6 Times Paying With a Debit Card Could Put You at Risk

debit or credit
NuStock/Getty Images
Some of the links in this post are from our sponsors. We provide you with accurate, reliable information. Learn more about how we make money and select our advertising partners.

While it might seem like using credit cards could hurt your finances because of the potential to rack up a huge amount of debt, you might be surprised that using debit cards can also be risky — but for different reasons.

The Differences Between Debit vs. Credit Cards

Although debit and credit cards may look the same, they’re completely different financial tools. I’m sure you’re familiar with how they work:

  • A credit card allows you to make purchases using borrowed money that you have to pay back with interest over time.
  • A debit card allows you to make purchases using your own money that’s linked to a bank checking or savings account.

But what you may not know is that credit and debit cards offer very different levels of legal and financial protection.

Debit cards give you fewer rights than a credit card, so it’s important to understand your potential liability.

What’s the Risk of Using a Credit Card?

First, let’s cover what happens if someone steals your credit card. Fortunately, you get some really nice protection thanks to a federal law called the Fair Credit Billing Act (FCBA).

This law is one of the reasons I prefer using credit instead of debit. The FCBA says if a thief takes your card or even just steals the card number and takes off on a shopping spree, you’re responsible for no more than $50.

It doesn’t matter if a cyber criminal hacks your credit card number online and then uses it to kick back in a five-star hotel in Maui for a week — you won’t have to pay more than $50. Plus, many credit card issuers offer fraud protection that completely eliminates your liability.

The protection gets even better if you become aware that your credit card is lost or stolen and report it before unauthorized charges are made. In that case, you’re not even responsible for $50 — you’re completely off the hook!

The FCBA protects you from unauthorized charges on revolving accounts, including credit cards, charge cards, retail store cards, gas cards and lines of credit. The law also protects you against other issues like being charged for unaccepted goods, undelivered goods or other formal disputes you make.

These are terrific protections that should make you feel confident about using a credit card in stores or online.

What’s the Risk of Using an ATM or Debit Card?

Now, let’s review what happens if someone steals your ATM or debit card. These cards are regulated by a federal law called the Electronic Fund Transfer Act.

Many people mistakenly believe that because their bank is FDIC-insured, their money is protected from theft. This is dead wrong.

The FDIC reimburses you up to a certain amount if your bank goes out of business, but not if a criminal accesses your bank accounts and steals your money.

Your liability for fraudulent charges on a debit card depends on how quickly you report it lost or stolen. Unlike with a credit card, your liability with a debit card is not capped at $50 — it’s unlimited.

Here’s How It Works

If you report a missing debit card before a thief uses it, you’re not responsible for any unauthorized transactions, just like with a credit card.

If you report your debit card as lost or stolen within two business days, you’re responsible for up to $50 only.

If you report unauthorized charges from a lost or stolen debit card within 60 days after you receive a bank statement, you’re on the hook for up to $500.

If just your debit card number is stolen while you still have the card in your possession, you have a little more protection. In that case, you’re not liable for fraudulent activity if you report it within 60 days of your statement date.

However, if it takes you more than 60 days to report fraudulent charges, you have unlimited liability. That means a thief could completely drain your bank account and get away with stealing your entire balance, plus you’ll probably have bank overdraft fees.

I use my bank’s iPhone app to check my bank accounts at least once a day. I would catch any unauthorized use immediately, report it within two business days and only get stuck with a $50 liability.

But if you’re not in the habit of reviewing your bank accounts on a daily basis, please think twice about using a debit card. Or consider switching to a better bank that offers tools to make it easy to stay on top of your transactions.

Now, let’s talk about when you should avoid using a debit card.

6 Risky Situations When You Should Never Use a Debit Card

Now that you understand the potential risks associated with debit and credit cards, here are six risky situations when I recommend you never use a debit card:

1. Shopping Online

Whenever someone tells me they don’t need a credit card because they simply use their debit card to shop online or make travel reservations, I cringe!

One of the most important rules for using debit cards is to never use them online. It doesn’t matter whether you’re buying shoes, getting concert tickets, paying your power bill or booking a cruise vacation.

Buying anything online using a debit card makes you vulnerable to a cyber criminal who could steal your card number and drain your bank account linked to the card — unless you watch your transactions like a hawk and would catch fraud immediately.

2. Making a Large Purchase

When you make a big purchase, like furniture, electronics or appliances, you get much less protection if you pay with a debit card instead of using a credit card.

For instance, let’s say your furniture is delivered and you find damage that occurred during shipment.

If the furniture company won’t reimburse you or exchange the merchandise, you can dispute the charge with your credit card company. The card company will reverse your payment to the merchant and inform them that they’ve opened a dispute on your behalf.

But if you paid with a debit card, the money is taken from your account right away. The only way to settle a dispute might be to begin an expensive lawsuit.

Additionally, many credit cards also offer extended warranties. So, if your new television has a 60-day warranty, but the display goes bad after 90 days, your credit card might protect you.

Of course, you should only use a credit card if you can pay off the balance in full or if you’re intentional about financing a planned purchase using a low-rate credit card, so you pay no interest or as little as possible.

3.  Dining Out

Using a debit card in a restaurant is especially dangerous because they’re one of the few places where the card leaves your sight. The server takes it away to process and you have no idea what could have happened.

Of course, someone could also steal your credit card number. But as I mentioned, because your potential liability is so much less with a credit card, paying with cash or a credit card is a smarter way to handle a restaurant bill.

4. Buying Gas

When you swipe a debit or credit card at the pump, some gas stations place an immediate hold on your account to make sure you don’t buy more gas than you can afford.

The hold amount varies by station, but could be $100 or more, even if you only plan to buy $10 worth of gas. While this practice is almost unnoticeable on a credit card, it can be a real problem with a debit card.

Some banks may process a debit transaction at the pump for the exact amount within seconds and clear the hold immediately.

But others may keep the hold for days, freezing a certain amount of money, which could cause you to bounce other payments or have new charges denied until the hold expires.

5. Making an Upfront Deposit

When you need to pay an upfront deposit for goods or services, never use a debit card. Some examples include booking travel reservations, making a deposit to order cabinets or flooring, securing freelance services or renting equipment.

As I previously mentioned, once a debit card charge is processed and money is withdrawn from your account, it’s gone.

On the other hand, putting a deposit on a credit card gives you the ability to dispute the charge and get your money back if something goes wrong.

6. Setting Up Automatic Bill Payments

While I love the idea of setting up recurring payments to make sure expenses like loan payments, gym memberships and utilities never fall through the cracks, it can become a bookkeeping nightmare if you don’t keep a cash cushion in your account.

To protect yourself from bank overdraft fees, consider setting up automatic payments on a credit card instead.

Should You Use a Debit or Credit Card?

Because dealing with fraudulent charges on a credit card is easier and less costly than with a debit card, be cautious about the six situations I covered — or paying with debit at any establishment that seems questionable.

If you have enough discipline to pay off credit card balances in full each month, they should be your primary payment method.

Not only do they give you more security and purchase protections, but they also help you build credit, give you a precise record of your expenses and allow you to earn rewards.

All of these benefits are free, as long as you pay your credit card bill in full every month. The trick to using a credit card successfully is to pretend it’s a debit card, so you never charge more than you can pay off right away.

But if you’re not ready to use a credit card for all your purchases, simply being informed about their pros and cons compared to debit cards will help you make smarter financial decisions.

This post originally appeared at Quick and Dirty Tips, a network of podcasts and digital content offering short, actionable advice from friendly and informed authorities. Laura Adams, host of the free Money Girl podcast, is a personal finance expert and award-winning author.