I'm 19, and I've been working since high-school. I still live with my parents.

All of my money is in a checking account and I often use my Visa card for my purchases.

My question is, how safe am I in the event of fraud? Am I covered? Should I open a savings account? How am I protected and what can I do to protect myself further? I cannot afford to lose the money in my checking account.

  • Is your Visa card a credit card or a debit card for your checking account? How many checks do you write each month? (I.e., how often do you give out the routing and account numbers?) – user2338816 Dec 11 '15 at 11:13
up vote 38 down vote accepted

While Rocky's answer is correct in the big picture there is another factor here to keep in mind: The disruption while you're waiting to resolve it.

If a fraudster gets your card and drains your account you'll get your money back--but there will be a period while they are investigating that it won't be available.

For this reason I avoid debit card transactions and only use credit cards. If the fraudster gets your credit card you might lose access while they investigate but you don't lose access to your bank account.

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    +1 This is the real answer since it provides how you can protect your bank account from fraud in the first place. Another benefit to putting everything on credit cards is the rewards. I've earned back over 2% of what I've spent on credit cards this year. That can really add up. – Doyle Lewis Dec 10 '15 at 14:33
  • How do you get cash? – user9760 Dec 10 '15 at 16:21
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    @tubes for an ATM withdrawal you're generally best using your debit card (cash advance fees on your creditcard generally suck); but your best off not using it for regular purchases. – Dan Neely Dec 10 '15 at 16:33
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    @JBentley The difference is that while a bank is investigating a fraudulent withdrawal from your checking account, the money is still not in your account and can't be spent (any checks, automatic bill pays, etc will bounce); it's only returned at the end when the bank ends up agreeing with with you. If you dispute a fraudulent charge to your CC, it immediately goes off your balance and you can continue to use your card normally. It only comes back onto your card if the bank decides you were lying. – Dan Neely Dec 10 '15 at 21:15
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    @JBentley In addition to Dan Neely's answer you also have the option of using a different card while the compromised one is being dealt with. You normally don't have a different bank account. – Loren Pechtel Dec 11 '15 at 15:12

Money in a U.S. checking account is FDIC insured, so it's "safe" in the sense that you don't have to worry about a run on the bank or going out of business.

Purchase fraud is something else entirely -- you need to check with your bank and see what their policy is for unauthorized charges made with your debit card. Federal rules apply: report fraud within two days and your liability is limited to $50. The maximum liability rises to $500 after that.

But many banks have a $0 fraud policy. Look at their web site and see what the policy is for your bank.

source: http://blogs.wsj.com/totalreturn/2015/05/19/fraud-worries-debit-vs-credit-cards/

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    Note that the liability limit only applies if the bank agrees with you that the purchase / debit was fraudulent. One risk that's sometimes overlooked is the possibility that they don't. In that case you won't get your money back unless you sue the bank (and win). – Nate Eldredge Dec 11 '15 at 2:17

If the checking account is in a FDIC insured bank or a NCUA insured Credit Union then you don't have to worry about what happens if the bank goes out of business. In the past the government has made sure that any disruption was minimal.

The fraud issue can cause a bigger problem. If they get a hold of your debit card, they can drain your account. Yes the bank gives you fraud protection so that the most you can lose is $50 or $500; many even make your liability $0 if you report it in a timely manor. But there generally is a delay in getting the money put back in your account.

One way to minimize the problem is to open a savings account,it also has the FDIC and NCUA coverage . The account may even earn a little interest. If you don't allow the bank to automatically provide an overdraft transfer from savings to checking account, then the most they can temporarily steal is your checking account balance.

Getting a credit card can provide additional protection. It also limits your total losses if there is fraud. The bill is only paid once a month so if they steal the card or the number, they won't be able to drain the money in the bank account.

The credit card, if used wisely can also start to build a positive credit file so that in a few years you can get a loan for a car or a place to live.

Of course if they steal your entire wallet with both the credit and the debit card...

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    +1. Note that some banks won't let you opt out of overdraft transfer, so your savings may still not be safe if you use a debit card. – Wayne Dec 10 '15 at 16:57
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    @Wayne I thought the US made any overdraft protection strictly opt in a few years ago. – Dan Neely Dec 10 '15 at 21:16
  • @Dan correct; this was one provision (among many) of the 2010 "Wall Street Reform" law commonly called Dodd-Frank; see e.g. cfpbmonitor.com/2015/04/29/… . – dave_thompson_085 Dec 11 '15 at 3:03

US checking accounts are not really secure, though many people use them.

One form of check fraud has been highlighted by Prof. Donald Knuth and carried out by Frank Abagnale, as portrayed in the film Catch Me If You Can.

Basically, anyone can write a check that would draw from your account merely by knowing your account number and your bank's ABA routing number. With those two pieces of information (which are revealed on every check that you write), anyone can print a working check, either using a laser printer with MICR (magnetic ink character recognition) toner, or by placing an order with a check-printing company. The only other missing element is a signature, which is a pretty weak form of authentication.

