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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

What Debit Card Companies Don't Tell You

by David Bach

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Posted on Wednesday, March 21, 2007, 12:00AM

My last column, "What Credit Card companies Don't Want You to Know," received an overwhelmingly positive response, with close to 4,000 comments posted in a matter of hours. It's exciting to see so many Yahoo! Finance readers taking an active role by posting feedback and suggestions.

One reader named Carol wrote, "I do not use credit cards because like a lot of others I got into a lot of trouble using them. After digging myself out, I cut them up and now I only use cash or my debit (bank account) card with a MasterCard logo."

A Debit Card Boom

I can relate. I also switched to a debit card after getting myself deep into credit card debt when I was in college. By using only my debit card, I became more disciplined about spending.

Carol and I aren't alone: Debit card use today is at an all-time high. You may be surprised to know that consumers are actually using debit cards more often than credit cards now. In fact, according to market research firm Mintel, debit card use surpassed a trillion dollars last year.

The Benefits of Debit Cards

Using a debit card for purchases is convenient, and it keeps you out of debt. After all, you can't spend what you don't have in your account. There's also no bill to worry about -- which means no interest, no late fee, no over-the-limit fee, no annual fee, and so on. Make a purchase and the money comes directly out of your bank account. What could be simpler?

But the same things that make a debit card so simple to use is also what makes it so risky. When your debit card information is compromised, thieves have direct access to your bank account.

Seven Tips for Debit Card Use

Obviously, it's important to understand the risks of debit card use, and how to protect yourself from those risks. Here are seven tips you need to keep in mind about debit cards:

1. Know your debit card's liability policy.

Many banks advertise that they offer "zero liability" debit cards. This means that if an unauthorized charge is made on your card and the transaction is signed for, you are not liable for the fraudulent purchase -- much like if you were to use a credit card.

However, it's really important to understand that in most cases, this zero-liability policy only applies to signature-based transactions when you're using a debit card with the Visa or MasterCard logo.

This means that if an unauthorized purchase is made using your debit card with your personal identification number (PIN), in most cases the zero-liability policy won't apply. What's more, the zero-liability policy for debit cards is just that -- a policy, not a federal law.

Ultimately, then, liability for fraudulent transactions are subject to review by the bank that issued the card. That said, it's possible that your bank offers a zero-liability policy even on PIN transactions, although very few do. Check with your bank.

2. Lose your PIN, lose your money.

Because PIN-based debit card transactions (processed via electronic fund transfer) generally don't carry the same protection as signature-based debit card transactions (processed through the Visa/MasterCard network), you want to do everything possible to safeguard that PIN. If your debit card information is stolen along with your PIN and you don't notify your bank right away, your entire bank account could potentially be wiped out.

Unlike credit card transactions, which are regulated by the Truth in Lending Act (Regulation Z), debit card transactions are regulated by the Electronic Funds Transfer Act (Regulation E). According to Regulation E, in order to limit your liability you must report suspicious debit card use for PIN-based transactions to your bank within two business days -- which will only put you on the hook for $50. Losses reported after two days will increase your liability to $500.

That's not all -- if you report unauthorized use of your debit card after 60 days from the time you received your statement, the bank doesn't have to reimburse you at all. In fact, you might even be liable for the maximum overdraft line of credit they extended to you. It's possible that your bank could have a greater protection policy than what the law requires; check to make sure you know what yours is.

3. It's easier than you think to have your debit card information stolen.

Your physical debit card doesn't need to be stolen out of your wallet or lost in the mall parking lot in order for your information to be compromised. This month, the Wall Street Journal ran an article on an increasingly common debit card scam.

In this scam, criminals attach "skimmers" to the card-swiping devices at grocery stores, gas stations, and even banks. Undetected by consumers, these skimmers copy debit card numbers -- including PINs -- that are entered. Once the skimmer is retrieved by the criminal, the information is sold or used to create fake debit cards. (Actually, this scam applies to both credit and debit cards. However, thieves prefer to steal debit card information since credit cards are monitored more closely by banks.)

So be on the look out for physical tampering at your ATM or checkout line, which could indicate that a skimming device is present. Don't use unbranded ATMs, either -- the kind you find in convenience stores or gas stations.

Also be aware of people lurking too closely at ATMs, or even for hidden cameras when you're entering your PIN. Use your hand to shield the numbers you're entering on the keypad.

4. Check your bank statement online every day.

Does that sound extreme? Trust me, it's not. While you're online checking email every day, take two minutes to log on to your bank's web site (from a secure computer, of course) and pull up your current statement.

Glance over your recent transactions and make sure they're all legitimate. If you see anything suspicious, call your bank immediately. Don't wait for your paper statement in the mail. By then it might be too late.

