What’s Safer: Credit Cards or Debit Cards

Just in case you haven’t been following the news, let me bring you up to speed.

A couple of weeks ago Target announced that their databases had been breached by hackers.

Anyone who shopped at Target using a credit or debit card from November 27^th through December 15^th potentially has had his or her payment information stolen.

The stolen payment information, which DOES include debit card PINs, almost immediately went up for sale on the so-called black market websites.

And, there have already been reports of people being the victims of credit card and debit card fraud as a result of the breach. That’s the bad news.

The good news is that, as I wrote here for Mint, you’ll likely not lose a dime of your money thanks to two Federal laws that cap your liability for credit and debit card related fraud.

It does, however, beg the question about the safety of credit card use versus debit card use? Which card is safer for me to be using?

Budget Control

When it comes to budgetary control, there’s no question the debit card is the winner. You can only spend what you have in your checking account so there’s not chance of getting into debt.

Debit cards don’t curb wasteful spending though; they just cap your downside if you lack self-control.

Usability

When it comes to usability, credit cards are slightly better than debit cards. Debit cards can be problematic when used for travel related expenses like hotels, gas, and rental cars.

These types of merchants commonly place a “hold” against the funds in your account that exceed the actual amount you’re going to spend.

When funds are being held they cannot be used to clear other transactions, which can cause you to go overdraft and either have your “swipe” declined or be assessed and overdraft fee.

Credit cards don’t have the same “hold” related problems as most credit cards have a sufficient credit limit to clear other transactions even when some amount of your credit limit is being held.

Once you’re done with your hotel stay or you turn in your rental car the amount is adjusted to the actual amount you spent and the transaction is posted.

Fraud

When it comes to fraudulent use of credit and debit cards, as people are learning because of the Target breach, the credit card is the hands down winner, and it’s not even close.

While your liability capped at $50 on a credit card, the four major credit card networks have zero liability policies that ensure you won’t even pay the $50.

Debit card liability is capped at $50 unless you don’t report the fraud within two days, and then your liability jumps to $500.

And, if you never report the fraud you can lose all of the money in your checking account.

Even if you eventually get your debit card funds returned by the issuing bank, that doesn’t solve your problems. Those funds are supposed to be there so that they can clear other transactions.

While you’re arguing with the bank to get your money back, and it is most definitely YOUR money, other transactions may not clear.

And, if other transactions don’t clear you can find your self-paying over limit fees or late fees on things like rent and other obligations that go past due.

Another problem with debit cards is they act as an incentive for you to keep way too much money in your checking account.

Not only do you have to maintain an amount sufficient to pay bills like rent, car, and student loam but you also have to maintain enough to pay for utilities, cell phones, and have enough left over for shopping and some mad cash.

Those are thousands of dollars every month that are at risk, unnecessarily. Unless you’re moving money in from a separate savings or money market account, where it’s actually earning some interest, then every dime of your balance is at risk because of debit card fraud.

John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.