Debit or credit cards: Which plastic has better armor?

Do you find yourself reaching for your debit card more often than your credit card these days? If so, you're not alone. Survey after survey shows that debit cards have become the preferred plastic for U.S. consumers still skittish from the fallout of years of accumulated debt.

When you reach for that debit card, however, are you leaving yourself vulnerable to theft and fraud? Credit card protections are well known, but what recourse do you have if your debit card is stolen or the PIN swiped?

It's the most aggravating answer in the world of finance, but, sorry to say, "it depends."

Debit cards are the belle of the ball

Debit cards now represent the most popular form of noncash payments, according to the 2010 Federal Reserve Payments Study. Debit cards were used for 37.9 billion payments in 2009, totaling 35 percent of all noncash payments and growing at an annual rate of 14.8 percent since 2006.

"Consumers are turning from one form of plastic to another," noted James Van Dyke, president and founder of Javelin, in the San Francisco Chronicle. "Credit cards are falling out of favor as cardholders become more cautious and look for more conservative payment methods."

More liability for you…and your checking account

You may already know that if your credit card is stolen, you're responsible for only the first $50 of fraudulent charges. With a debit card, however, the clock is ticking once you're aware of a theft: You can be responsible for $500 in charges if you don't report the missing card or PIN within two days of discovering it. Even worse, if you wait for 60 days, you could be responsible for any withdrawals after that date. (The Federal Trade Commission offers instructions for what to do if your card is stolen.)

Use that PIN

When it comes to fraud, there's an important distinction between how you use the card: whether you enter your PIN at the point of purchase or sign for the purchase as you do with a credit card. It's in the bank's interest for you to sign for the purchase, because a transaction handled through the credit card processing network generates more fees for the bank. As a result, your bank may offer you perks for signing for your purchases.

But these types of transactions, by their very nature, are less secure than requiring customers to use a PIN. Avivah Litan, a senior analyst at Gartner, told Consumer Reports:

"Signature-based transactions are definitely less secure, so it's really outrageous that banks are steering customers to use signatures rather than PINs simply because it generates more fee income."

Co-branding helps, but it won't prevent bounced checks

The holographic image on the face of your card is not just for looks, it's extra armor. The major players in debit card co-branding, Visa and MasterCard, both have "zero liability" policies in place that extend the protections required by the federal government.

So why aren't debit cards as worry-free as credit cards? It's hard to keep a straight face when suggesting that credit card problems aren't a headache--any dispute with a vendor can lead to a few pulled hairs. With a credit card, however, your money remains in your checking account while you work to resolve the issue.

Not so with a debit card. Because the money is deducted from your checking account either immediately or within a couple of days, you could be left short on critical cash that you need for rent, bills or food.

Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, told Consumer Reports:

"Unlike a credit card, payment for a fraudulent transaction has already come out of your bank account, so you're fighting over your money, not theirs, and you could be bouncing other checks while you're waiting for it to be resolved."

What to do

So, what should you do to find out the protections offered by your debit card? It's the second most aggravating answer in personal finance: "Read the fine print." Call your bank or read the materials that came with your card.

Want to learn more about responsible use of credit and debit cards? Learn the top three rules for using a credit card as well as scary tales of card use. And discover great ways to avoid overdraft fees, including thoughtful use of your debit card.

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