Paper or Plastic:
What Have You Got to Lose?

1.	Introduction.
2.	Our Recommendation: Do Not Use Debit Cards
3.	Credit Cards and Charge Cards
4.	Debit Cards (Check Cards) and ATM Cards
5.	Gift Cards, Prepaid Cards, and Stored Value Cards
6.	Checks and Other Paper
7.	Tips for Limiting Your Loss
8.	Other Resources

1. Introduction

Once you decide to buy something, you then must determine how to pay for it. Do you hand over cash? Write a check? Pay with a credit card? Or use a debit card and have the payment automatically deducted from your bank account?

If you’re like most people, you use a combination of paper, plastic and electronic payments. To save time with the monthly bill-paying ritual, you may even put your mortgage payment or health club dues on auto-pilot, authorizing an automatic deduction from your bank account or a periodic credit card charge.

Pros and cons exist to whichever payment method you choose. Many of us decide quickly about the method of payment and spend too little time thinking about the potential costs or consumer protections of each method.

But you should be aware that thieves are inventing new ways to steal consumers’ account information. For example, some crooks have learned to use “skimming” devices to steal credit card or debit card information off card-swipe machines.

Credit cards, debit cards, and other plastic cards such as “stored-value” cards may look alike. However, if your card is lost, stolen, or otherwise compromised, the similarities end there. Your out-of-pocket loss could be nothing. Or, a thief could drain your entire bank account.  It all depends on the kind of card you use and when you report the loss.

Debit cards typically put consumers at much greater risk than credit cards because they offer less legal protection in the event of a loss. And because debit cards access funds directly from your bank account, your money will remain missing while you and your bank sort out any theft, which could mean bounced checks, late fees, and numerous other problems.

2. Our Recommendation: Do Not Use Debit Cards

Many consumers have asked our advice on what we consider the best or safest method for making payments.  We encourage you to read this fact sheet and make that determination for yourself.  Every person’s financial and personal situation is somewhat different   However, the Privacy Rights Clearinghouse recommends that consumers never use (or even carry) debit cards (also known as check cards) because of their risks and their limited consumer protections.

By reading this fact sheet, you will understand how a lost, stolen, or otherwise compromised debit card can result in your bank account being wiped out by a thief, without using your PIN number.  Even if you promptly report the loss to your bank, under federal law the bank can wait up to two weeks (or longer in certain cases) to restore the funds to your account.  That could make you unable to pay your bills or withdraw cash at an ATM.  And if you wait too long to report the loss, you may not be able to recover the stolen funds.

Why the concern over debit and check cards?

Thieves have become increasingly sophisticated in gaining access to sensitive financial information.  Databases of major retailers and restaurants have been compromised by hackers.  Merchant card reading devices have been surreptitiously replaced with card skimmers.  Restaurant employees have secretly captured card information on hand-held card readers.  If you have a debit or check card and your account information is compromised, funds can quickly be withdrawn from your bank account without your knowledge.  Your account can be emptied, resulting in overdrafts, fees, and an inability to pay your bills. 

On the other hand, if you use a credit card, you will have an opportunity to dispute a fraudulent transaction before you have to pay the bill, so you will still retain access to the funds in your bank account.  Part 4 of this fact sheet covers some of the other disadvantages of debit and check cards.

But my bank offers a debit or check card fraud guarantee, so I’m covered, right?

Not exactly.  Many banks do offer a fraud guarantee, and your fraudulently removed funds are likely to be replaced eventually, assuming that you comply with the specific requirements of your bank’s fraud guarantee program.  The key word here is eventually.  The important thing to note is that the bank is not obligated to restore the funds to your account for at least two weeks while it investigates.  During this time period, you may not have your funds available in your account to pay your mortgage, rent, loans, or other bills.  Many people cannot afford to be without their money for that length of time.

Don’t I need a debit or check card to get cash from an ATM machine?

Not necessarily.  You can ask your bank to replace your debit card with an ATM-only card.  With an ATM card, a PIN is always necessary to complete a transaction.  If your ATM card is lost or stolen, it cannot be used without your PIN.  A debit or check card can be used by a thief without knowing your PIN. 

