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Related topics: identity theft, fraud, credit cards, financial privacy, Liz Weston

Credit cards have long been the safest way to pay online, with stronger consumer protections than any other form of payment.

But you may not know that:

Debit card issuers have bolstered protections and streamlined dispute processes in recent years as debit card use has grown, shrinking both the likelihood of fraud and its severity.

Using a retailer-specific card, rather than a general-purpose credit card, may put you at greater risk of fraud.

Alternative payment systems, such as PayPal, can provide an additional layer of security, but they also have quirks you need to know about.

These are the conclusions of Javelin Strategy & Research, a company that performs the massive annual identity theft survey for the Federal Trade Commission and has compiled reams of data about online payments and fraud.

Nearly all financial institutions have zero-liability policies for debit cards that limit users' risk, said Javelin CEO James Van Dyke. The banks also have improved their fraud-detection capabilities, he said.

Liz Weston

Liz Weston

Now, zero liability doesn't mean zero costs to victims. In fact, the bigger the fraud, the more likely victims are to incur out-of-pocket expenses, Van Dyke said.

Some of these expenses are incurred trying to clean up the mess, and some people "run out of energy" trying to fight continuing fraud and simply pay the bill.

But the improvements in fraud detection and resolution with debit card fraud are reflected in the average out-of-pocket expenses reported by victims.

Average cost of fraud to victims200720082009
Debit cards$739$545$243
Credit cards$696$521$314

And you're still more likely to be the victim of credit card fraud than debit card fraud, Van Dyke said. Credit cards are used in about half of all transactions but make up two-thirds of reported frauds.

The credit card figures contain another surprise. The toll from major credit card fraud -- fraud using Visa, MasterCard, American Express or Discover -- averaged $396 in 2008, Van Dyke said. By contrast, the average cost to victims of fraud using retail cards -- the kind of revolving accounts you can use only at a single retail chain, rather than everywhere -- was a whopping $960.

Single-retailer cards tend to use smaller processing networks that aren't as adept at detecting fraud as the major credit card networks, Van Dyke said.

Here's what you need to know about various forms of payment.

Credit cards

The federal Truth in Lending Act outlines the substantial consumer protections that accompany credit card use:

  • Your maximum liability for unauthorized use is $50 when your card is used offline (and most issuers waive that in their zero-liability policies). When used online, your liability is zero by law.
  • There's no specific time limit for you to report unauthorized use, FTC senior attorney Carole Reynolds said, although "it is best to do so as soon as possible." With other methods of payment, failing to report fraud quickly can cost you a bundle.
  • You don't have to pay a disputed charge until it's been investigated. With other forms of payment, the money typically disappears from your account, and you have to wait to get it back.

You'll still want to be a savvy consumer to reduce the chances of becoming a victim, of course. That means making sure the address bar of the retailer's website shows "https" rather than just "http," to denote SSL encryption, and not using any site if you get a pop-up window or warning that there's something wrong with the site's encryption. You'll also want to review each month's bills for fraudulent charges and, if there are any, to dispute them immediately. Many issuers allow you to start those disputes online, but you should follow up in writing to preserve your federal rights.