997. A single swipe could drain your checking account. Laura Adams reveals 10 dangerous situations where using a debit card exposes you to unlimited liability and how to protect your hard-earned cash from cybercriminals and skimmers.
997. A single swipe could drain your checking account. Laura Adams reveals 10 dangerous situations where using a debit card exposes you to unlimited liability and how to protect your hard-earned cash from cybercriminals and skimmers.
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Imagine that you’re standing in line at the grocery store, you swipe your debit card to check out, and the machine says you’ve been declined. You thought there was more than enough money in your checking account!
But when you check your banking app, you see a $0 balance. You don’t know it yet, but a thief across the globe is responsible for draining your bank account.
While it’s true that using a debit card can be an excellent way to avoid debt if you’re unable to use credit cards wisely, they also come with risks. In today’s Finance Friday edition of the show, I’ll review ten dangerous places to use a debit card so you understand where your finances may be vulnerable.
Today’s topic was inspired by my terrific editor, Holly. She didn’t actually ask a question, but she was surprised that in episode 996, called "Wallet Audit: 9 Items to Remove Now," I mentioned that I’m generally not a fan of using debit cards. So, I wanted to give you more information as a follow-up to that show.
Thanks for joining me everyone! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, that's my Substack newsletter. You can learn more and sign up for The Money Stack newsletter at LauraDAdams.com.
Also, as we approach the 1,000th episode of Money Girl, I’m working on a special show to celebrate this milestone. I want to invite you to participate by giving me a message. You can call 302-364-0308 and leave a short comment, question, or even your favorite money tip you've learned from the show! I look forward to hearing from you and highlighting your calls!
What are the differences between debit and credit cards?
Although debit and credit cards look alike, they're entirely different financial tools. A credit card allows you to make purchases using somebody's else money, using borrowed money that you must repay with interest over time. A debit card allows you to make purchases using your money in a linked bank account.
While it might seem like using credit cards could hurt your finances because of the potential to rack up debt, debit cards are also risky, but for different reasons.
In the previous podcast, I mentioned that the Fair Credit Billing Act (FCBA) provides really good protection if someone steals your credit card or even the credit card number. If a criminal steals your card and maybe checks into a 5-star hotel in Maui, you won’t have to pay more than $50. The card issuer will fight to recover its losses after you report fraud.
But debit cards are different. They are regulated by the Electronic Fund Transfer Act. It says that your liability for fraudulent charges on a debit card is unlimited if you don’t catch it within 60 days. And that’s because the money you use with a debit card is yours, not a bank’s.
So, if you’re not in the habit of reviewing your bank accounts frequently, set a reminder on your phone to regularly review your transactions. The potential hassle and unlimited liability for theft are the primary reasons that I prefer using credit cards instead of debit cards. But we'll talk more about that. Plus, credit cards offer many additional benefits that I enjoy and will review in this show.
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I understand that many people use debit cards and may be willing to accept the risk of more potential liability, especially if you frequently review your bank account transactions, which I definitely recommend.
An excellent way to add more protection is to use a debit card with a mobile wallet. Wallets use tokenization, which sends a one-time code to a merchant rather than your actual card number. In other words, even if a merchant is hacked, the criminal won’t get your debit card or bank account information.
But if you choose to use a debit card and especially a physical card, here are ten dangerous situations when you’re most vulnerable.
1. Shopping online.
One of the most essential rules for debit cards is never to use them online. Whether buying clothes or ordering food from a delivery app, it doesn't matter.
Using a debit card online makes you a target for cybercriminals. If a site or app is breached, your banking information could be at risk. A thief could use it to drain your bank account linked to the card, unless you watch your transactions like a hawk and catch and report unauthorized activity immediately. In that case, you have a limited amount of liability.
2. Making large purchases.
When you make a big purchase, like furniture, electronics, or appliances, you get much more protection if you pay with a credit card instead of a debit card. For instance, if you buy furniture and find damage that a furniture company won't reimburse you for, you can dispute the charge with your credit card company.
Once you dispute a card charge, the issuer will reverse your payment to the merchant and inform them that a dispute has been opened on your behalf. That gives you leverage to ensure you’re happy with a big, expensive purchase.
