Target's Data Breach Should Be a Wakeup Call for Your Finances
If you're a Target shareholder, you've felt the pain from Target's stock price drop since the news was made public. If you're a Target consumer, you're likely worried about how much of your personal information was compromised, and your credit and or debit card may have been misused. All in all, it's an ugly situation and one of the risks we face in our ever more electronically connected lives.
What's the Worst That Can Happen?
The data thieves were likely motivated by money. With credit and debit card information for tens of millions of cards, they could buy stuff with the credit cards and drain cash out of people's accounts with the debit cards prior to being found out.
As Target points out on its website dedicated to the data breach, you as a consumer ultimately aren't responsible for any false charges on your accounts associated with that theft of your information. Target is offering free credit monitoring for people who shopped in its stores, to help folks affected by the loss quickly get a handle on just how big the impact is to them personally.
While, as a consumer, you won't ultimately be held responsible for false charges on your account from this breach, that doesn't guarantee you'll be free from any effort associated with the losses. While your card company probably had fraud monitoring capabilities that blocked much of the thieves' charging, if your account did get wrongly charged, you still have to make sure it gets cleaned up.
When Credit Beats Debit
Cases like these -- in which people's card information gets stolen and used for nefarious purposes -- illustrate one way that credit cards clearly beat debit cards.
If you were shopping at Target with acredit card when your information got stolen, all it would likely take is one phone call to your card company to get the charges reversed and the card replaced. In some cases, card issuers have been proactively replacing cards that were used at Target during the breach window.
If, on the other hand, you were shopping with a debit card, it gets a bit more challenging. You must contact the bank that issued your debit card within two days of noticing the theft to be covered by its maximum guarantee. If the money came out of your checking account, your bank generally has 10 days to investigate the theft before deciding whether it has to refund the money.
That's 10 days after you report that your cash is missing from your account. That's potentially 10 days of bounced checks, late payments, overdraft fees, returned check fees and all the other personal headaches associated with not having your money in your account.
Given a choice -- what would you prefer?
- A quick phone call that takes care of the problem.
- About two weeks where every payment you legitimately make could get rejected and bounced back with extra fees, while your account is empty and waiting on the investigation.
While credit cards are safer than debit cards when it comes to the fairly rare event of fraud, they can still be financially dangerous tools in everyday use.
Discover Financial(DFS) recently reported that it received more than $7 billion in interest payments in 2013. That's revenue the credit card issuer earned, largely on the money it loaned out to people who didn't pay their balances in full every month.
Interest rates on credit cards are incredibly high. Even "low interest" cards are charging around 11 percent, according to Bankrate (RATE). %VIRTUAL-article-sponsoredlinks%If you're paying interest to borrow money from a credit card, you're helping fund the costs associated with making good on that "$0 fraud liability" promise that many credit cards have. And the interest you're paying is money you lose every month -- not just on the rare occasions when you fall victim to a scam.
If you are going to use credit cards, be smart with them. Pay off your balance in full every month to avoid interest charges. You might even want to act like the money is coming directly out of your checking account as if it were a debit card by deducting it from your checkbook with each transaction. That way, you'll know how much you really have available to spend on everything else to reduce your risk of overspending.
As Target's data breach reminds us, our digitally interconnected world is still a dangerous place for you and your money. While you can't eliminate all financial risk from your life, you can mitigate the damage by staying vigilant and on top of your spending -- no matter how you spend your money.
Motley Fool contributor Chuck Saletta has no direct position in any stocks mentioned, but his wife owns shares of Target. The Motley Fool has no position in any of the stocks mentioned.