What MasterCard's Zero Liability Pledge Means for Your Debit Card

June 4 (Reuters) - In the wake of a spate of data breaches highlighting the vulnerability of companies that hold consumer information, MasterCard Inc announced last week it would apply the same rules to PIN-based debit card transactions as those used for credit cards: zero liability when fraud is reported.

"Fraud and identity theft have been in the news a lot lately. We want to give cardholders peace of mind," says MasterCard spokeswoman Beth Kitchener. The breach at Target last year, which affected more than 40 million customers, is still a top concern for many.

For consumers who have MasterCard-branded debit cards, the extension of zero liability means some things will change, while others won't. Here is what you need to know about the new policy, which takes effect on Oct. 1.

Q: Does this mean that using a debit card is just as safe for transactions as using a credit card?

A: Not exactly. While those who have MasterCard-branded debit cards will benefit from the policy change, the inherent issues with debit cards remain. The main difference between debit card and credit card transactions is debit cards are tied to users' bank accounts.

"With credit cards, it's not a big deal. It's their money not yours," says Gerri Detweiler, director of consumer education for Credit.com. "With a debit card it is a big deal. Consumers still need to be very careful when a debit card is tied to their main financial account."

Q: How much money could I be on the hook for right now if someone steals using my debit card?

A: Federal laws extend protection to consumers using both credit and debit cards, but losses for victims of fraudulent credit card transactions are capped at $50. Most credit card issuers, however, set the cap at zero. Responsibility for fraud on a debit card is tied to when it is discovered and reported.

If you report the loss within two days, federal law caps consumer responsibility at $50. If you report it within 60 days of receiving a statement that shows the fraudulent transactions, liability is capped at $500. If you don't report it within 60 days, that liability is unlimited.

Q: Why isn't a PIN enough to protect me?

A: Theoretically, using a PIN protects the cardholder because it's a secure password. However, card skimmers can steal numbers, and some people use PINs that are easy to figure out.

Javelin Research & Strategy, which analyzes banking and fraud, found that about 10 percent of identity fraud victims had their debit card PIN taken. That works out to more than 1.2 million cards.

Q. How do I get money restored to my account if it is stolen?

A: You should contact your bank as soon as you learn your account has been compromised, says MasterCard's Kitchener. Call the phone number on the back of your card or the financial institution that issued the card. How quickly the money is restored varies from bank to bank.

Q. What's the biggest issue for consumers when someone commits fraud with their debit card?

A: Getting back the money in a timely fashion. Only about a quarter of the leading financial institutions offer to make money lost to fraud available in bank accounts the day after it is reported, according to Javelin. However, that one quarter includes some of the largest banks in the country: JP Morgan Chase and Bank of America.

Q. What are the exceptions to the zero liability rule?

A: There is one exclusion for exercising "reasonable care in safeguarding your card." Consumer experts complain that this is not very specific. "Reasonable can have variable definitions depending on who you ask," says John Ulzheimer, credit expert for CreditSesame.com.

Kitchener says it's up to individual financial institutions to determine what would be considered a violation of the "reasonable care" rule. An example, says Detweiler, would be giving your card and password to someone to buy a gallon of milk and ended up spending $200. Or writing your PIN on the card.

Q. Is this policy change a good thing for consumers?

A: Credit experts say that it is. "Certainly the notion that certain transactions weren't covered by zero liability was confusing to the consumer," Detweiler says. "It's great that they're simplifying that for their customers and covering all transactions."

Given that so many consumers use debit cards as a way to control spending - using their own cash rather than borrowing on a credit card - Ulzheimer says any effort to protect users is beneficial.

"By and large this is a good thing for consumers who choose debit over credit," he says. "It lets them keep their budgetary controls in place while worrying less about fraud." (Editing by Beth Pinsker and Sofina Mirza-Reid)