I don’t like to carry cash.  How can I pay for my everyday purchases without using a debit or check card?

3. Credit Cards and Charge Card

When you use a credit card, you’re essentially taking out a loan. The merchant, going through the card network, electronically contacts your card issuer (usually a bank) to verify your account number, expiration date, and credit availability. Once that information is verified, the card network authorizes the transaction. The merchant then is paid by the card network, and the card network collects the money from the card issuer, which bills you in your next statement. You can choose to pay the bill in full each month without interest or extend the payments over a number of months or even years while paying interest.

Charge cards operate similarly. However, with charge cards, you make purchases and must pay the entire bill, without interest charges, at the end of the monthly billing cycle.  Most companies have phased out the issuance of consumer charge cards in favor of credit cards.  However, some American Express cards are still considered charge cards.

Pluses:

1. With credit cards and charge cards, you can buy now and pay for the goods and services later. Used with discipline, no-fee credit cards are basically free, 30-day loans. This allows users to hold onto money longer while earning interest on balances before paying bills.
   
   
2. Many cards offer extras, like rewards programs—cash rebates or points that can be exchanged for airline tickets. gift certificates, or merchandise—and extended warranties on purchases, along with car-rental insurance coverage.
   
   
3. Widely accepted and easy to use, credit cards and charge cards can be especially helpful in emergencies, such as when you encounter unexpected health-care costs or expensive auto repairs.
   
   
4. Strong consumer protection is another big advantage of credit cards. Credit cards generally offer the best legal remedies against billing errors, defective  merchandise and other consumer problems (See below).

Minuses:

1. Interest charges, fees, and penalties can mount up, especially if you don’t comprehend the details of how your card works. With many cards charging 18% or more interest on an unpaid balance, consumers can end up paying many more times the price of the item they bought.
   
   
2. Identity theft often involves fraudulent credit and charge card use. A crook may use your credit cards in a variety of ways. Unauthorized charges may be made using your existing account information.
   
   

What are the consumer protections available for credit card transactions?

There are three distinct protections available for consumer credit card transactions:

• The first credit card protection shields you against liability for unauthorized use of your credit card, that is, when someone steals or otherwise uses your card or card number without permission.   
• The second protection involves disputes about your bill (billing errors).  These disputes may include a merchant overcharging you or charging you for products you never received.  
• The third protection is the right to stop payment. Stopping payment is a powerful tool that you can use when you are dissatisfied with the quality of goods or services that you paid for with a credit card. 

These three important protections are discussed in the National Consumer Law Center’s excellent Consumer Facts publication at www.nclc.org/action_agenda/seniors_initiative/content/FACTSCreditCardRights.pdf   

Remember that these three consumer protections only apply to transactions made with a credit card.  They do not apply to debit card transactions.

What law applies to credit card transactions?

The federal Truth in Lending Act (TILA) (15 U.S.C. §§ 1601-1667f, as amended), requires creditors to disclose information about interest rates and other terms of credit.

What do I do about unauthorized credit or charge card charges?

The FCBA limits your loss from unauthorized charges to $50.  With some credit card companies your potential loss is zero. But to take advantage of this, you usually have only 60 days to notify the card company.

The Federal Trade Commission offers the following advice on using the FCBA to dispute unauthorized credit and charge card purchases:

• Write to the creditor at the address given for "billing inquiries," NOT the address for sending your payments. Include your name, address, account number, and a description of the billing error, including the amount and date of the error.

• Send your letter so that it reaches the creditor within 60 days after the first bill containing the error was mailed to you. If an identity thief changed the address on your account and you didn't receive the bill, your dispute letter still must reach the creditor within 60 days of when the creditor would have mailed the bill. This is one reason it's essential to keep track of your billing statements and follow up quickly if your bills don't arrive on time.

• You should send your letter by certified mail, and request a return receipt. It becomes your proof of the date the creditor received the letter. Include copies (NOT originals) of your police report or other documents that support your position. Keep a copy of your dispute letter.

