The security of your money in your wallet

[edit 2010-01-02: see this Chicago Tribune article on debit vs. credit card security for purchases]

My girlfriend had her debit card number skimmed, which led to me thinking about exactly how secure the money we have in our wallets (cash, debit, and credit cards) truly is.

Take your credit card. It is vulnerable to having its number skimmed by a false card reader at a store. You could also end up with its number written down by a waiter who takes it to be swiped. And you know those portable card readers that are getting used more and more? They use Bluetooth for wireless communication which has no inherent security mechanism, leaving your number as vulnerable as the card reader manufacturer decides to leave it vulnerable (which means "very vulnerable" since good security costs money to implement). And if you make purchases online then your card is as vulnerable as the weakest web site you used (which is to say "very vulnerable" again since most people don't take the time or money to heavily secure where they store your credit card).

Your debit card is exposed to the same extent as your credit card, except for web sites (as long as you don't use your debit card's credit card feature to make payments with it). Your PIN can still be intercepted by a skimming card reader. And a waiter can still get your number and just watch you punch in your PIN.

As for cash, its only vulnerability is from you being robbed. Otherwise no one is going to forge your money and try to use it to pay for something like a card. And if you get robbed any of your cards can be used for quick purchases.

With all of this in mind, why would you choose way of paying over another?

For cash, it can only be taken if you are robbed. According to the Department of Justice in the US, you have a %0.2 (or 2 out of 1000) chance of being robbed these days. The problem with having your cash stolen, is that if it's gone, it's gone. Unless the police recover your money you have no way of retrieving it again. That would suggest that if you prefer cash over other types of purchases then you should minimize how much you carry around at any time to prevent losing your entire paycheck or something.

Cash does have two perks to it. One is that you are being nice to vendors as cash has no overhead cost. Using either a debit or credit card carries a transaction fee that merchants must pay which cash does not have. Cash also helps you manage your money by limiting you to what you have on hand. If you can't control your spending well, restricting yourself to only the cash you have on you is a good way to make sure you stick to a budget.

Although cash does make it harder to track one's budget. Thanks to web sites for your credit and debit accounts it is easy to log on and look at where you money is going. But in the instance of cash, you have to do that bookkeeping and analysis manually. If you are not good about that it can nullify the budget-restricting power that cash holds over credit and debit cards.

For credit/debit card fraud, I can't find any solid numbers in terms of victimization. Best I could find is that roughly $0.07 of fraud is done per $100 in transactions. But considering everyone I know has had a credit card or debit card number stolen but not been mugged, I think the chances are much higher than having your cash taken from you.

But what are the repercussions of having your cards stolen? In the case of credit cards, you report the bad charge, wait for a few weeks for them to figure out what happened, and potentially wait for a new card to be overnighted to you. For debit cards you go in to the bank personally, get your money back on the spot, and receive a new card. Obviously the speed of response is different between credit and debit cards as one gives you a temporary loan why the other is your actual, physical money. But in both instances you end up getting the fraudulent charges removed and have no loss of money short of inconvenience and stress. Plus credit and debit cards let you manage your finances easily with online reports of your expenditures.

What it seems to come down to is a tradeoff between the inevitable inconvenience of when your credit and debit card numbers are stolen compared to the possibility of being robbed of your cash. If you are fine with dealing with your bank or credit card company when your card number gets stolen then I would say use your credit card for everything. That way any issues won't directly affect you if for some reason the bank drags their feet. Plus you get perks typically with your credit card (cashback, frequent flier miles, etc.) that you don't get with a debit card. Otherwise use your debit card if you feel you can't trust yourself with a credit card. I would only use cash if you feel bad for merchants being charged fees by the credit card companies or you have real issues with someone knowing what you have bought.