Your Bank Account is Cleaned Out
Imagine you are returning to land after five wonderfully peaceful days at sea without mobile phone service. Once the 100 year old schooner gets close enough to shore to pick up a signal from a cell tower, your phone starts buzzing with texts and voice mails from your bank. The bank has been trying to contact you about fraudulent transactions on your debit card. You learn that cyber criminals used your debit card number and cleaned out your account. More than $5,000 of your hard earned money is gone. Just like that.

Mortgage Payment and Other Monthly Bills Bounce
Making matters worse, this debit card is tied to your checking account. All of your automatic bill payments and checks, including your mortgage, have over drafted because there is no money left in the account. Not only are you out $5,000, you owe hundreds of dollars in overdraft fees. Your payments will be late, which affects your credit score and the interest rate you will receive on future loans.

That was the predicament friends of mine were in during a vacation we all went on several years ago. It ruined the rest of their vacation. They were on the phone for days, dealing with the bank to get their money back. They had to contact the mortgage company and the other companies they made payments to. Those companies wanted their payments and were not so forgiving about the bad checks. It took several stressful weeks and some sleepless nights before they worked it all out. In the meantime, they had no money.

Why it Happened
It turns out the couple used their debit card that was tied to their checking account for everything—their mortgage, utilities, as well as the day-to-day purchases, such as groceries, daily coffee, manicures, restaurants, you name it. One of the companies the couple did business was hacked. The hackers used the couple’s debit card number to rack up charges that cleaned out their accounts. Banks did not have strong protections for detecting fraudulent transactions at the time like they do now. But the hackers continue to change their tactics and are still a threat to banks and debit cards.

Lessons About Debit Cards and Keeping Separate Accounts for Different Functions: 

  • Use a checking account dedicated specifically for your important monthly bills, such as the mortgage, the utilities, insurance, kid’s school tuition, etc.
  • Don’t mix day-to-day purchases with your primary checking account dedicated to your monthly bills. That way, your primary checking account is more protected from potential hacking as it is not used and exposed as much. It also makes it much easier to know that you have enough money in your checking account dedicated for your important monthly bills when you don’t have to sift through scores of individual deductions for your trips to the coffee shop, restaurants, clothing purchases, and so on. It’s hard to balance your account when you have scores of transactions each month for small amounts. That makes it more likely to be low on funds when it’s time to pay an important bill. When you have separate accounts for separate functions, your day-to-day expenses won’t affect your important monthly expenses.
  • Use cash or a credit card day-to-day expenses. 
  • For financially undisciplined individuals, credit cards can get them into a lot of trouble with debt. They should use cash. For those who insist on a debit card, use a dedicated debit card account for day-to-day expenses separate from their primary checking out. * see note for those with high balances.
  • For those who are financially disciplined and pay their card balances each month, credit cards are a better option. They offer additional protections. Stores you shop at do not have direct access to your money. When you purchase gas for your car with a debit card, next time check your account and notice how there is a $100 hold by the gas station on your account until the transaction clears even if you only purchased $40 worth of fuel. If you use a debit card to pay for your hotel on vacation, the same things happens. A hold is placed on your account for more than the cost of the room as soon as you check in. What if you don’t have enough money in your account to pay for the hotel? You may not be able to check in. With a credit card, you won’t have that problem. And you won’t have to fight to get your money back when something goes wrong. The credit card company will do the work to resolve fraudulent charges. When you use a credit card, you pay the bill the following month. If there is a fraudulent charge, your funds are not at risk.
  • Credit cards also offer rewards, such as cash back or travel points, which can be worth hundreds or thousands of dollars per year. In the past year, I traveled a lot. I stayed in hotels 16 nights this past year for free, using points I earned on rewards credit cards. Those 16 nights were worth $4,200. There are plenty of websites dedicated to credit card rewards for travel and cash back. The Points Guy is a good place to start.
  • Take it further by using specific credit cards for specific uses. If you are truly organized, consider using one credit card for travel, one for groceries, and one for online purchases. This makes it easier to manage when you review your monthly statements. It’s hard for fraudulent transactions to jump out when there are so many of them. With a card dedicated to a specific purpose, you’ll immediately know there’s a problem when a purchase for Amazon shows up on the credit card you use for travel.

Greg Halpin MA, Information Security Auditor

* If you have any concerns with high credit card balances consider the debt management plan with Credit Counseling Center.  They have helped many people get out of debt and restore their credit.