Despite the common belief that credit cards offer better consumer and fraud protection, debit cards are becoming increasingly popular among U.S. consumers. This could be a result of cautious lending and improved financial awareness by consumers. According to the February 2010 Nilson Report, debit and prepaid card transactions in 2009 increased by 13% while credit card purchase transactions fell by 4%.
So consumers are taking a safer approach to spending through the use of debit cards. But which kind of card provides the best protection from fraud and overspending?
Current Security Measures
Under federal law, consumer liability is limited to $50 for both debit cards and credit cards. In the case of debit cards, however, the card’s theft or loss must be reported within two business days. As the popularity of debit cards surged, VISA and MasterCard extended consumer protection by requiring card issuers to offer zero percent liability in the event a cardholder would fall victim to fraud.
Although federal law and card processors attempt to regulate the security features that come with credit cards and debit cards, card issuers usually provide additional protection to credit cards because they represent a larger pool of revenue. Perks such as price protection and extended warranties sway some consumers toward using a credit card over a debit card, contributing to the conventional wisdom that credit cards are safer than debit cards.
The Constraints of Debit
Credit charges have an advantage over debit charges due to the flow of money during a purchase transaction. When swiping a credit card, the amount of the purchase is held as borrowed funds and posted two to three days after the purchase date. With a debit transaction, funds are instantly transferred out of your checking account.
If your card, whether debit or credit, is lost or stolen, unauthorized purchases are eventually refunded. The problem arises when that card is a debit card and your checking account remains empty as your bank works to return your cash. Any checks or scheduled bill payments would bounce and leave you strapped for cash, perhaps causing unnecessary stress.
Should You Pay With a Debit Card or a Credit Card?
In general, the best option would bet to use a credit card for convenience and security when it comes to dealing with fraud. A great reason to use a credit card is that it earns rewards and cash back while most debit cards don’t offer such programs. Also, credit cards play a significant role in building good credit. Therefore, credit cards are ideal for expensive or Online purchases.
On the other hand, debit cards are great for consumers who want to closely monitor their spending. Because the money spent comes directly from a checking account, debit cards create more awareness of a consumer’s spending habits and overall financial situation. If use of debit cards is a must, it is best to limit them to small purchases where you receive what you paid for on the spot.
Which kind of card do you prefer, credit or debit? Tell us in the comments section.