Debit cards lack consumer protections of credit

As posted on November 24, 2010 on

By Sandra Block

For budget-minded holiday shoppers, debit cards seem to offer an ideal combination of convenience and self-discipline.

They're safer than cash and less cumbersome than checks. Most retailers that accept credit cards also accept debit cards. And because debit cards withdraw money directly from the card holder's bank account, they offer relief from the surprise interest rates, late fees and indecipherable contract terms that have soured many consumers on credit cards.

In 2009, payment volume for debit cards exceeded that of credit cards for the first time, a trend that's expected to continue this year, according to Javelin Strategy and Research. Eighty percent of consumers own a debit card, while 78% own a credit card, according to the Federal Reserve. Seventy percent of consumers plan to use a debit card or cash for this year's holiday expenses, according to a survey by the National Foundation for Credit Counseling.

As increasing numbers of consumers are learning, however, there are drawbacks to debit cards. When it comes to fraud and theft, credit cards offer a distinct advantage over debit cards — something debit card holders may not realize until they discover that money has gone missing from their bank accounts.

As the use of debit cards has risen, so have incidences of debit card fraud. Such losses from debit cards totaled an estimated $788 million in 2008, up from $662 million in 2005, according to the American Bankers Association.

In August, Erica Sandberg, 46, a journalist and credit expert who lives in San Francisco, was headed to the mall to do some back-to-school shopping for her third-grade daughter when she received a recorded phone message from Bank of America.

She was told that someone had used her debit card to buy $800 in merchandise at a Dillard's department store in Phoenix. When she contacted the bank, a representative assured Sandberg that her account would be credited for the stolen money. Still, she didn't have access to her account for five days.

Fortunately, Sandberg's husband had his own account, and she also has a savings account she could have tapped if necessary. But she says the experience left her feeling frustrated and vulnerable, particularly since neither Bank of America nor Dillard's could tell her how the fraud occurred.

"You don't know how it happened, you don't know if it's going to happen again, and you don't even know for sure that the bank is going to believe you," she says.

Most major financial institutions and debit card issuers offer "zero liability" policies that promise to reimburse consumers if their debit card is compromised. But not all debit card transactions are covered by such policies. And consumers can lose the zero liability guarantee if they wait too long to report a theft, behave in ways deemed irresponsible by debit card issuer (such as sharing their personal identification numbers with others) or are suspected of participating in the fraud. Even those who are covered may not get their money back right away — a serious problem for consumers living paycheck to paycheck.

By contrast, credit card holders have access to their funds while disputed charges are investigated, says Bill Hardekopf, chief executive of, a credit card comparison website.

"He who has the money makes the rules," he says. "With a credit card, you have the last say."

What the law covers

Credit and debit cards often are issued by the same financial institutions, but they're regulated by separate consumer protection laws.

Credit cards are covered by the Fair Credit Billing Act, which limits card holders' liability to $50. If the theft is reported before the card is used, the card holder isn't responsible for any unauthorized transactions. Likewise, card holders aren't responsible for any fraudulent purchases if the card number — but not the card itself — is used to make the purchases, according to the Federal Trade Commission.

The Electronic Fund Transfer Act, which governs losses from debit cards and ATM withdrawals, is more complicated.

Under the EFTA, if a card holder reports a card within two days after discovering a loss, the individual's liability is limited to $50. After two days, the card holders' maximum liability jumps to $500. A card holder who fails to report the loss within 60 days after receiving a bank statement could be liable for the entire amount.

When consumers report debit card losses, the EFTA requires financial institutions to conduct an investigation and restore the funds within 10 days. But "those 10 days could be very critical days in your life, if that's your rent money, food money or cash you needed to do something," says Adam Levin, co-founder of

Representatives for debit card issuers say funds usually are restored much more quickly than the law requires. Typically, financial institutions will give debit card customers what's known as a "provisional credit" — a credit to their account that can be revoked if an investigation reveals the transaction was fraudulent.

