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]