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Why You Should Never Use Your Debit Card

By Patrick Morris – Jan 14, 2014 at 9:25AM

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With the number of customers affected by the Target data breach nearing 70 million, there is no time like the present to see why people shouldn't use debit cards.

Target (TGT -0.02%) provided the latest update about the theft of its customers' information on Friday, and nearly doubled the amount of affected individuals hit by its data breech from 40 million to 70 million. Names, mailing addresses, phone numbers, and email addresses were all stolen. 

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While there is often a lot of guidance on why customers shouldn't use credit cards, this latest news from Target shows why using a debit card may in fact be a worse idea. And while in the example of Target both credit and debit cards were affected, and it has assured that its customers "will not be held financially responsible for any credit card or debit card fraud," it brings into question whether or not debit cards should be used at all.

The case against debit cards
While some say credit cards are dangerous because of the potential to rack up massive amounts of debt, it isn't as though debit cards should be used without caution or concern. With debit cards, consumers have fewer rights when it comes to unauthorized purchases, greater potential liabilities, longer potential resolution times, and even less protection on the purchases they do make.

The $500 potential
For both credit and debit cards, Federal law maximizes your potential losses to a maximum of $50 if your card is lost or stolen. Yet there is an important qualifier in the case of debit cards, and that is you must notify the bank within two days of the loss or theft. The Federal Deposit Insurance Corporation (FDIC) notes in the case of debit cards, "if you notify your bank after those first two days, under the law you could lose much more." 

Source: Flickr/ Images of Money

In the case of debit cards, if the problem isn't reported within those two days you could be liable for up to $500 in fraudulent charges. There is even the potential to be on the hook for more than $500 depending on the circumstances and the situation. 

In situations like the most recent Target example, an individual has 60 days to report an unauthorized transaction with a debit card if the number is stolen and the card is not. This is all contingent on carefully reviewing every transaction to ensure that all purchases were indeed made by the cardholder. In the case of a credit card, there is no 60 day limit to the error -- instead, you are simply "not liable for unauthorized use," according to the Federal Trade Commission. 

The waiting game
While the potential losses are greater in the event of a stolen or lost debit card when compared to those of a stolen credit card, another big problem is that even if you notice the unauthorized purchase within the time window, the banks still have weeks before their investigation of the improper charges have to be complete.

Source: Flickr/ Lending Memo

When transaction errors do occur, banks have up to 10 business days (and at times 20) to conduct their own investigation after they receive notice from the card holder that an error occurred. In the case of a debit card, this means that an individual might not be refunded, and the charges, withdrawn for weeks. At times banks will provide a credit to the account for the amount in question, known as "provisional credit" -- but that still takes time.

"Until the bank provides provisional credit, you could temporarily be out of pocket for the amount in dispute," said FDIC consumer issues attorney Richard Foley. "This would not typically happen with a credit card because consumers can withhold payment of the amount in dispute." 

Fewer rights
In addition to greater potential losses when a faulty transaction is made on a debit card, consumers also have fewer rights and less protection with debit cards when they receive damaged goods, faulty service, or defective merchandise when compared to the rights they have with credit cards.  

Since federal protections are greater with credit than debit cards, Heather St. Germain, an FDIC Consumer Affairs Specialist says, "you might consider using a credit card if you're concerned that your purchase might not go smoothly." 

While debit cards are helpful because they only allow individuals to pay for things which they actually have the money for, the reality is they also have their own fair share of risks too. If you pay the full amount owed each and every month, viewing a credit card as a safer way to make purchases is a great way to protect yourself and your money.

Fool contributor Patrick Morris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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