• The creditor must acknowledge your complaint in writing within 30 days after receiving it, unless the problem has been resolved. The creditor must resolve the dispute within two billing cycles (but not more than 90 days) after receiving your letter.

For details, see this Federal Trade Commission (FTC) site:  www.consumer.gov/idtheft/con_resolv.htm#credit

Does the FCBA allow me to dispute all unauthorized accounts or charges?

No. The FCBA only applies to unauthorized credit and charge card purchases. If a thief used your debit card or got a car loan or other credit involving installment payments, the FCBA does not apply.

For more on credit and charge card fraud, how it happens and what you can do, see the FTC’s publications:

• Avoiding Credit and Charge Card Fraud, www.ftc.gov/bcp/conline/pubs/credit/cards.htm
• Billed for Merchandise You Never Received? Here's What to Do, www.ftc.gov/bcp/conline/pubs/credit/billed.htm.

4. Debit Cards (Check Cards) and ATM Cards

Debit cards (also known as check cards) look—but don’t act—like credit cards. Typically, they have a Visa or MasterCard logo on the front, but (unlike a credit card) will also say “Check Card” or “Debit” somewhere on the front of the card.  They work more like checks because the money is deducted directly from your bank account. You or the merchant runs the card through a scanner that enables the bank to electronically verify the funds are available and approve the transaction. 

Debit cards can function both with a Personal Identification Number (PIN) (on-line transaction) or without a PIN (off-line transaction).  ATM (automatic teller machine) cards only function with a PIN (on-line transaction).

• An “on-line transaction” deducts the money from your account almost immediately and for safety reasons, requires you to give a Personal Identification Number, or PIN.  PIN transactions take money from your account via electronic fund transfer (EFT), networks such as Pulse, Interlink, Star, or NYCE.

• An “off-line transaction” may not transfer the funds for a few days, and you generally sign a receipt instead of using a PIN.  Signature purchases generally go through the MasterCard, Visa, or Discover networks, just like a credit card.

Merchants often steer customers toward using the PIN-type card because banks get higher fees from retailers when consumers use signature cards.  Banks often steer their customers toward no-PIN transactions (signature transactions) because they collect higher interchange fees for no-PIN transactions.  At some banks, there may be a point-of-sale fee for merchant PIN transactions,

Debit cards also have other features including overdraft protection (for a fee) and a monthly statement listing your use of the card.

Pluses:

1. Using a debit card is easier and faster than writing a check, and they are widely accepted by merchants. Some consumers like the sense of security they get by spending only what money they have in the bank, though in some cases that may be a false sense of security. (See “minuses.”)
   

Minuses:

1. Debit cards don't carry the same legal protection as credit cards. Federal law limits your liability on a debit card to $50, but only if you notify your financial institution within two business days of discovery of the theft. If you wait longer than 60 days after your bank statement was mailed, you could lose all the money in your checking account, and even more! We at the PRC have been contacted by many identity theft victims who have experienced debit card fraud. While in most cases their banks eventually replenished the stolen funds from their checking accounts, many were without access for several weeks while the bank conducted its investigation. In the meantime, they were caught short, unable to pay their bills.
   
   
2. Consumer protections for debit cards are not as strong as those for credit cards. Because funds are deducted from your account quickly, you do not have the option to stop payment in a dispute.
   
   Debit and ATM card transactions are included in the broader category of EFT or electronic funds transfers. Use of these cards and your potential loss are governed by the Electronic Funds Transfer Act (EFT Act) (15 U.S.C. §§ 1693-1693r)
   
   
3. The big car-rental firms, including Hertz and Avis, have stopped letting people rent cars using debit cards. For years, these companies have used possession of a credit card as a way of weeding out potentially risky renters. But with banks issuing debit cards to nearly anyone with a bank account, the car-rental outfits have tightened their rules.
   