5. Don't let your debit card out of your sight.

Make sure all your debit transactions are handled without the card being taken out of your line of sight. Once you take your eye off the card, anyone who handles it has the opportunity to steal the card information.

6. Check your credit report regularly.

If you suspect that your debit card information has been compromised, report it to the credit bureaus right away. Order a copy of your credit report and monitor it regularly.

For a (genuinely) free credit report, go to AnnualCreditReport.com. They offer a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies, in accordance with the Fair and Accurate Credit Transactions Act.

7. Know when not to use your debit card.

There are certain situations in which it simply makes sense to use your credit card instead of your debit card. If you're making a "sight unseen" purchase over the Internet, for example, you have more recourse with a credit card if the item arrives in poor condition or not at all.

Personally, I never use a debit card for online purchases. It's always much more difficult to have money returned to your bank account than to dispute a charge on your credit card statement.

Finally, if you can avoid it, don't use a debit card when paying for a hotel stay, car rental, or even at the gas pump. When you do, banks put a block on a certain amount of money in your account until the entire transaction is complete and posted -- which could take days. In the meantime, your money is tied up and you won't be able to access it, which could lead to fees being incurred for an overdrawn account.

When using a credit card in these situations, be sure to pay the balance in full as soon as your bill arrives.

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544 Comments

Showing comments 6-35 of 544<< PreviousNext >>
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  • JudyA - Wednesday, April 25, 2007, 10:54AM ET  Report Abuse

    • Overall: 5/5

    I stopped using my debit card a few years ago when I had paid all my credit cards in full. I now use one credit card that offers me cash back on all my purchases. Now I put anything and everything I can on that credit card and pay it in full each month. AND, I put the money I receive back from the credit card into an account for family entertainment.

  • Lee - Saturday, April 14, 2007, 10:40PM ET  Report Abuse

    • Overall: 5/5

    Thank you for this article re debit cards. I have been thinking about that it may be riskey, but continue to use it. Now I know my inner voice was right. It usually is, and I should listen to it. Now I will be more careful, and maybe I will just now use it anymore. I stopped using cash because my relative who lived with me would steal it, but now I can use it again because she moved. Thank you again.

  • Lisa Michelle - Monday, April 9, 2007, 11:50AM ET  Report Abuse

    • Overall: 5/5

    This article was right on track! I use my debit card only because I have gotten into trouble with credit cards in the past. It also helps keep you accountable for your spending. It's too bad I didn't see the article earlier though! I used an ATM at a convenience store once, drew out $20 and it hit my bank 3 times! So I ended up losing $40 because it was "convenient".

  • happy - Sunday, April 8, 2007, 6:39PM ET  Report Abuse

    • Overall: 5/5

    I hope to see the day when everyone uses their debit card instead of their credit card.credit card companies are making far too much money and have been for many years,mostly off the poor.

  • Shashank - Sunday, April 8, 2007, 5:49PM ET  Report Abuse

    • Overall: 5/5

    People actually typing out these reviews. 5 Stars.

  • AlanW - Saturday, April 7, 2007, 9:51AM ET  Report Abuse

    • Overall: 1/5

    I think your coment about not using your card for hotels, car rentals etc. is ludicrus! Every time you take out a credit card and pay for something you are taking a risk. A risk that you won't pay it next month, a risk that you will pay it late. There is only one way to use a credit card, to dull the blades of your home shredder.

  • Lee - Wednesday, April 4, 2007, 12:26PM ET  Report Abuse

    • Overall: 5/5

    Good article with great information. To respond to rjwhitt2001, the author does not actually state that signature-based debit card transactions are regulated by Reg Z - he says that credit card transactions are covered by Reg Z and debit card transactions are covered by Reg E. I agree that a clarification may be in order to point out that "debit card transactions" includes both signature-based and PIN-based transactions, just to eliminate any confusion among readers who aren't careful with the terminology.

  • Yahoo! Finance User - Wednesday, April 4, 2007, 8:13AM ET  Report Abuse

    • Overall: 4/5

    I am glad to see that someone is getting good information out. The only thing I would change is the statement made about not being able to overspend with your debit card. Every bank is different. At the bank I work at, each account has an amount they can overdraw. Some customers actually like this feature, most don't. But if you are not actually writing down your transactions in your register, and you're going by the balance an ATM or computer shows, you're just asking for overdraft fees. Online Banking is very usefull and effective if used WITH your transaction register.

  • dave d - Tuesday, April 3, 2007, 3:48PM ET  Report Abuse

    • Overall: 1/5

    So here's a question. Can Mr. Bach tell us what customer has ever lost a dime on a fraudulent debit card transaction. Just one dime. Come on.

