One of my clients was looking forward to a vacation at Disney World earlier this year. They had budgeted, saved, and packed their bags for the airport. They didn’t know that, earlier that week, someone stole their debit card information via a local coffee retailer and subsequently emptied their accounts. Not only was their account empty, but they had overcharges, as well: No money for the trip and no way to get it back in time.
Debit card fraud is on the rise. Skimming alone grew 96% in 2023, according to VP Product Management Debbie Cobb of FICO
FICO
The Benefits Of A Debit Card
Debit cards are a popular and convenient way to pay for everyday expenses. They:
- Allow you to access your own money without carrying cash or writing checks
- Help track your spending and budgeting (since every transaction is recorded on your bank statement)
- (Some) Offer rewards or cash back for using them
- Allow you to withdraw cash from ATMs, make online purchases, and pay bills
- Require no minimum credit score, since you draw directly from your bank account
- Merchants cannot tack on surcharges like they do with credit cards
Debit card use has been trending up for decades, especially among lower-income households and younger generations, according to research from S&P Global Market Intelligence. Federal Reserve data shows debit cards accounting for a greater percentage of card spending than credit cards, a trend that began back in 2004.
For people that have little to no credit or who have difficulty managing their spending, debit cards can be a good way to build stronger spending habits. “If a client is currently or has a fairly recent history of overspending, I encourage them to continue using the debit card,” says Sara Young, CFP®, Founder and Financial Planner of Live and Give Financial, “I also advise them to keep a small cushion in the attached checking account, and the bulk of their cash in other accounts to help mitigate the risk of excessive cash being lost if the card is compromised.”
The Risks of Using a Debit Card
Despite their convenience, debit cards carry risks that have serious financial consequences. A stolen number, PIN, or security code can result in unauthorized transactions, overdraft fees, bounced checks, an empty bank account, and even personal information breaches. These events can have far-reaching effects on your credit score, job prospects, and legal standing. The recovery process for debit card theft is also lengthy, and there’s no guarantee your funds will be returned.
Debit card protection also pales in comparison to credit cards, where users are typically liable for only up to $50 of fraudulent charges. By contrast, debit card users must report unauthorized transactions within 60 days or risk full liability. Even with timely reporting, banks may take up to ten business days to investigate, leaving you without access to your funds.
Jake Skelhorn, CFP® Partner and Wealth Advisor at Spark Wealth Advisors, emphasizes the advantages of credit cards, “If the client has their spending under control I try to steer them towards using credit cards and paying them off in full weekly or semi-monthly. Fraudulent purchases on a credit card are covered by nearly every issuer. Fraudulent debit card purchases are much harder to recover.”
Fraudsters employ various tactics to access debit card data, including skimming devices at ATMs and gas pumps, and increasingly sophisticated phishing scams. Even merchant errors can pose problems, with debit card users left to resolve disputes directly with merchants, a process that can be time-intensive with no guarantee of positive results.
Alternate Methods Of Spending
Financial planners widely agree that debit cards are inferior to alternate payment methods for savvy spenders. “I advise all of my clients to use credit cards for everything they can, and pay their bill in full at the end of every month,” said Hunter Smith, MBA, Founder and Lead Adviser, Cornerstone Investment Services. “If they are spending more than they can afford to pay in full, then they don’t need it.”
- Credit Cards: Credit cards offer better protection against fraud and unauthorized charges. Consumers are only liable for up to $50 of unauthorized charges, and many card issuers waive that amount. However, credit cards can lead to overspending and high-interest debt if not used responsibly. Some merchants may also tack-on a surcharge for their use.
- Cash: Using cash eliminates the risk of identity theft and unauthorized charges. It’s the ultimate tool for those that are bad at managing spending or budgeting, since you can only spend what you have on you. However, carrying large amounts of cash can be risky, and it can be difficult to keep track of spending. Further, cash is a “bearer asset,” meaning if you lose it, it’s gone.
- Checks: Checks offer a paper trail and the ability to stop payment if necessary. However, they can be time-consuming to write and process, and there is a risk of bounced checks and overdraft fees. Checks aren’t accepted at most retailers, as well.
- Mobile Payment Apps: Mobile payment apps offer convenience, but there is still a significant risk of hacking and unauthorized access to personal information. Further, there is no FDIC insurance and little recourse in the event of fraud with most providers.
Young agrees that credit cards are a better option for responsible spenders. “For those without a history of overspending and who are easily able to adjust their spending to meet their self-defined savings goals credit cards are a great option for points or cash back,” says Young.
“Points,” agrees Skelhorn about using credit cards, “Cash back, travel points, etc. can build up to enough to cover a few nights in a hotel, a flight, or a (budgeted) shopping spree each year.”
Protecting And Responding To Debit Card Fraud
Debit card fraud can happen to anyone, but there are proactive steps you can take to protect yourself and reactive measures to follow if fraud occurs:
Preventing Fraud
- Monitor Your Accounts: Keep an eye on your bank statements and online banking for any unauthorized transactions.
- Choose ATMs Wisely: Prefer bank ATMs at actual banks, with a preference for well-lit, indoor locations to reduce the risk of skimming devices.
- Cover Keypads: Always cover the keypad when entering your PIN at ATMs or payment terminals.
- Prefer Contactless Payments: Whenever possible, use “tap-to-pay” methods, which are more secure.
- Be Paranoid: Don’t click on links in emails or texts from unknown sources and never share sensitive information.
- Strong Passwords: Create complex passwords and PINs for your accounts and change them regularly.
- 2FA: Use two-factor authentication for all financial institution online accounts
How To Respond To Fraud
- Notify Your Bank Immediately: You must report debit card fraud within 60 days of the event
- Update Automatic Payments: Once you receive a new card, update any linked automatic payments.
- File A Fraud Report: Report the incident to the FTC at reportfraud.ftc.gov for official documentation and assistance.
- Local Authorities: Inform your local police department, as the fraud may be part of a larger regional issue.
- Consider Monitoring Services: If the fraud is extensive, services like Lifelock, Aura, and IdentityForce can help monitor for identity theft.
If you use a debit card, consider switching to a more secure payment method. If you cannot due to lack of credit or access to alternatives, be sure to review your accounts regularly and ensure you’re implementing strong security practices.
As for my own Disney-bound clients, they learned their lesson the hard way. They canceled their debit cards, filed a fraud report, switched to credit card, check, and cash spending, and ended up going the extra mile to enroll in identity monitoring services. Their vacation is still on hold, but they’re rebuilding their savings to – hopefully – get back on the Disney track next year.
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