   
4. Another debit card danger arises from merchant “blocking.”  Blocking occurs when a merchant routinely withholds an amount on a debit card until the transaction is fully processed.  This typically occurs at hotels, gas stations, and those rental car companies that still accept debit cards.  When you use a debit card, the blocked amount can cause your bank account to be overdrawn.
   
   
5. You might be charged for “potential” overdrafts.  With off-line (signature-based) transactions, the debit is processed through the credit card payments system, which means the money takes a few days to be deducted from your account  However, at least one major bank charges an overdraft (bounced check) fee when pending debit card transactions exceed your available balance, even though your balance is sufficient to cover the debit when it is finally processed through the system.
   
   
6. Contrary to popular belief, it is possible to run up a huge debt with a debit card. Some banks process debit card charges despite insufficient account balances, creating overdrafts. This can catch cardholders by surprise and undermine their sense of fiscal security.
   
   
7. Some debit card issuers allow only a fixed number of uses each month. After that, they charge fees. Some issuers enforce maximum daily spending limits, which can create a problem while shopping for large-ticket items.
   
   
8. In addition, consumers who use debit cards to the exclusion of credit cards may be missing an opportunity to establish their creditworthiness. Responsible use of credit cards—unlike debit cards—helps build good credit scores.  A good credit score can reduce the rates that you pay on car loans, mortgages, and insurance premiums.
   
   

Does use of a PIN make debit or ATM cards safer to use than credit cards?

A PIN may give you some comfort as long you closely guard your PIN and are alert to potential scams. For example, thieves have been known to “rig” ATM machines so your account number and PIN are surreptitiously recorded when you insert your card. Account information and PIN numbers have also been captured when unwary consumers buy gas or use a debit card for purchases.

You should also use caution when using a debit card to make online purchases. Remember, however, that although you choose to use a PIN with your debit card, a thief can use a debit card in a non-PIN transaction, thereby emptying your bank account without knowing your PIN.

How much can I lose from debit or ATM card fraud?

To limit your potential loss, unauthorized use of your debit or ATM card must be reported within two days. The Federal Reserve Board (FRB) (www.federalreserve.gov) outlines the EFT Act’s timetable for potential loss:

• Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code. But you could lose as much as $500 if you do not meet the two-day deadline.

• If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit, if any.

See www.federalreserve.gov/pubs/consumerhdbk/electronic.htm#loss

What happens after I report misuse my ATM or debit card?

The EFT Act requires the bank to investigate within the following timeline:

• The bank must investigate and resolve your complaint within 45 days.

• For errors involving new accounts (opened in the last 30 days), point-of-sale transactions, and foreign transactions, the bank may take up to 90 days to investigate the error.

• If the bank takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation. For new accounts, the bank may take up to 20 business days to credit your account for the amount you think is in error.

• If it finds no error, the bank must explain in writing why it believes no error occurred and let you know that it has deducted any amount re-credited during the investigation. You may ask for copies of documents relied on in the investigation.

The above information is summarized from the Federal Reserve Board’s Consumer Handbook. To read the Board’s entire section on how to correct errors as well as other information on EFT transactions, see www.federalreserve.gov/pubs/consumerhdbk/electronic.htm#errors .

The important thing to note is that the bank is not obligated to restore the funds to your account for 10 or 20 business days while it investigates.  During this time period, you may not have your funds available in your bank account to pay your mortgage, rent, loans, or other bills. Contrast this with a credit card dispute, in which you have access to the money in your bank account during the investigation.

What if the bank doesn’t believe I’ve been a victim?

You can file a complaint against the bank or other financial institution with the appropriate federal agency. For more on filing complaints against banks, see www.federalreserve.gov/pubs/Complaints/ .

Even though the EFT Act requires an investigation, some financial institutions may give your complaint a cursory look, send you a “form” letter and refuse to restore your money. If this happens, be persistent, and, if necessary, speak with an attorney about your options.

Does the EFT Act cover preauthorized payments?

Not always. The EFT Act does not apply to electronic funds transfers within the same financial institution. If, for example, you authorize automatic mortgage payments and your mortgage is held by the same bank from which you are transferring payments, the EFT Act would not apply.

