Will it be Debit or Credit?

By Charles Webb

Not all plastic is created equal.  When you reach into your wallet and pullout a card to make a purchase, you probably don’t give much thought as to what the card is beyond VISA or American Express, but you should, and here’s why.  The real distinction among the various cards offered today is if it’s a credit card or debit card. 

There are two primary differences between credit cards and debit cards.  Firstly, credit card charges accumulate in an account with the card issuer and can go no further than that.  Because you owe the balance to the card issuer, you are in an inherently stronger position when it comes to dispute resolutions.  You can wait to make the payment after the dispute is resolved to your satisfaction.  A debit card, on the other hand, places you in the position of having the card issuer refund your money once the dispute is resolved to their satisfaction because the money is withdrawn from your checking account when the charge is made. 

The second difference between the two card types is the consumer protection laws.  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.

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. Past two days and 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.  Most card issuers have a zero liability policy because they want you using their cards, but ultimately they are not required to by law. 

Most stolen card information has come from retailer data breaches.  This means that you likely won’t even know that fraudulent charges are being made until well after the fact.  If this occurs with a credit card, then there is no harm while the situation gets fixed.  However, if the fraud occurs on a debit card, your checking account can get emptied before you’re notified, potentially affecting all of your other checking activity (i.e. bounced checks, unable to get cash from an ATM, etc.).  Even though your bank will refund the fraudulent charges, you still have to deal with the NSF charges from the companies you wrote checks to.  There’s no guarantee they’ll refund those or that it won’t lead to dings on your credit report.

Hands down, a credit card is the safer form of payment.  As a bonus, many credit card companies also offer free reward points just for using your card.  Banks promote the use of debit cards because it’s a better deal for them.  You should do all of your shopping on a credit card and pay it off every month.