Fact Sheet 131 - Credit Cards vs. Debit Cards

Fact Sheet 131
Credit Card vs. Debit Card

This fact sheet will cover:

• What is a credit card?
•   What is a debit card? aka Visa’s Checkcard or MasterCard’s Mastermoney card
• How they work
• What rules govern them?

In today’s fast paced society, the quicker the transaction the better.   We’ve all seen the commercials where the business is running smoothly until someone pulls out their check book to manually write out a check.

Welcome to the world of Debit or Credit

According to a 2005/2006 Study of Consumer Payment Preferences conducted by the American Bankers Association (ABA), 45% of the respondents reported using cash less often than they used to. The question now asked at check-out has changed from “Cash or credit” to “debit or credit”.

Of those replacing cash with card-based payments:

• 40% credit cards
• 31% DEBIT WITH PIN
• 22% DEBIT WITH SIGNATURE (off-line)
• 7% paper checks

The fact of the matter is banks make money on purchases made with debit or credit cards.   Whether it is a percentage based fee on a “signature” transaction or a flat fee for a PIN-based transaction, banks profit from consumers growing use of plastic.  

What is a credit card?

In the past, the primary methods of making a purchase were either with cash or by writing a check.   This was followed by the introduction of credit cards, ATM cards and debit cards.

A credit card is a bank-issued card that allows people to purchase goods or services from a merchant on credit (Entrepreneur.com).  According to Answers.com Business & Finance, a credit card allows consumers to purchase products or services without cash and to pay for them at a later date. To qualify for this type of credit, the consumer must open an account with a bank or company, which sponsors a card. They then receive a line of credit with a specified dollar amount (credit limit). They can use the card to make purchases from participating merchants until they reach this credit limit. Every month the credit card company provides a bill, which reflects the card activity during the previous 30 days. Depending on the terms of the card, the customer may pay interest charges on the amount that they do not pay for on a monthly basis. Also, credit cards may be sponsored by large retailers (such as major clothing or department stores) or by banks or corporations (like VISA, MasterCard or American Express).

NOTE:   Major credit cards (i.e. MasterCard and Visa) should not be confused with a charge card for a revolving account, commonly known as store cards or gas cards.

According to the ABA, credit cards allow you to make purchases 24/7, around town, around the world, or from the comfort of your home.   They are very useful for unexpected expenses or emergencies.

About Credit Cards:

• Must be applied for with a bank or other creditor (i.e. department store).
• Allows consumer to buy goods and services on credit
• Limited by the available credit at the time of purchase
• “Buy Now, pay later”
• Allows for disputes with vendor – option of withholding payment should there be dissatisfaction with product or service or in the case of a fraudulent charge
• Many come with Reward Programs and extended warranties on purchases
• Best form of payment for on-line purchases
• Greater protection from fraud loss if reported within 60 days
• If you find an error, you have 30 to 60 days to notify the creditor in writing and need not pay the amount in question during the investigation

Fair Credit Billing Act

• If reported within 60 days, maximum liability for the unauthorized use of the credit card is $50
• If reported before fraudulent use, cannot be held responsible for any unauthorized charges

What is an ATM Card:

The ATM card is the most basic form of “plastic”.   An ATM card is offered by financial institutions as a method of withdrawing cash/funds through the use of Automated Teller Machines.   According to the ABCs of ATMS by Bankrate.com, ATMs make cash available 24 hours a day, seven days a week.   In addition to withdrawing money, you can check account balances, transfer money between accounts or deposit funds into an account.

The Debit feature, adding the ability to make purchases, is a feature now offered by most financial institutions.

What is a Debit Card?

According to the Federal Deposit Insurance Corporation (FDIC), a debit card looks like a credit card but works like an electronic check.  U.S. PIRG defines a debit card as an ATM card with a VISA (Checkcards) or MasterCard (Mastermoney) logo.   There are two ways for a merchant to process a debit card transaction:

• Debit with PIN – In this instance, you press “debit” and enter a PIN (secret numeric number) to authorize the purchase.   Once this has been entered, you need not sign for the purchase.   In transactions where the PIN is used, you may have the opportunity to get cash back over the cost of the purchase.
• Debit with Signature- For these transactions, you sign the merchant’s copy of the receipt. At the check out counter, you hit the “credit” option then sign for the purchase.

In other words, a debit card is an alternative method of removing money from your attached bank account/s.   Debit cards, like credit cards, have made point of purchase transactions faster and easier.   In today’s marketplace, debit cards are more readily accepted than checks.    

