Fraud Protection: What's The Difference Between Credit And Debit?

Everyone knows that credit cards offer better protection against fraud than debit cards, but why? Blueprint for Financial Prosperity sheds some light:

Federal Reserve Board Regulation E is the federal regulation that governs Electronic Fund Transfers and includes provisions that makes debit-card transactions instantaneous. Instantaneous means that the money is technically spent from the account the moment the card is used, which is important because your debit card draws from a bank account as opposed to a line of credit.

Why does this distinction matter? It matters because when a transaction is under investigation with a credit card, the charge is generally reversed until it is investigated further. With debit cards, the charge stays on while the transaction is investigated. So, if you have a fraudulent charge, you’re out the money until it’s fully investigated. This often causes a cascading effect where the missing money causes your account to go negative and start incurring fees. It’s not the bank’s fault at this point because it doesn’t know the offending charge was fraudulent and you really have little in the way of a defense to get the fees reversed since your account was negative.

There’s more a BFP, or you could read the regulation yourself. Interesting stuff.

Regulation E: Understanding Debit Card Fraud Rules[Blueprint For Financial Prosperity]
(Photo:scarequotes)

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  1. anatak says:

    “This often causes a cascading effect where the missing money causes your account to go negative and start incurring fees.”

    Often? Hrrm… maybe ‘sometimes’ is more appropriate.

    What’s great is when you actually fund your emergency fund, you can simply replace the missing money until the bank is finished with their ‘investigation’. Then again, I’ve never had to do that since every fraudulent charge (and we’ve had several) was immediately reversed when we called the bank about it. Funds replace by the next business day. No bounced checks, no negative balance. No fees. No investigation. Ever. But its a nice theory to go along with the theory described in the post.

  2. Graedus says:

    Aside from the security, the thing that sucks most about debit is that, even though the cash withdrawl is instantaneous, the banks allow you to take out money you don’t actually have, giving you fines. This isn’t bad for people who know that they don’t have enough money and decide to pay back the fines anyways, but it definitely sucks for those who always make sure that there is enough money in there account, and would likely only go over if their security had been compromised.

    What would I like to see? A debit card that won’t let you withdraw more than you have in the account, and alert the bank when someone is trying to take more money out than you have, since it would likely be someone trying to steal from you. (At least as an option… although the banks would likely miss those tasty fees).

  3. jjbelsky says:

    “It’s not the bank’s fault at this point”

    The primary job of my bank is to hold my money for me and keep it safe. If they give it to somebody who isn’t me, then they made a mistake and it is their fault. Charging me fees because they made a mistake is unacceptable.

  4. FLConsumer says:

    Or you can avoid the hassle & just pay with a credit card. If there’s a screwup, it’s not your money, your mortgage payments will still go out on time, the rules are clear about how it should be handled, etc. AND, there’s $0 liability for Visa credit card holders, but not for their debit card holders.

  5. moeman1024 says:

    What section are you referencing? I have been having problems with my bank doing instant transactions with the debit card.

  6. j03m0mma says:

    Washington Mutual actually will credit your account up to a certain amount (not sure the exact amounts but I’ve had it up to $300) till the investigation is complete (which entails them talking to you and getting a police report) now if you don’t provide them information, or they find the claim not fraud the then remove that money the credited you with.

    Another reason why I like WaMu.

  7. Sidecutter says:

    @Graedus: Credit cards don’t keep you from overspending either, a lot of the time. hence the “over-limit” fees they can slap you with. Same concept as overdrawing a checking account. I really don’t see what is so hard about having it set up so if you’re charging more than you have, be it in your checking account or credit line, it’s denied with that as a reason.

  8. Buran says:

    @anatak: Yes, banks will do that but they do it because of their own policies, not because of federal law. The protection you get from credit cards, including the $50 liability limit is codified in law.

    The bank can back out of its policy at any time, technically, but it’s always bound to obey the law.

  9. Buran says:

    @FLConsumer: Federal law makes that limit $50, but I’m glad that the policy (which could change at any time) is $0. I’ve never been charged a cent for any of the fraudulent transactions I’ve had over the years (though it would be nice if they’d actually track down the scammer, fine them, and use part of the fine to repay me for my trouble in dealing with it).

  10. goodguy812 says:

    my bank removed the overdraft privelage as they call it, where you spend what you don’t have, and now if i try to spend even one penny more than whats in my account, it declines! yesss! with no fees. like it should be. some banks though won’t do it.

  11. FLConsumer says:

    @Sidecutter: That’s providing your credit card has a limit.

    @Buran: Yep, it’s nice to have it as actual Federal law…but that only applies to the credit cards. It’s still the wild west with debit card. Makes me wonder what BoA would do…

  12. Extended-Warranty says:

    The responsible use of a credit card is your best method of payment. Only suckers use debit.

  13. anatak says:

    @FLConsumer: Once again, dead wrong… or just too lazy to look it up. And we wonder where myths come from…

    [usa.visa.com]

    Visa’s Zero Liability policy took effect April 4, 2000, and is a great improvement on the previous policy. The former policy required that you report fraudulent activity within two business days of discovery. After this two-day period, you could be held responsible for up to $50 of the unauthorized charges. With the new Zero Liability policy, you’re no longer required to report fraudulent activity within two days and you’re not responsible for any fraudulent transactions made over the Visa network.

    The Zero Liability policy covers all Visa credit and debit card transactions processed over the Visa network-online or off. The only transactions not covered under the Zero Liability policy are commercial card, ATM, and non-Visa-branded PIN transactions.

    And what would B of A do?
    [www.bankofamerica.com]

    Total Security Protection®
    # Zero Liability. If your card is lost or stolen, Bank of America reimburses you for any unauthorized card transactions up to the amount of the loss, when reported within 60 days from statement date.
    # Guaranteed credit. Your account will be credited by the end of the next business day for unauthorized transactions if your card is lost or stolen.

    That’s their policy, and in my experience, they have done exactly that, as detailed above.