  • Darin - Tuesday, April 3, 2007, 6:08AM ET  Report Abuse

    • Overall: 5/5

    It is so easy to use the debit card and it does prevent you from overspending but it is good to realize that there are dangers. Debit carda are used so often it is easy to forget that there are scam artists that can steal your information and drain your bank account.

  • Yahoo! Finance User - Monday, April 2, 2007, 10:26PM ET  Report Abuse

    • Overall: 3/5

    The article above incorrectly stated that signature-based debit card transactions are regulated by Truth in Lending. This would qualify these types of debit card transactions as Reg Z. This is incorrect. All Debit Card transactions are regulated by Reg E (Electronic Funds Transfer), not Reg Z (Truth in Lending). This distinction is important considering the liability discussion the article presented. Please issue a correction to the article published.

  • Chicago120 - Sunday, April 1, 2007, 7:23PM ET  Report Abuse

    • Overall: 5/5

    This is for cnet62. Even though the information presented is common sense, he may be suprised how many people forget or simply are in a hurry and make mistakes. It never hurts to be reminded every now and then that this is serious. By the way there are also a lot of people out there with advanced degrees who couldn't find their out of a paper bag laying on it's side.

  • Yahoo! Finance User - Sunday, April 1, 2007, 12:16PM ET  Report Abuse

    • Overall: 1/5

    silly and a waste of time. Tell us something that the average bloke on the street with a bit of common sense does not know. If this is what analysts can come up with - Yahoo needs to wake up.

  • R.C. - Sunday, April 1, 2007, 11:13AM ET  Report Abuse

    • Overall: 4/5

    Vital information that everyone should be aware of. I was skimmed at a local gas station two months ago - I realized the warning signs and contacted my bank as soon as I got home. They put a block on the debit card and PIN. Luckily I beat the thieves to my account.

  • Yahoo! Finance User - Sunday, April 1, 2007, 10:32AM ET  Report Abuse

    • Overall: 1/5

    Silly, alarmist nonsense

  • kevin - Saturday, March 31, 2007, 7:38PM ET  Report Abuse

    • Overall: 5/5

    i would like to see more articles about protecting your cards online. thanks

  • Carlos F - Saturday, March 31, 2007, 6:53PM ET  Report Abuse

    • Overall: 5/5

    I appreciate the information. Some suggestions I hadn't thought about but do make a lot of sense. Thanks.

  • Rico B - Saturday, March 31, 2007, 10:57AM ET  Report Abuse

    • Overall: 5/5

    very good and informative.

  • Stern - Friday, March 30, 2007, 7:47PM ET  Report Abuse

    • Overall: 5/5

    I was just dealing with USA Federal Credit Union regarding a "former"friend stealing $1600 from my account. Actually I only had around $1000 in the bank when he was visiting me in Las Vegas. He decided to go to a casino late at night by himself and borrowed my car, to do a little gambling. Over the coarse of the night, he withdrew the $1000 and was able to take out $600 more. I woke up the next morning and he was nowhere to be found. A few hours later I realized my card was gone, so I went online to see if any charges has occured. Sure enough, he was at the Silverton. I immediately called my bank and told them to shut my card off. I went to the police department to file a report that same day. Being that he was a good friend, he may have seen me put my pin number at an ATM. The bank initially refunded my money, but the revoked it 25 days later. They didnt even send me a letter until 2 weeks after that. They stated that since he had my pin #, I was liable for the charges. Well, I closed my account and told them that they could kiss my rear in trying to get the other $600 that he withdrew. I am still trying to get my money returned to me. There is a federal law that protects consumers. Here is the link to the FDIC's regulation: http://www.fdic.gov/regulations/laws/rules/6500-3100.html#6500205.6 I am working that angle to get my money back. Maybe that can help other back. I dont know how they can cheat innocent members like that.

  • Yolanda - Friday, March 30, 2007, 6:59PM ET  Report Abuse

    • Overall: 5/5

    Very good information, I am passing it along.

  • john - Friday, March 30, 2007, 6:35PM ET  Report Abuse

    • Overall: 5/5

    This is something every college student should read before starting freshman year. I started with credit cards and found myself getting in too deep, so now I'm getting myself out and relying almost exclusively on debit cards. Great tips!