But if you pay with a debit card, the funds are immediately deducted from your account and sent to the merchant. In that case, the only way to settle a dispute might be with an expensive lawsuit.
Additionally, many credit cards offer extended warranties. For instance, if your new television has a 60-day warranty and something goes wrong after 90 days, your credit card might cover the cost.
LISTEN ALSO: How to pay off credit cards when money is tight
3. Dining out.
Using a debit card in a restaurant is especially dangerous because it's one of the few places where the card is usually out of your sight when the server processes the charge. It would be easy for someone to steal your debit card number when you’re not watching.
While your credit card number could also get stolen, your potential liability is less than for a stolen debit card. As I mentioned, you’re never on the hook for more than $50 in unauthorized credit card charges.
4. Buying gas.
This is a big one. When you swipe a debit or credit card at the pump, some gas stations immediately put a hold on your account to ensure you don't buy more gas than you can afford. The hold amount varies by station but could be $100 or more, even if you only plan to buy $10 worth of gas.
Some banks may process a debit transaction at the pump for the exact amount within seconds and clear the hold immediately. But others may keep the hold for days, freezing a certain amount of money, which could cause you to bounce other payments or have new charges denied until the hold expires.
In addition, gas stations are well-known targets for physical card skimmers. A card skimmer is an illegal device that a criminal can attach to a card reader to capture your information during legitimate transactions. Skimmers might even have a camera that watches you enter your PIN, and it could appear to be a normal part of the machine.
If you have any doubts about swiping a card because the device doesn’t look right, pay for gas inside the store or even use a station’s app, when possible–especially if you plan to pay with a debit card!
5. Using non-bank automatic teller machines (ATMs).
Free-standing ATMs in places that aren’t banks like convenience stores, restaurants, or sidewalks, may have limited security. A thief could easily install a card skimmer and record your PIN as you enter your confidential information. So only use legitimate ATMs located inside a bank lobby or that are attached to a branch building.
6. Checking into hotels.
Like gas stations, hotels often put holds on funds when you pay with a debit card, which can temporarily reduce your available bank balance. For instance, a $250 hotel stay might result in a $500 hold on your card, potentially leaving you short for other expenses. So have a credit card ready when you check into a hotel.
7. Booking travel.
Many credit cards offer travel-related benefits like rental car coverage, trip cancellation insurance, and lost luggage reimbursement. Plus, they may pay bonus points and rewards for travel expenses that you can accrue to reduce the cost of future trips.
Also, when traveling, you may not know which merchants are reputable. If you use a debit card in an unfamiliar location or it gets compromised in a different city or state, your bank may freeze the account. So, stick with a credit card when traveling. Remember it’s the bank’s money on the line, not yours.
8. Making upfront deposits.
Using a credit card is best if you need to pay an upfront deposit for goods or services like travel reservations, freelance services, or equipment rentals. As I mentioned, once a debit card charge is processed and the money is withdrawn from your account, it's gone.
But putting a deposit on a credit card allows you to dispute a charge and get your money back if something goes wrong.
9. Setting up automatic bill payments.
While I love the idea of setting up recurring payments to make sure expenses like loan payments, memberships, and utilities never fall through the cracks, it can become a bookkeeping nightmare if you don’t keep a cash cushion in your account.
To avoid any bank overdraft fees, consider setting up automatic payments on a credit card instead.
10. Building credit.
While this isn’t a dangerous situation, many people don’t realize that debit cards don't help you build credit, which is critical for healthy finances. You need credit accounts, such as a credit card or line of credit, in your name and in good standing to build a positive credit profile.
However, you never need to carry a balance or pay a cent of interest on a credit card to build excellent credit scores. Paying your bill in full and on time every month helps you build a strong credit history.
If you can use a credit card like a debit card–meaning you only spend what you have in the bank and pay the monthly statement in full–you can build great credit, get fantastic protection, and accrue rewards, while paying no interest.
If you need to use a credit card to finance a purchase, always use the lowest-rate card possible. But if you’re not ready to use a credit card for all your purchases, being informed about their pros and cons compared to debit cards will help you make smarter financial decisions.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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