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Written by Peter Dean, President and CEO of Optimizing Risk LLC
Many of us carry both a credit card and a debit card in our wallet. When we choose to use one rather than the other may be based on how many points or reward dollars we can earn, how we want to manage our cash or wanting to buy something now that we can’t afford to pay for until next month.
A major difference between the two types of cards is that you are generally spending your own money when you use a debit card, while with a credit card; you are spending the money of the bank that issued the card. But there are more significant differences when fraud is committed against your credit and debit card accounts.
The Fair Credit Billing Act limits your liability to $50 for any unauthorized use of your credit card. And if you report the card as lost before it is fraudulently used, you have no liability. And most banks will waive the $50 charge as part of their marketing strategy.
In the case of a debit card, the Fair Credit Billing Act also limits you liability to $50, but only if you report the unauthorized use of the card within two business days. If reported between three and 60-business days, your liability is as high as $600. Beyond 60 business days, there is no limit to how much you are liable for. Some banks, as a good will gesture, may waive some or all of the liability, but they don’t have to.
You may think that, since you only keep a few hundred dollars in your checking account, you can live with the liability risk because your checking account will be suspended once your funds are used up. However, depending on how the fraudster “stole” your debit card, they could have direct access to your account through your bank’s ATM. If the fraudster is able to obtain your debit card and PIN, he can go to any of your bank’s ATMs and then:
- Withdraw funds from a line of credit that you added to your checking account to prevent overdrafts;
- Transfer funds from other accounts at the bank that your account is linked to, and then steal those funds;
- Deposit fraudulent checks into your account and withdraw the funds, once the bank makes the funds available;
Note: If you are a VIP customer, the bank may make hundreds of dollars from deposited checks available immediately and, in some cases, up to $10,000.
You may think that you are protected because your bank limits cash withdrawals to $500 per day. But if the fraudster withdraws $500 at 11:30 p.m., he can often withdraw another $500 a half-hour later at 12:00 a.m., when the bank starts its new day.
So how does the fraudster get both your debit card and PIN?
Most merchants will allow you to use your PIN instead of a signature, to authorize a charge. But if you choose to sign at the card terminal, you will not need to use your PIN unless it is a grocery store and you elect to get cash back for up to $50 over the charge. Then you will be required to enter your PIN, which the fraudster wants as much as your card information.
To get what they need, the fraudsters may have placed a recording device in the card terminal that captures your debit card number and electronic codes unique to your card: all the information they need to manufacture a fraudulent copy of your debit card, to be used anywhere cards are accepted. And with your PIN, they can use your debit card at an ATM to withdraw cash.
Recently, both MasterCard and Visa have established zero liability policies that, on the surface, will reimburse debit cardholders for the type of fraud just described. But they have two catches:
- You have to use reasonable care in protecting your card from loss or theft; and,
- You have to promptly report to your financial institution when you knew that your debit card was lost or stolen.
What does reasonable care and prompt reporting mean? The definition is left up to the bank that issued the debit card. And when will you get your money back? That also depends you your bank. If it is a small amount and you are a profitable customer, it could be soon. But if the amount is large and you’re not a VIP customer, you could be relying on the good will of strangers.
There are steps you can take to prevent being the victim of debit card fraud.
- If possible, use your credit card at merchants, not your debit card.
- If not possible:
- Don’t use you PIN if you have the option to sign at the authorization terminal.
- Do unlink your primary account from any other savings or checking accounts that you have control over.
- Don’t let 60 business days go by without reviewing your checking account transactions.
- If possible, review your account every two-business days.
- Immediately report suspicious or unrecognized transactions to your bank – the telephone number is on the back of your card.
- Continue to monitor your checking account activity, even if your debit card is cancelled – there may be fraudulent transactions that have not yet been posted to your account.
Peter Dean is the President and CEO of Optimizing Risk LLC, a company that focuses on consumer credit and fraud risk management. He has provided risk management training to mangers in over 30 countries and has consulted for major banks, credit card organizations and finance companies on five continents. Contact Peter at [email protected] or reach him on LinkedIn.