  • Shane - Friday, March 30, 2007, 3:26PM ET  Report Abuse

    • Overall: 3/5

    I thought the information was decent but focused only on fraud. I have encountered other major problems. I bank with Charter One, and I don't think these problems are exclusive to my bank. I am on a very tight budget, so I do check my account every day. I check my balance before any withdrawl from an ATM as well. I will check my balance and it can be 3 or 4 days before a debit is posted, so I really never know where I stand. I should be able to trust the balance they give me is correct and up to date. In 2007 a debit should be reflected instantly, If I go below my balance I am charged insane fees no matter what day of the week or time of the day. I get charged up to $90.00 since it has happened a few times. I checked my balance today and the most recent debit was March 26th. I wonder sometimes if my bank has been introduced to computers. I work on the floor of a major financial exchange and we are capable of settling all trades by the end of the day or at least first thing in the morning so I know it is possible. The Charter Ones out there take advantage of their not so wealthy customers by not updating their technology. I have never encountered fraud since it would be a futile effort to defraud a deadbeat like me.

  • Kenneth - Friday, March 30, 2007, 3:20PM ET  Report Abuse

    • Overall: 5/5

    Really enjoyed the information in this article. At the beginning of March, someone got a hold of my debit card information and cleaned out my bank account in 5 minutes. I got a call from the credit bureau that does the monitoring for my bank and they alerted me of the charges being made on my card. I had my card in my wallet, in Houston, while these charges were being made in Mexico City. Thankfully, my bank came through for me and I got my money back. A few days before this incident, I did notice a small amount on my on-line banking that didn't match with my records in my checkbook, but I dismissed it as I had misplaced a receipt since the amount was for an amount I usually debit. Come to find out, it was the person using my debit number a few days before, obviously making sure it would work. It's been a month now and I'm still nervous when I use my card and even more nervous when I check my account, thinking all my money will be gone again. I don't know how they got my number, but they did. Articles like these are very helpful.

  • arthur - Friday, March 30, 2007, 2:42PM ET  Report Abuse

    • Overall: 5/5

    Excellent article fm David. Debit cards certainly due put "the brakes on" as David said, you can't spend what you don't have. Just be careful of your surrondings when using a debit or any card for charges. It's just common sense to be vigilant.Tks Dave Art Ippolito Ocala, Dla

  • Yahoo! Finance User - Friday, March 30, 2007, 2:19PM ET  Report Abuse

    • Overall: 5/5

    this article should be published more often

  • AMAN - Friday, March 30, 2007, 2:17PM ET  Report Abuse

    • Overall: 4/5

    yes.... use cc's like cash.pay ur balance in full every month.....never use a debit card online or better at around-da-corner retailer.....and try not to swipe debit at non-bank ABM's. Bank with a dominant, larger bank and den u dont hv to go far to acess ur ABM. Conclusion: Debit card fraud can hv more consequences for you vis-a-vis cc fraud. So limit debit card use. if u have to, never use online

  • BedrockBulletCo - Friday, March 30, 2007, 2:14PM ET  Report Abuse

    • Overall: 5/5

    I don't own a credit card since we got in trouble with ours in 1994.Haven't had one since. I've heard some advisors say having one will improve your credit score, but mine is in upper 700's without it. I do use a debit card but only on legit sites and trusted businesses I deal with on a regular basis. My only problem is on rare occassions,when we get a hotel room,I like paying cash.I sometimes have to pay a security deposit for possible damage,but I get my money back when I leave.The problem is, these days, when you pay things with cash,people look at you as if you're doing something wrong or shady.Has cold hard cash,up front, become such a bad thing these days or what? I can still get thru the checkout quicker with cash than using my debit card.And the people in front of me with credit and debit cards actually slow the line down.I may have become old fashioned in my old age but I can still tell time. Still, the guy has some great pointers for people who love using their cards and I do admit, mine is,at times very handy when I don't have enough cash on hand,but my son got a debit card and ran in to overdraft fees 'cause he didn't keep up with his balance in his fastpaced life. (Use your head,slow it down just a little when you're handling YOUR money,guys) So, back to my rant about cash."If there's no more of that awful green stuff in your pocket, don't put things in your shopping cart." Cash is still King in my house." Good Day.

  • Yahoo! Finance User - Friday, March 30, 2007, 2:07PM ET  Report Abuse

    • Overall: 3/5

    Why not use credit cards like cash - pay balance in full every month?? That makes more sense than using debit cards.

  • Rosita - Friday, March 30, 2007, 2:06PM ET  Report Abuse

    • Overall: 5/5

    Thank you for this information. I have been having problems with my debit card. Now I know what to look out for. rbillie

  • Yahoo! Finance User - Friday, March 30, 2007, 2:05PM ET  Report Abuse

    • Overall: 4/5

    Excellent advice, but in the UK I was not able to access Annual Credit Report.com I got a note saying it is only available to IPS users in the USA

Showing comments 6-35 of 544<< PreviousNext >>

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