In many cases, Wells Fargo customers receive the credit immediately after reporting a fraudulent charge, says Edward Kadletz, head of the company's debit card division. At Bank of America, the vast majority of card holders are given a provisional credit within 24 hours after reporting a loss, says Robert Shiflet, head of the company's consumer fraud division.

Even so, when a large amount of money has been removed from a consumer's bank account, even a short delay can be unnerving.

Scott Hardy, 34, president of Top Class Actions, a company that provides information about class-action lawsuits online, recently discovered that someone had used his debit card number to withdraw $1,400 from his Bank of America account. He immediately reported the theft and was told the funds would be credited within one business day. However, because the theft occurred on a Friday, he didn't get his money back until Monday.

"Thankfully I'm not in a position anymore where that could cripple me," says Hardy, who lives with his wife and two young daughters in Phoenix. A few years ago, it would have been "devastating," he says. "If you're a guy in your 20s, you're out for the weekend and you've got no money — that doesn't bode well."

Debit card holders also could wind up short of funds while fraudulent charges are pending. While reviewing his online bank account one day in July, Sean O'Riordan, co-owner of Rachel Stephens Photography in Portland, Ore., noticed that the company's debit card had been used at a grocery store and clothing store in New Jersey. He immediately reported the transactions to Chase, his bank. But because both of the charges were still pending, he was advised to sit tight until they cleared.

Once that happened, O'Riordan says, Chase immediately credited $500 to the account. But during the two days it took for the transactions to clear, O'Riordan and his wife, Rachel Stephens, didn't have access to that money.

Financial institution executives say they have no choice but to wait until transactions clear, because until that happens, they can't determine whether they're fraudulent. Some pending charges stem from a merchant's processing error and are canceled by the retailer before they clear, Kadletz says. If a customer is concerned about a pending charge, Wells Fargo often advises the individual to contact the retailer, he says.

Exceptions to zero liability

Zero liability policies are designed to assure customers that 100% of funds stolen from their accounts will be reimbursed, usually within 24 hours. But these policies don't apply in all circumstances. Zero liability plans may not cover:

•PIN transactions.MasterCard and Visa's zero liability policies are limited to transactions in which customers sign for their purchases. When card holders use a PIN instead of their signature, the transactions don't go through Visa or MasterCard's networks and are subject to the liability policies of the financial institutions that issued the card. The only exception are transactions conducted within Visa's proprietary PIN network.

Similarly, fraudulent ATM withdrawals aren't covered by Visa or MasterCard's zero liability policies, spokesmen for the companies say.

Bank of America's zero liability policy covers all debit card transactions, including PIN transactions and ATM withdrawals, Shiflet says. Wells Fargo's policy also covers PIN and ATM transactions.

•Reckless behavior. Debit card holders may be held responsible for losses if the card issuer determines they behaved irresponsibly. Issuers have different interpretations of what that means. MasterCard's zero liability policy doesn't cover card holders who have reported two or more unauthorized transactions in 12 months. Wells Fargo may decline to credit a card holder's account if it discovers the customer wrote their PIN on their debit card or shared the PIN with someone else, Kadletz says. Bank of America won't penalize card holders for writing their PINs on their cards unless there's a pattern of unauthorized transactions, Shiflet says.

'This is your cash'

To protect themselves from bounced checks and lost funds, consumers should monitor their bank accounts regularly for signs of fraud, Levin says. He advises consumers to set up online accounts and check them every day. Consumers should also monitor credit card accounts, but it's even more important for debit cards, he says, "because this is your cash."

O'Riordan doesn't need to be reminded to monitor the debit card account he manages for his family's business.

He and his wife switched to a debit card for all of their business travel expenses after their credit card issuers slashed their credit limits. Using a debit card has been liberating, O'Riordan says, because he no longer worries about unexpectedly high credit card bills. But he's all too aware of the risks debit cards pose — which is why he goes online and checks the account five times a day.

"It terrifies me that somebody could get our card number and clean us out," he says. "If someone hits us, we're literally out of business."