, when possible, as they are more secure than magnetic stripe readers. Cover the keypad when entering your PIN at an ATM or a point-of-sale terminal. Keep your card in a safe place and report it lost or stolen immediately10.
Conclusion
Credit cards offer better protection against fraud, as they limit your liability, allow you to dispute charges, and are not directly linked to your bank account. Debit cards offer less protection against fraud, as they expose your money to theft, and are harder to reverse transactions or get your money back.
However, the best choice depends on your personal preferences and financial situation. You should also take some precautions to protect yourself from fraud, regardless of which type of card you use.
I hope this article helps you understand the risks of using credit cards versus debit cards. If you have any questions or feedback, please let me know.
Interested in learning how this information applies to your financial situation?
1 https://www.ftc.gov/business-guidance/blog/2023/02/ftc-crunches-2022-numbers-see-where-scammers-continue-crunch-consumers
2 https://www.cnbc.com/2019/08/27/debit-cards-are-dangerous-warns-fraud-expert-and-ex-con-artist-frank-abagnale.html
3 http://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title15-chapter41-subchapter1-partD&edition=prelim
4 https://www.fdic.gov/news/financial-institution-letters/2019/fil19009b.pdf
5 https://www.forbes.com/advisor/credit-cards/0-fraud-liability/
6 https://www.forbes.com/advisor/credit-cards/what-is-a-credit-card-chargeback/
7 https://www.nerdwallet.com/article/credit-cards/credit-card-vs-debit-card-safer-online-purchases
8 https://www.finra.org/investors/personal-finance/how-your-credit-score-impacts-your-financial-future#:~:text=A%20credit%20score%20is%20usually,the%20time%20of%20your%20application.
9 https://www.experian.com/blogs/ask-experian/pros-cons-credit-cards/
10 https://www.security.org/digital-safety/credit-card-fraud-report/