For more on automatic, preauthorized transfers and the EFT Act, see the FRB’s consumer guide on electronic transfers. www.federalreserve.gov/pubs/consumerhdbk/electronic.htm#questions

How can I protect my account?

• Immediately deduct your debit card transaction and fees from the balance in your checkbook. Also, keep your debit-card receipts so you can compare them to your bank statement.

• Safeguard your account number and PIN. See tips on how to do this at the end of this guide.

• Check your monthly statement and balance to spot any unauthorized transfers.

• Between bank statements, check the account balance printed on your ATM receipts. A suspicious drop in your balance could be a tip-off that a thief has tapped into your account.

5. Gift Cards, Prepaid Cards, and  Stored Value Cards

Worried about carrying too much cash? Wonder what to give a friend for her birthday? Tired of stopping at the toll booth or fare-card machine on your daily commute to work?  Don’t like the hassle of carrying travelers’ checks when you go on vacation?  For these and other purposes, you can prepay “up-front” and get a gift card, prepaid card or stored value card..   Most of these cards do not have any value until they are sold, at which time the monetary value  is noted in a database, cross-linked to the card.

Prepaid cards include cards for which the value is recorded on a remote database, which must be accessed for payment authorization. These include most gift cards, payroll cards, flexible spending account cards, and government benefit cards. Some cards can be reloaded with value, while other cards cannot.

Pre-paid debit cards are a type of prepaid card issued by financial institutions for use at retailers that accept debit or credit cards.  Some may be used to obtain cash at ATMs and can be useful as substitutes for traveler's checks.   

Gifts cards are increasingly being offered as consumer incentives at no cost or for a substantial discount. For example, reward points given for the use of credit cards can be exchanged for a variety of gift cards, and some companies will offer high-value gift cards at a discount. Gift cards are readily available at a discount using online trading services.

Many states have passed laws regulating gift cards. Often these laws set the same standards for gift certificates, the paper equivalent of gift cards. However, these laws generally do not give you a right to recover from a lost or stolen card. Rather, most state laws cover such things as service fees, expiration dates, and exempt the cards from unclaimed property laws. For a list of state laws governing gift cards, visit the National Conference of State Legislators’ Web site, www.ncsl.org/programs/banking/GiftCardsandCerts.htm .

In California, most gift cards cannot have expiration dates or service fees. However, the California gift card law is complex and does not apply to all gift cards. For example, it does not apply to multiple retailer gift cards such as mall gift cards or bank gift cards including Visa and MasterCard gift cards. Effective January 1, 2008, a gift card with a remaining balance of less than $10 is redeemable in cash for its cash value. There are numerous exceptions to the California gift card law. For a complete explanation, see http://www.dca.ca.gov/publications/legal_guides/s-11.shtml

If you live in a state that does not restrict fees and expiration dates on gift cards, there is a summary of the major retailers’ gift card policies available at www.bankrate.com/brm/news/cc/20061120_gift_card_compare_a1.asp?caret=4 .

With many retailers recently filing for bankruptcy, you should be aware of the rules governing gift cards in a bankruptcy proceeding. A gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the gift card may have a claim against the bankruptcy estate. Sellers that file "Chapter 11" (reorganization) bankruptcy intend to stay in business, so they typically will ask the bankruptcy court for permission to honor gift cards in an effort to maintain good customer relations. If the bankruptcy court does not allow gift cards to be honored, or if the seller files "Chapter 7" (liquidation) bankruptcy, holders of gift cards are creditors in the bankruptcy case. For consumer tips on retail store bankruptcies, see http://www.dca.ca.gov/publications/bankruptcy_tips.shtml (although this is a California state publication, most of the information in it applies nationwide).

There are Web sites that allow users to trade, donate, buy and sell gift cards. Sellers use these Web sites because the gift card is not to a store of their liking. Buyers use them because they provide opportunities to buy these cards for less than they are nominally worth at the business.

