I just read a thread where the comments heavily suggested OP use a credit card when they travel again so that it would be easier to dispute a fraudulent charge. What makes a dispute through your bank less successful?
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Credit cards are a huge target, since many people have credit limits between $1500 and $10K or more. Credit companies know that, expect fraud to happen, are actively looking for it, and have whole departments dedicated to fraud prevention and prosecution. If you’re defrauded chances are the CC company will know before you do.
On the other hand *most* people living paycheck to paycheck have bank accounts that barely cover this month’s expenses, making it a poor target for fraudsters. The bank therefore assumes that a) you are in control of your bank card and b) any losses will not be a huge burden in the long run. They’ll gladly offer you a loan at prime+1 to pay off the loss. Banks do follow up banking mistakes and if the bank is hit with fraud your accounts are insured up to $250,000. If you have savings more than a 1/4 million, split it up between banks 🙂
When credit cards were brand new, they were typically only utilized by wealthy individuals for major / luxury purchases. It wasn’t until around 1980 (15 USC § 1643) that laws were passed protecting consumers from fraudulent charges on cards. I’m going out on a limb here but if memory serves, credit card companies actually heavily lobbied for this to drive more frequent usage of their cards. The money they were making in annual fees and transaction charges more than made up for the cost of absorbing fraudulent transactions (as a side note, this also heavily incentivized all the anti-fraud investments card issuers would make in the coming decades). In the late 80s / early 90s, card issuers started running heavy ad campaigns encouraging consumers to use their cards for everyday purchases like groceries and gas.
This had a direct impact on consumer spending habits, leading more and more customers to put everything on plastic. I don’t have an immediate source to back this up, but this is very likely when we saw national averages of personal debt skyrocket.
When card-branded debit cards came out in the 90s, they were introduced as a way to ~~collect card transaction fees from consumers who lacked the credit rating to get actual credit cards~~ allow just about everyone to share in the Convenience and Fun ™ of using a credit card. Because these aren’t credit cards, they aren’t covered by 15 USC § 1643. As a result, card issuers can — but do not have to — offer varying levels of protection if they are so inclined.
As a side note, it’s very likely that we may see this protection wane in the coming years. Card issuers argue that credit card usage is common, which was the original purpose of that law — which is true. They also argue that their fraud protection systems are infinitely more sophisticated than they were in 1980, which is also true. And they will argue that even without that law, The Power Of The Free Market ™ will incentivize them to handle fraud properly because consumers can just switch to another card issuer … which is at least half true. Therefore, because automatically paying for fraud costs card issuers money, there’s a financial incentive to move this to a slower manual process, where the burden of proof shifts entirely to the consumer as opposed to the presumptive fraud model of today.
How long until this happens? Your guess is as good as mine, but I’d say we’re looking at a major shift within the next 10-15 years.
The biggest advantage is that a credit card isn’t your money. Two scenarios, both with $10k.
* Scenario 1 is your credit card has a $10k limit and you go on vacation. Someone racks up $8k of false charges and you come home to find that. Rent is due, car needs an oil change, whatever. You report it, the credit card investigates, you never once had to worry about not having that money.
* Scenario 2 is your debt card has $10k on it and you go on vacation. Someone racks up $8k in false chargers and you come home to find that. You now have $2k to your name, likely overdrafted since you were on vacation and spending money. You need to pay rent and get your oil changed, but you don’t have the money. You contact your bank and are told it will be 5 business days before your money is returned. You have to ask friends and family to loan you money.
Really is just a layer of protection. With a credit card you are spending someone else’s money and paying them back later, with a debit card you are spending your own money at that point in time.
Here’s a better real answer, instead of “bankz evilz”
Money transferred from bank accounts is final. This is a good thing. You wouldn’t want a bank “reversing a transaction” after you have accepted payment into your account.
Credit cards are in the business of facilitating transactions. Having confidence in the system is the reason that disputes work. The credit cards do take losses – but that is part of their business model. There is a reason there is a 5% up-charge to the credit card companies. They take the risks and make it work.
I’ve never had issues disputing charges with my bank.
However, the big difference I’ve personally experienced is the speed at which it gets taken care of.
I’ve had disputes with my bank that takes them weeks to fix vs. days with credit cards.
And in the meantime, depending on the bank they may put a hold on the account or if you’re lucky just the amount of money that’s being disputed until the matter is resolved.
Which means your actual money could be inaccessible to you for a meaningful amount of time, which could be a massive pain in the ass if it’s an account you pay bills with.
I can see a lot of people talking about regulations, but not why the regulations differ.