The problem with Debit cards – the use may allow for a false sense of security.   The swiping of a debit card, with the use of a forged signature, can easily wipe out your account/s.

DEBIT CARDS

•   Readily available with the establishment of a checking or savings account
• Cash removed immediately from a linked account
• May be attached to a checking, savings or brokerage account
• Very important to protect Personal Identification Number (PIN)
• Alleviates concerns over finance charges and interest rates
  • However, user fees may be charged at point of purchase
•   Limited to the amount of funds in designated account
• Can result in overdraft fees in cases of insufficient funds
• In cases where additional accounts are attached for overdraft protection,
  there is a risk of these accounts being drained of funds
• No ability to place a “stop payment”

Electronic Funds Transfer Act

• Limited time to report loss or unauthorized use of card
•   If debit card is reported missing before it is used, cannot be held responsible for any unauthorized charges or withdrawals
•   If reported within 2 business days, cannot be held responsible for more than $50
• If reported after two business days but before 60 days, the most you could lose is $500
• Card issuer has 10 business days (from notification) to investigate error
  • Pending continuing investigation, funds must be returned to consumer’s account on 11^th day.
  • If no fraudulent activity is detected, the funds may be withdrawn from consumer’s account.
• If loss is not reported, greater risk of losing all funds in account
• In case of fraudulent charges/losses, consumer has to fight with bank to have funds replaced

The Dangers of Plastic Cards
Skimmers
A growing threat to both credit card and debit card users is an activity commonly known as "skimming."  Skimming occurs when thieves set up a device that captures the magnetic strip and keypad information from ATM machines, gas pumps, and retail and restaurant checkout devices.  This allows for the duplication of the card enabling it to be used as either a Debit or credit card.
www.aba.com/Press+Room/122107Skimming.htm

Example 1:

After the waiter takes your debit card for payment, he skims (scans) the card before returning it to the table.   With this number in hand, there exists the possibility of duplicating that number onto a fraudulent debit card.   At this time, the new card may be swiped as a CREDIT purchase without the need for a PIN number.          

Example 2:

You pull into your favorite gas station for a quick fill-up.   Someone has mounted a skimmer on the face of the point of purchase device.    At this point, the thief has the information necessary to create a fraudulent card.   Additionally, an extra device may be place within the line of sight of the keypad to video record your PIN code.   Now the thief has everything he needs.

Key Logging

Key logging comes in two forms:   the first form is a physical device which can be attached to a computer, most commonly via the keyboard input port.   These devices tend to collect a finite number of key strokes.   The device can then be removed and used by the thief to see every key stroke made on that computer.

The second form of key logging is software-based.   In other words, this is a program which may be added to your computer by logging into a website, receipt of a bogus email, or the exposure to a virus or Trojan horse.   This type of key logging will transmit your exact key strokes to a remote location where the thief can have access to it.   This occurs whenever your computer is logged on to the internet.

Example 1:

Mr. Brown is a traveling salesman staying at a well-known hotel equipped with a business center.   He uses the business center computer to access various accounts.   Once he leaves the computer, the thief comes by and removes the physical key logger device.

Example 2:

A software-based key logging program has been loaded on your computer by way of a Trojan horse.   Unaware, you go through your day to day on-line activities which included monitoring your financial accounts, accessing emails, on-line shopping, etc.   The entire time your computer is linked to the internet, it is communicating your keystrokes to a remote site.   The thief may then retrieve this information at will.

ITRC Recommendations: 

•   Use caution when using stand-alone ATMs, especially those which might seem out of place.   
• Establish a separate account for debit purchases.   Make sure that this account is NOT linked to any other accounts.   This avoids the draining of all your attached accounts, due to fraudulent purchases.
• Limit your use of debit cards

For further information visit the following links :
Fact Sheet 122 Identity theft Travel Tips
Fact Sheet 126 Check Account Takeover and Check Fraud

This fact sheet should not be used in lieu of legal advice. Any requests to reproduce this material, other than by individual victims or their own use, should be directed to ITRC.
Fact Sheet 131, Copyright February 2008, Identity Theft Resource Center ®,
Created by ITRC staff

This project was supported by Grant No. 2007-VF-GX-K038 awarded by the Office for Victims of Crime, Office of Justice Programs, U.S. Department of Justice.   Points of view in this document are those of the ITRC and do not necessarily represent the official position or policies of the U.S. Department of Justice.