Stored value cards refer to products for which a value is recorded on the card itself.  They are frequently used by many public transport systems and library photocopiers, where a simplified system (with no network) stores the value only on the card itself.  To thwart counterfeiting, the data is encrypted, though not very strongly given the relatively low amounts of money involved.

Fees charged for stored-value cards vary greatly, and what you can do about a lost or stolen card depends on the terms of your agreement with the vendor. For a further description of the current uses of stored-value cards as well consumer protection issues, see the FRB advisory, Stored-Value Cards: An Alternative for the Unbanked?, www.ny.frb.org/regional/stored_value_cards.html .

• For stored-value: The FCBA and the EFTA may not cover stored-value cards or transactions involving them, so you may not be covered for loss or misuse of the card. However, stored-value cards still might be useful for micro-payments and other small purchases online because they can be convenient and — in some cases — offer anonymity. Before you buy a stored-value card or other form of e-money, ask the issuer for written information about the product’s features. Find out the card’s dollar limit, whether it is re-loadable or disposable, if there’s an expiration date, and any fees to use, reload, or redeem (return it for a refund) the product. At the same time, ask about your rights and responsibilities. For example, does the issuer offer any protection in the case of a lost, stolen, misused, or malfunctioning card, and who do you call if you have a question or problem with the card?

For more on various e-payments and how to play it safe, see the FTC publication, A Consumer’s Guide to E-Payments, www.ftc.gov/bcp/conline/pubs/online/payments.htm .

Bottom line: Before you plunk down cash for a piece of plastic, know the terms and what you can do if the card is lost or stolen.

6. Checks and Other Paper

Years ago, personal bank checks replaced cash as the preferred method of paper payments. Your signature on this piece of paper makes it a “negotiable instrument.” The Uniform Commercial Code (UCC), a version of which has been adopted by most states, includes consumer protections against check fraud. Generally, the UCC holds the bank responsible for fraudulent checks as long as you, the customer, exercise “reasonable” care, such as timely reporting.

If someone steals your checkbook or creates a counterfeit check using your account information, you may still look to state UCC laws. But in other ways, as you may have noticed, things have changed. Instead of getting all your cancelled checks, you may see the notation “ACH” on your monthly statement, but not receive the cancelled check. ACH stands for Automated Clearing House network which signals that your payment was processed “electronically.”

In fact, understanding modern check processing may be the most difficult challenge if you find something amiss in your checking account. Here are some examples of when a check is not a check:

• You send a check to your credit-card company. The check may be processed as you’ve been accustomed to for years, and you receive the cancelled check back with your monthly bank statement. Or, just as likely, you may never see that check again. The credit card company may decide to processes the check as an electronic payment,

• You write a check for your weekly groceries or buy a new suit. The grocer or merchant may decide not to accept the check but rather take the information, process your transaction as an “electronic funds transaction” and hand the signed check back to you.

If a creditor or merchant decides to process your check electronically, your avenue for dispute is the EFT Act, the same as if you had used a debit card or authorized an electronic payment by phone. When disputing a check processed as an electronic funds transfer, see Part 4 above on debit and ATM card disputes.

Can I still depend on the delay of several days between when I write a check and when it’s processed?

Increasingly not. As old checking-account rules fall, so should bad checkbook habits.

For most consumers who grew up before the technological advances of the last decade, the “float” was the time—usually several days—between when you wrote a check and when the check arrived at  the bank and was subtracted from your account.

In a series of steps, though, that delay is being eliminated as we move toward paperless banking and faster check clearing. The switch began with Check 21 (for “Check Clearing Act of the 21st Century”), a law passed in 2004 designed to make the check-payment system more efficient by making it easier for banks to process checks electronically. Check 21 made it so that physical checks did not have to be moved from one bank to the next. For many banking customers, that meant that they stopped getting canceled checks returned.

Other steps toward a cashless society—or at least one without checks—have followed.  Most recently, merchants are being allowed to convert checks into electronic payments without the delay of taking them to their bank. The payment is not instantaneous, but the transaction usually reaches the bank during the day or at day’s end. So that will effectively end the idea of making a purchase on Saturday by check and expecting that the check won’t clear before Monday or Tuesday at the earliest.

