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Debit cards lack protections of credit cards

Debit cards have become one of the most popular ways to make everyday purchases, but when buying big ticket items, most experts suggest using your credit card instead.

Why? Well, your credit card purchase is protected under a law called the Fair Credit Billing Act, which basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise or for merchandise that was never delivered. It's the law.

"It's wonderful. It's a great law there," says E. Thomas Garman, author of more than 30 books on personal finance. "You've got Visa on your side."

With debit cards, both Visa and MasterCard also offer zero liability for unauthorized transactions made over their networks. Visa says U.S. issuers must comply with its policy, unless they can prove negligence on the part of the cardholder, such as throwing the card, intact, into a dumpster. MasterCard's policy also has a negligence exception and covers cardholders who don't have a delinquent account and haven't reported two more "unauthorized events" within the last 12 months. However, that zero liability is a policy -- not a law -- on debit cards and therefore subject to review by the card issuer.

"The industry is doing that out of a sense of fair play, out of the goodness of their hearts," says Jeanne Hogarth, program manager for the consumer education and research section at the Federal Reserve Board. "They could change that policy tomorrow."

Times have certainly improved for consumer debit card use. In the past, many merchants treated a PIN-based debit card purchase as they would a personal check or cash. If the product was unsatisfactory, you might get stuck with several hundred dollars in store credit instead of a refund. Now, policies have changed in favor of debit card transactions, offering more protection and, in many cases, zero liability.

Debit cards, such as the Visa Check Card and MasterCard Money, are linked to a cardholder's checking account and can be used to make purchases just about anywhere credit cards are accepted.

But don't let the word "Visa" on the front of the card fool you. You don't have the same consumer protections with a PIN-based debit card as you do with a credit card. According to Visa, PIN-based transactions may process through non-Visa networks, which may or may not match Visa's zero liability policy. The financial institution that issued your card will decide your liability in cases of fraud. Signing for purchases ensures that the transaction processes over the Visa network and falls under the protection of the zero liability umbrella.

Credit-card cushion
With a credit card you have the option of withholding payment should you be unsatisfied with the quality of an item. Ditto for an item purchased with a personal check. You simply call your bank and ask them to stop payment before the check clears.

But, there are a few catches. The sale must be for more than $50 and have taken place in your home state or within 100 miles of your home address. But few issuers enforce the $50 or 100-mile rule on purchases made in the United States. Visa officials say their debit cards are protected in much the same manner.

"Visa check cardholders are protected by Visa's zero liability policies, which far surpasses protections made by federal law," says Rosetta Jones, vice president of corporate relations for Visa.

But, it is important to contact their bank to find out what liability they have under both signature and PIN-based transactions. "Many times, depending on what network it goes through, a PIN-based purchase may not be totally covered like a signature-based purchase," says Jones.

A different money matter
Also, with a debit card, which yanks money from your bank account almost immediately, there's a good chance the merchant already has your money by the time you realize something is wrong with a purchase. So you have a lot less leverage.

As long as you have your receipt, you may have a case under your state's unfair trade practices law. But pursuing that course could prove costly and time-consuming.

Jones says that Visa considers all online debit card purchases signature based purchases and customers are protected under zero liability if the purchase was fraudulent or the customer was dissatisfied with the product.

Consumers must try to resolve the dispute with a merchant on their own before they contact their debit card issuer. "The merchant may want to make some other arrangement like a store credit or a gift certificate or some other thing," says Hogarth. "That isn't exactly putting money back in your account."

What kind of federal protections do you have with a debit card? Under the Electronic Fund Transfer Act, you have the right to dispute an error on your bank statement, and you have some protections if your debit card is lost or stolen.

It's not so bad if you act fast. Your liability is capped at $50 if you notify your bank within two days of finding out your debit card is missing. Wait more than two days and you could lose as much as $500.

Jones says, "Consumers should monitor their bank account on-line and immediately report any suspicious activity." If you discover an unauthorized charge on a bank statement, you may be on the hook for as much as $500, provided you contact your bank within 60 days.

If you wait longer than 60 days, you're stuck paying every cent of a thief's spending spree. You could lose everything in your checking and overdraft accounts.

However, if your debit card sports a Visa or MasterCard logo, you don't have to report fraudulent activity within two business days and you won't be held responsible for fraudulent transactions made over their networks. Of course, you should report missing or stolen cards immediately so you don't get stuck paying an imposter's charges.

Spend smart, simple
Because of more limited consumer protections, a debit card may be the best choice for smaller, routine purchases such as gas or groceries. Paying by debit card is quick and convenient, and you won't pay a penny of interest.

You also won't enjoy the float you have when you write a check or pay by credit card. With a debit card purchase, the money gets yanked out of your account almost immediately. So it's important to keep good records.

Forget to write a debit card purchase or two in your checkbook and you could end up paying some hefty account fees. If you decide to make a larger purchase on a debit card, it's best to do it at a store that lets you inspect the merchandise thoroughly before buying.

Credit cards are the best choice for purchases made on the Internet or by phone. Yet both Visa and MasterCard's zero liability policy cover in-store purchases, as well as purchases over the Internet. If you have a different card company, find out if they offer a zero liability policy. Make you sure you understand it before using your debit card.

"If you're ordering merchandise I would almost always encourage people to use the credit card because if something goes wrong you have more recourse," Hogarth says.

Bankrate editorial assistant Leslie Hunt contributed to this story.'s corrections policy
-- Updated: Nov. 22, 2006
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