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 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 percent 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 has a savings account she could have tapped if necessary. But she says the experience left her feeling frustrated and vulnerable, particularly because 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 LowCards.com, a credit card comparison website.
"He who has the money makes the rules," he says. "With a credit card, you have the last say."
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. …