One of my clients was looking forward to a vacation to Disney World earlier this 12 months. He had budgeted, saved, and packed his bags for the airport. Little did he know that earlier that week, someone had stolen his debit card information through a neighborhood coffee retailer and subsequently emptied his account. Not only was his account empty, but he was also overdrawn: no money for the trip and no option to get it back in time.
Debit card fraud is on the rise. Skimming alone is anticipated to extend by 96% in 2023, based on VP Product Management Debbie Cobb from FICO
FICO
with greater than 315,000 affected cards identified. “While skimming is one of the vectors fraudsters use to separate victims from their hard-earned money, criminals will also continue to use phishing, smishing (SMS-based phishing) and other tactics to obtain all the data they can use to commit fraud across all channels.”
One of my clients was unable to go on his recent trip to Disney as a consequence of debit card fraud.
The benefits of a debit card
Debit cards are a preferred and convenient option to pay for on a regular basis expenses. They:
- Allows you to access your individual money without having to hold money or write checks
- Help you retain track of your spending and budget (as every transaction is recorded in your bank statement)
- (Some) Offer rewards or cashback to be used
- Allows you to withdraw money from ATMs, make online purchases and pay bills
- No minimum credit rating is required as you withdraw directly out of your checking account
- Merchants cannot charge surcharges like with bank cards
The use of debit cards has been on the rise for a long time, especially amongst low-income households and younger generations, based on Research by S&P Global Market Intelligence. Federal Reserve data shows Debit cards account for a bigger percentage of card spending than bank cards, a trend that began in 2004.
Wealthy households far prefer bank cards over debit cards.
For individuals who have little or no credit or are struggling to maintain their spending under control, debit cards will be a fantastic option to develop higher spending habits. “If a client is currently or recently overspending, I advise 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 leave a small buffer in the associated checking account and keep the majority of their cash in other accounts to reduce the risk of losing too much cash if the card is compromised.”
Debit cards have been the preferred type of payment in US households since 2005 and proceed to be … [+]
The risks of using a debit card
Despite their convenience, debit cards carry risks that may have serious financial consequences. A stolen number, PIN or security code can result in unauthorized transactions, overdraft fees, bounced checks, an empty checking account and even personal data breaches. These events can have far-reaching effects in your credit rating, job prospects and legal standing. The recovery process for debit card theft can be lengthy and there is no such thing as a guarantee that your money will probably be returned.
Debit card protection can be fairly limited in comparison with bank cards, with users typically only answerable for as much as $50 in fraudulent charges. In contrast, debit card users must report unauthorized transactions inside 60 days or risk full liability. Even if reported in time, it may take as much as ten business days for banks to analyze, leaving you without access to your funds.
Jake Skelhorn, CFP® partner and wealth advisor at Spark Wealth Advisors, emphasizes the advantages of bank cards: “If the client has their spending under control, I try to get them to use credit cards and pay them off in full weekly or bi-monthly. Fraudulent purchases made with credit cards are covered by almost all issuers. Fraudulent purchases made with debit cards are much harder to catch up on.”
Fraudsters use quite a lot of tactics to acquire debit card data, including skimming devices at ATMs and gas pumps and increasingly sophisticated phishing scams. Even merchant errors could cause problems, as debit card users must resolve disputes directly with merchants, a process that will be time-consuming and offers no guarantee of positive results.
Debit card fraud is on the rise, with skimmer fraud being particularly common.
Alternative output methods
Financial planners largely agree that debit cards are inferior to alternative payment methods for savvy consumers. “I advise all my clients to use credit cards for everything possible and to pay their bills in full at the end of each month,” said Hunter Smith, MBA, founder and senior advisor at Cornerstone Investment Services. “If they spend more than they can afford to pay in full, they don’t need the card.”
- Credit cards: Credit cards offer higher protection against fraud and unauthorized charges. Consumers are only answerable for unauthorized charges as much as $50, and plenty of card issuers waive that quantity. However, bank cards can result in overspending and high-interest debt if not used responsibly. Some merchants may charge a surcharge for his or her use.
- Checkout: Using money eliminates the chance of identity theft and unauthorized charges. It is the final word tool for many who are bad at managing expenses or budgets because you possibly can only spend what you’ve with you. However, carrying large amounts of money will be dangerous and it may be difficult to maintain track of spending. In addition, money is a “possession asset,” meaning in case you lose it, it’s gone.
- Controls: Checks provide a paper trail and the power to stop payment if mandatory. However, they will be time-consuming to jot down and process and there’s a risk of checks bouncing and overdraft fees. Checks are also not accepted by most retailers.
- Mobile payment apps: While mobile payment apps offer convenience, there remains to be a big risk of hacking and unauthorized access to private information. Additionally, most providers don’t provide FDIC insurance and have little recourse within the event of fraud.
Young agrees that bank cards are a greater option for responsible consumers. “For those who have no history of overspending and can easily adjust their spending to fit their self-defined savings goals, credit cards are a great option for points or cash back,” says Young.
“Points,” Skelhorn agrees in regards to the use of bank cards, “cash back, travel points, etc. can accumulate to the point where you can finance a few hotel nights, a flight, or a (budgeted) shopping spree each year.”
Protecting against and responding to debit card fraud
Debit card fraud can occur to anyone. However, you possibly can protect yourself proactively and take reactive motion if fraud does occur:
Fraud prevention
- Monitor your accounts: Keep a watch in your bank statements and online banking to detect unauthorized transactions.
- Choose ATMs fastidiously: Prefer ATMs at real banks and preferably well-lit indoor locations to scale back the chance of skimming devices.
- Keyboard covers: Always cover the keypad when entering your PIN at ATMs or payment terminals.
- Prefer contactless payments: Use tap-to-pay methods each time possible as they’re safer.
- Be paranoid: Do not click on links in emails or texts from unknown sources and never share confidential information.
- Secure passwords: Create complex passwords and PINs to your accounts and alter them often.
- 2FA: Use two-factor authentication for all online financial institution accounts
How to answer fraud
- Notify your bank immediately: You must report debit card fraud inside 60 days of the event
- Update automatic payments: As soon as you get a brand new card, update any linked automatic payments.
- Submit a fraud report: Report the incident to the FTC at reportfraud.ftc.gov to receive official documentation and assistance.
- Local authorities: Inform your local police department because the scam could also be part of a bigger regional problem.
- Consider monitoring services: If the fraud is widespread, services like Lifelock, Aura and IdentityForce can assist monitor for identity theft.
If you utilize a debit card, consider switching to a safer payment method. If this isn’t possible as a consequence of poor credit or lack of alternatives, you need to often review your accounts and make sure you implement strict security measures.
My own Disney clients have learned their lesson the hard way. They’ve canceled their debit cards, filed fraud reports, switched to bank cards, checks and money, and eventually gone the additional mile and used identity monitoring services. Their vacations are still on hold, but they’re rebuilding their savings to—hopefully—get back on Disney track next 12 months.