Result: Anyone who is accustomed to using the float as a form of short-term financing should instead be looking for overdraft protection or should curtail spending to avoid the heavy fees banks now levy for bounced checks.

Modern check processing and what to do about errors or unauthorized payments is explained in more detail in a consumer advisory published by the Office of the Comptroller of Currency:

• Writing a Check: Understanding Your Rights, www.occ.treas.gov/consumer/checkwriting.htm

Demand Drafts

A demand draft is a document created through an Internet site to withdraw money from a bank account. Demand drafts don’t require a signature but include a bank-routing number, account number, and sometimes a valid e-mail address. “Checks” may be sent through e-mail and can be printed for payments.

Creators of demand drafts do not necessarily verify the owner of the account. See  www.privacyrights.org/ar/qchex.htm and the Federal Deposit Insurance Corporation’s consumer advisory about demand drafts, www.fdic.gov/news/news/SpecialAlert/2005/sa8205.html .

Should I be concerned that someone could steal money from my account with a demand draft?

Unauthorized access to your bank account is always possible if a thief knows your bank routing number and account number. More common complaints about demand drafts have come from people accepting fraudulent payments. For example, someone sells an item over the Internet and accepts payment by demand draft, only to find out later the payment was a fraud.

What should I do if someone uses an unauthorized demand draft to withdraw money from my account?

You should notify your bank immediately. And, follow the procedures outlined above for disputing unauthorized electronic funds transfers.

What should I do if I receive a fraudulent demand draft?

Information should be forwarded to the FDIC's Cyber Fraud and Financial Crimes Section, 550 17th Street, N.W., Room F-4004, Washington, D.C. 20429, or transmitted electronically to alert@fdic.gov.

Cashier’s Checks and Money Orders

Cashier’s checks and money orders work in some ways like stored-value plastic cards. You pay cash up-front for this paper and use the paper for other purposes. Like personal checks processed conventionally, cashier’s checks and money orders are governed by the terms of your state’s version of the Uniform Commercial Code. If you purchase these products from a bank, post office, or other reliable source, you can be assured that the paper is legitimate.

Your greatest risk involves accepting a cashier’s check or money order from someone who owes you money. Counterfeit paper that looks like a cashier’s check or money order is often associated with Internet scams. When, for example, you sell personal items through an online auction site, a thief may send you counterfeit paper, often in an amount greater than the sales price, and ask you to refund the difference.

Government banking agencies’ Web sites are replete with advisories about such tricks. Here are just some of the many examples from the OCC, the FTC and the FDIC:

• OCC Advisory: Counterfeit Cashier’s Checks, Frost National Bank, www.occ.treas.gov/ftp/alert/2003-3.txt
  
  
• FDIC Alert: Counterfeit money orders and cashier's checks drawn on Monson Savings Bank, Monson, Massachusetts, are reportedly in circulation, www.fdic.gov/news/news/SpecialAlert/2005/sa15305.html

• FTC Alert: Check Overpayment Scams: Seller Beware www.ftc.gov/bcp/conline/pubs/alerts/overpayalrt.htm

What can I lose from accepting fraudulent paper payment?

You can lose in three ways:

• You may send the item you sold over the Internet, thinking you have a received your funds.

• The person who sends the payment may make the amount greater than the sale price, and ask you to send the difference.

• You will probably deposit the fraudulent paper in your bank account. Thinking you’ve received bona fide payment, you may spend the money before the payment has actually cleared. If you write checks or make withdrawals based on this faulty assumption, the bank will show little sympathy for your loss.

7. Tips for Limiting Your Loss

1. Protect your cards, account numbers, and PINs. Keep your cards safe and be sure to sign the back of the card as soon it arrives. Take home your receipts (which may have your account numbers printed on them) and shred them instead of leaving them in the store’s trash. Memorize your PIN; don’t write it on your card or write it on a note in your purse or wallet. And always position your body so that no one can see the keypad at the ATM or checkout counter when you punch in your number.
   
