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Debit Cards vs. Credit Cards

A few years ago it was easy to tell the difference between a credit card and a debit card. You used your debit card at the ATM with a personal identification number, and you used your credit card for purchases. But today both types of cards carry familiar credit company logos, both can be swiped at the checkout counter and both can be used to make online purchases.

But even though debit and credit cards look and act the same, legal protections and the steps to settle problem purchases are quite different.

To protect and serve
Government regulations and voluntary industry policies will protect you if a credit or debit card is used to make unauthorized purchases. But the protections for credit cards are much broader.

Credit cards.
Under federal law, if someone steals your credit card you're only responsible to pay the first $50 of unauthorized charges. And, says FTC lawyer Carol Reynolds, if you notify the issuer before the thief makes any charges, you may not be out anything. You're also free from liability if unauthorized purchases occur when the card is not physically present, say in an Internet purchase, she says.

Zero-liability policies, like those offered by Visa and MasterCard, add a second layer of protection. Under these programs you won't pay anything if someone fraudulently uses your credit card online or off.

Debit cards. The rules are similar for debit cards, but there are a few restrictions. For example, your liability under federal law is limited to $50, but only if you notify the issuer within two business days of discovering the card's loss or theft. Your liability could jump to $500 if you put it off. And even this cap is lifted if you wait more than 60 calendar days from the time your bank statement is mailed.

Federal protections are a bit more generous if a thief just steals your debit card number (and not the actual card), but you still have 60 days after receiving your bank statement to report any unauthorized transactions.

The Visa and MasterCard zero-liability policies also apply to debit cards, but only to non-PIN transactions. If a thief steals your card and your PIN, the federal rules are your only defense.

For additional protection check your homeowners or renter's insurance policy. Most cover up to $500 for losses from unauthorized card use. And no matter which card is stolen, always follow up with a certified letter to your issuer -- return receipt requested.

Which card when?
Your best bet is to "limit your use of debit cards to cash-and-carry types of purchases," says Susan Grant, vice president for public policy at the National Consumers League, such as for groceries, at the gas station or dry cleaners.

But for expensive or sight-unseen purchases (those made over the Internet or by phone), credit cards offer much more protection. For instance, you can contest a credit card charge for a product that arrives broken, or if the product you bought stops working after two weeks.

To get the rules on disputing a charge, check with your credit card issuer.

"With a credit card, if you dispute a charge, it is taken off the record," says Ken McEldowney, executive director of Consumer Action, in San Francisco. "With a debit card purchase you are fighting to get your funds back into your account."

This gives you less leverage. You can contact your card issuer to see if they'll handle the dispute, but you'll probably have to take on the merchant yourself. And even if you succeed, you may be stuck with whatever the store policy is for cash or check returns.