Debit or credit? More differences than meet the eye
September 03, 2010
High-interest and rewards checking accounts frequently give perks for debit card use, sweetening the deal for the growing number of Americans who are increasingly reaching for their debit cards instead credit cards.
However, debit cards offer different protections than credit cards in the event of unauthorized use or disputes. Know the differences so you can choose the form of payment that meets your needs.
1. Withholding payment
If the merchandise or service turns out to be defective, you cannot legally withhold payment via debit card as you might with a credit card.
- Tip: Most experts suggest using credit cards for big purchases. Use debit cards only for small, routine purchases, the Federal Reserve advises.
2. Fraud liability
Federal law caps your liability for unauthorized credit card transactions to $50 to limit the effects of errors or fraud. But your liability for a checking account debit card depends on how fast you report the problem--from $50 to $500 or more. You must report a lost debit card or unauthorized transaction within two business days to limit your liability to $50. After that, your liability may increase substantially.
Some banks independently waive liability for unauthorized transactions if customers take reasonable precautions to avoid fraud, but the Federal Reserve says consumers should still report problems as soon as possible.
Even if the bank waives your liability for an unauthorized debit card transaction, you may experience delays accessing the unauthorized funds even after you notify your bank. Banks have up to 10 business days--20 in some cases--to investigate following your notice. If the investigation takes longer, they must provide provisional credit until the problem is resolved.
- Tip: Use your credit card rather than your debit card online. If hackers steal your debit card information, your checking account balance and any accounts linked to it are at risk.
- Tip: Monitor your checking account online daily, and report problems to your bank immediately.
3. Temporary transaction hold
When you use your debit or credit card to purchase something and the final total is unknown, merchants put a temporary hold on your account for more than you might spend. For instance, a hotel might put a hold of $250 or more per day for your upcoming stay when you check in. The hold protects the hotel against possible losses. When you check out, the hotel will remove the hold and complete the final transaction for the actual amount you owe. However, a hold on your checking account effectively freezes that money until it's lifted.
- Tip: Use a credit card to book a hotel reservation, and then, if you wish, use your debit card to pay the tab at check out.
You're in good company if you find yourself using your debit card more frequently these days. Checking account debit card use expanded tremendously in the last decade, surpassing credit card use in 2006, according to the Federal Reserve. Using debit cards makes sense in many situations--as long as you monitor your account closely and guard yourself against fraud.