   
2. Timely reporting is a must. To limit your credit card loss to $50, you must report  unauthorized charges within 60 days. For debit, ATM and other electronic transfers, you only have two days to minimize your loss.
   
   
3. Monitor your credit card charges and bank accounts frequently. Online access is an easy way to monitor even daily activity.
   
   
4. For online purchases use credit cards rather than providing your debit card, especially when dealing with an unfamiliar site.
   
   
5. Checks should be written only to those you know and trust. Remember, your check includes your bank routing number and account number. This is all a thief may need to access your bank account.
   
   
6. Suspect payments, especially money orders, you receive from an unknown source. For tips on how to spot a phony money order, see the US Postal Service, September 2005, fraud alert: www.usps.com/postalinspectors/fakemo.htm.
   
   
7. Caution is advised when depositing money orders, checks, cashier’s checks or other payments you receive from an unknown source. Deposits you make may not have cleared, even if your bank balance shows the funds have been added.
   
   
8. Beware of suspicious-looking ATMs and checkout-lane card readers. Unbranded ATM machines in convenience stores and the like can be scams. Also, some recent high-profile thefts have involved the practice of “skimming,” in which account data from cards’ magnetic stripes were secretly copied from checkout-lane card readers and later used to create counterfeit cards.
   

8. Other Resources

Laws:

• Truth in Lending Act, www.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00001601----000-.html

• Fair Credit Billing Act, (See Sections 1666-1666j of the TILA) Electronic Funds Transfer Act, www.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00001693----000-.html

• Uniform Commercial Code, California Commercial Code, www.leginfo.ca.gov/cgi-bin/calawquery?codesection=com&codebody=&hits=20

Plastic and Electronic Payments

• FTC Facts for Consumers: Credit Cards, ATM Cards, Debit Cards, What to Do If They’re Lost or Stolen, www.ftc.gov/bcp/conline/pubs/credit/atmcard.pdf

• FTC Facts for Consumers: Fair Credit Billing, www.ftc.gov/bcp/conline/pubs/credit/fcb.htm

Other Government Publications

• Federal Reserve Board, Consumer Handbook, www.federalreserve.gov/pubs/consumerhdbk/,

• Office of Comptroller of Currency, Writing a Check: Understanding Your Rights, www.occ.treas.gov/consumer/checkwriting.htm

• Federal Deposit Insurance Corporation, Don't Be an On-line Victim: How to Guard Against Internet Thieves and Electronic Scams, www.fdic.gov/consumers/consumer/guard/index.html , and Paper or Plastic?,

FDIC Consumer News, www.fdic.gov/consumers/consumer/news/cnspr00/cvrstry.html

• Privacy, Fraud, and Scams, www.mymoney.gov/mymoneyinfo.shtml#scam

Privacy Rights Clearinghouse Publications

• How Many Identity Theft Victims Are There? What Is the Impact on Victims?, www.privacyrights.org/ar/idtheftsurveys.htm

• Fact Sheet 17: Coping with Identity Theft: Reducing the Risk of Fraud,  www.privacyrights.org/fs/fs17-it.htm

• Fact Sheet 17a: Identity Theft: What to Do if It Happens to You,  www.privacyrights.org/fs/fs17a.htm
  
  
• Fact Sheet 30: Check 21: Paperless Banking, www.privacyrights.org/fs/fs30-check21.htm

Copyright © Privacy Rights Clearinghouse/UCAN. This copyrighted document may be copied and distributed for nonprofit, educational purposes only. For distribution of this fact sheet, see our copyright and reprint guidelines. The text of this document may not be altered without express authorization of the Privacy Rights Clearinghouse. This fact sheet should be used as an information source and not as legal advice. PRC fact sheets contain information about federal laws as well as some California-specific information. Laws in other states may vary. Overall, our fact sheets are applicable to consumers nationwide. This publication was originally developed under the auspices of the University of San Diego.

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