It’s because fundamentally, when you use a credit card, the credit card company buys the item and gives it to you, in return for you paying them. By giving you the item, the credit card company itself takes the part of a seller.
It forms something very unusual – a tripartite contract. Both the credit card company and the original seller take the place of different parts of the seller in the contract.
This means if something goes wrong with your product you don’t need to sue the product seller – you can sue the credit card company just as if they were the seller. They assume the liability.
Then it becomes clear – if you can sue them as the seller, your ability and access to retribution is much higher, hence the ‘regulations’ which help the buyer.
If it was just a regulation, credit card companies would have lobbied to remove them ages ago. They can’t because it’s fundamentally a different contractual setup to a debit card.
In the USA there is a law that says a credit card holder is not liable for fraudulent charges, simple as that. Debit cards have no such safeguard laws.
Having said that, I’ve never had any trouble getting false debit card charges reversed, many times over the years. Your mileage may vary.
While the top answers are true, they miss the fundamental reason for this. Credit cards charge retailers around 3% of the purchase price. Debit cards not so much. Because credit cards make so much more money, there is more demand for consumers (you!). So credit card companies are incentivized to appeal to consumers and provide benefits (like paying attention to you, forcing retailers to play ball, potentially “eating” chargebacks) whereas they do not have these incentives for debit cards.
Another way to look at this is if your debit card is stolen/compromised, they could drain your entire checking account. You not only have to cancel the card, but you also now have to fight to get all your money back. But if a credit card is stolen/compromised, they will effectively “run up a bill” on the credit card, but your personal funds remain untouched. So there is an extra layer of protection. And when disputing the credit card transactions, you are essentially disputing the “bill” they will charge you at the end of the month, rather than disputing past expenses (money is already gone) in the case of a debit card.
The job of a debit/credit card is to perform transactions.
Imagine YOU are your friend’s debit/credit card, and are going to make a transaction for them.
Debit card:
Your buddy calls you and says “Hey I want to buy a carbon fiber road bike on Craigslist this weekend, but I’ll out of town. Can you buy it for me?” *Here’s $1000*”.
He gives you the address, you go there, seller takes your money but refuses to give you the bike. You call your friend and say “Hey man, your $1000 was stolen. You’ll have to figure this out when you get back.”
Are you at fault here? Nope. Should you reimburse your friend the $1000? You certainly don’t think so, but your friend wants his money back. You’re a nice person and want your friend to be made whole, but you’re not paying $1000. You tell him to take it up with the seller and/or the police.
If the police come knocking on your door, you’re answering the bare minimum questions. Here’s the guy’s address, he didn’t give us the bike. If they take you in you’re requesting a lawyer. Your friend is turning into a real POS over his mistake, and you’re putting your walls up.
You and your friend do NOT have the same incentive to get the money back. Your friend wants $1000 back, and if you’re not defensive it’ll end up being your $1000.
Do you learn from your mistakes? Improve your security? Not really no. Next time someone wants you to buy something, you’re either going to say no (for a bank, that means simply not doing business), or you’re just going to do it. It’s not your money on the line, so why not.
Credit card:
Same scenario. Friend wants to buy a bike, but this time he says “Hey can you pay him and I’ll pay you back later?”
You and him have somewhat of an account together. He does this all the time, and you really don’t mind. You’ve come to trust him. You buy stuff for him every month, and he ALWAYS pays you back, sometimes with interest, otherwise you wouldn’t put up with it.
“Sure”.
You go to the seller, they take your $1000, and same deal. No bike for you.
What’s different? Well this time around, you BOTH want the money back. In fact, you’re a little worried that if you put it on your friend, he’s going to ghost you. Most importantly, this time around you’re incentivized to work with police because there’s no chance of you losing more money. You can only get money back.
That’s the KEY difference. This time around, you care.
After all is said and done, what are you going to do differently next time? Well, you could just not do it (Visa doesn’t make money by not making transactions though), OR you could beef up your security a bit.
For one, you’re going to take down a lot of information. Date and time, address and description of the seller, etc. You’re going to pay attention to the kinds of purchases your friend wants you to make. If they suddenly ask for something unusual, or something far away, you’re going to question it first.
That’s what Visa and Mastercard do. They improve their security to prevent these things from happening, because if they don’t, then the lender (and them by legal extension) are on the hook for lost money. They’re going to work out a system where they hold transactions for one or two business days. E.g. if it were Visa making a craigslist purchase, they’d be handing over a time-release lock box that they can disable and retrieve if the bike is not delivered or is defective. They’d have the seller’s full description, whereabouts, and they’d have the police on speed dial with a PI on retainer to follow the buyer or seller if there was an issue later.
That’s the difference between a debit and credit card.
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