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This post comes from Mitchell D. Weiss at partner site Credit.com.
The epic personal data breach at Target stores across the country was an unhappy Christmas surprise for consumers: An estimated 40 million shoppers’ account numbers were stolen by hackers.
While there remain many unanswered questions — how something like this happened and why it took so long for Target to discover and report the crime, for instance — consumers are bracing themselves as reports of illicit sales of the stolen account numbers are also making headlines.
Once the financial extent of the problem has been sized and the fraud has been contained — hopefully — consumers will use this near credit-death experience to re-evaluate their relationships with the cards that brought them to the brink in the first place.
A good place to start for that would be to compare the risks and benefits of debit vs. credit cards, so consumers know what they’re dealing with when they choose a payment method at the register.
The risks of debit cards
Debit cards have been around since 1966, according to the Kansas City Federal Reserve Bank. They were originally developed to reduce operating costs because, from a bank’s standpoint, it’s a whole lot easier — and cheaper — to process an account debit that’s been keyed in or swiped than it is to decipher someone’s barely legible handwriting on a paper check.
The Electronic Fund Transfer Act — legislation that governs debit card issuance and use — was designed to protect consumers against fraud. But that safety net is not without holes.
Consider what happens behind the scenes when things go wrong. Since debit cards are typically linked to personal checking accounts, fraudulent charges can compromise your account balance before you know it, as the checks you’ve written against what you thought you had on deposit begin to bounce.
Get used to being tapped out for a while, then, because after you’ve reported the crime, your bank’s investigation could very well take an entire statement cycle (usually 30 days) or more to complete. That’s because its first order of business will be to rule you out as the prime suspect.
In the meantime, where do you go for the replacement cash to pay your bills? What about the late charges you’re likely to incur from those you paid with checks that didn’t cash out?
What’s more, when a debit card is used to make a purchase, the money is transferred from your checking account soon after your card is swiped. Take a look behind the scenes here, too. What if the merchandise you purchased turns out to be defective or the item you ordered never arrives? Your bank isn’t going to fight that battle for you, because the EFTA doesn’t obligate it to do so. Consequently, you’re the one who will have to negotiate your own refund because the money will have already exited your account.
However, neither of these problems exists with credit cards, thanks to the Fair Credit Billing Act that governs its use. Not only doesn’t the cash leave your account until you’ve verified the charges and authorize payment, but the FCBA also requires card companies to remove from your statement any charge you contest until the dispute has been resolved.
But then there’s the underappreciated matter of the so-called account hold – which affects both types of card.
When a credit or debit card is used to purchase gas or secure a hotel room, the merchant asks the card issuer or bank to confirm that there’s enough available credit or cash on hand to settle the bill, plus a margin for error. For example, if you pump the gas yourself, the machine may automatically set the hold limit at $100 (or more) because it has no way of knowing whether you’re filling up a Harley or Winnebago.
That’s fine, but what if your credit is nearly tapped out or your checking account balance is light? Frankly, it’s the overdraft risk that worries me most, particularly when I think of my college students who all too often rack up big fees on their low-balance accounts.
To be fair, though, there are plenty of things to be concerned about with credit card use.
Credit card pros and cons
To start, there’s the veritable deli menu of fees and interest that you will incur if you carry a balance, transfer it from one card to another, take a cash advance or are late with your monthly payments. And, of course, there are also those who decry high credit limits that tempt consumers into getting in over their heads.
But we’re all grown-ups, right? So let’s act like it by limiting credit card charges to what we can afford — no different from limiting debit card utilization to the balance in a linked account. And if your card gets hacked and bogus charges begin to pile up, the FCBA’s superior consumer protections are there to help untangle the mess.
To that end, there is one more thing that you can do to safeguard your account.
Ask your card issuer about text and email alerts for when your card is charged without it being physically presented — in the case of an online or phoned-in purchase. It’s also a good idea to set a low threshold for the notifications. That’s because it’s not unusual for hackers to test the validity of the account by initiating a series of low-dollar charges before they start putting through bigger ones.
It happened to me about a year ago. Two $99 test charges were initiated before the crooks put through much larger purchases. The text and email alerts hit and all the fraudulent charges were promptly removed from my bill.
The takeaway from the Target data breach debacle? Choose a payment method that exposes you to risks that you fully understand and can easily overcome before they compromise your financial standing.
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