When presented with such a check, your bank would probably honor it before finding out, too late, that it is fraudulent.

A variant of this vulnerability is ACH funds transfers. This is the mechanism through which you could have, say, your utility company automatically withdraw money from your account to pay your bill. Unfortunately, the transfer is initiated by the recipient, and the system relies largely on trust with some statistical monitoring for suspicious patterns.

Basically, the whole US checking system is built with convenience rather than security in mind, since other institutions are able to initiate withdrawal transactions by knowing just the ABA number and account number. In practice, it works well enough for most people, but if you are paranoid about security, as you seem to be, you don't want to be using checks.

The European system, which has largely eliminated checks in favor of payer-initiated push transactions, is safer by design.

In addition to @mhoran_psprep answer, and inspired by @wayne's comment. If the bank won't let you block automatic transfers between accounts, drop the bank like a hot potato

They've utterly failed basic account security principles, and shouldn't be trusted with anyone's money. It's not the bank's money, and you're the only one that can authorize any kind of transfer out.

I limit possible losses through debit and credit cards very simply. I keep only a small amount on each (~$500), and manually transfer more on an as needed basis. Because there is no automatic transfers to these cards, I can't lose everything in the checking account, even temporarily.

In the case of bank failures

You are protected by FDIC insurance. At the time I wrote this, you are insured up to $250,000. In my lifetime, it has been as high as $1,000,000 and as low as $100,000. I attached a link, which is updated by FDIC.

In the case of fraud

It depends.

If you read this story and are horrified (I was too), you know that the banking system is not as safe as the other answers imply:

In February 2005, Joe Lopez, a businessman from Florida, filed a suit against Bank of America after unknown hackers stole $90,000 from his Bank of America account. The money had been transferred to Latvia.

An investigation showed that Mr. Lopez’s computer was infected with a malicious program, Backdoor.Coreflood, which records every keystroke and sends this information to malicious users via the Internet. This is how the hackers got hold of Joe Lopez’s user name and password, since Mr. Lopez often used the Internet to manage his Bank of America account.

However the court did not rule in favor of the plaintiff, saying that Mr. Lopez had neglected to take basic precautions when managing his bank account on the Internet: a signature for the malicious code that was found on his system had been added to nearly all antivirus product databases back in 2003.

Ouch.

But let's think about the story for a second - he had his money stolen because of online banking and he didn't have the latest antivirus/antimalware software. How safe is banking if you don't do online banking? In the case of this story, it would have prevented keyloggers, but you're still susceptible to someone stealing your card or account information. So:

  1. If you use online, have the latest security software.
  2. If you don't use online, you must be aware that you may experience card fraud or theft.

In the bank's defense, how does a bank not know that someone didn't wire money to a friend (which is a loss for good), then get some of that money back from his friend while also getting money back from the bank, which had to face the loss. Yes, it sucks, but it's not total madness.

As for disputing charges, from personal experience it also depends. I don't use cards whatsoever, so I've never had to worry, but both of my parents have experienced banking fraud where a fake charge on their card was not reversed. Neither of my parents are rich and can't afford lawyers, so crying "lawsuit" is not an option for everyone. How often does this occur? I suspect it's rare that banks don't reverse the charges in fraudulent cases, though you will still lose time for filing and possibly filling out paperwork. The way to prevent this:

  1. Keep a low limit on a card, so if something is stolen and the bank refuses to reverse the charge. Close the account if this happens and avoid working with the bank.
  2. Use cash and don't have a card. You still may have your cash stolen, though and if you misplace it, there's a guarantee that you'll lose everything.

As much as I hate to be the bearer of bad news, there is no absolutely safe place to keep your money. Even if you bought metals and buried them in the ground, a drifter with a metal detector might run across it one day. You can take steps to protect yourself, but there is no absolute guarantee that these will work out.

Account Closures

I added this today because I saw this question and have only seen/heard about this three times. Provided that you get the cashier's check back safely, you should be okay - but why was this person's account closed and look at how much funds he had! From his question:

In the two years I banked with BoA I never had an overdraft or any negative marks on my account so the only thing that would stick out was a check that I deposited for $26k that my mom left me after she passed.

Naturally, people aren't going to like some of my answers, especially this, but imagine you're in an immediate need for cash, and you experience this issue. What can you do? Let's say that rent is on the line and it's $25 for every day that you're late.

Other steps to protect yourself

Some banks allow you to use a keyword or phrase. If you're careful with how you do this and are clever, it will reduce the risk that someone steals your money.

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    An interesting anecdote. I believe it applies to business accounts, which do not get the same level of protection as personal accounts. – JoeTaxpayer Dec 10 '15 at 22:07
  • @JoeTaxpayer exactly; krebsonsecurity.com has similar horror stories every month or so, all small organizations, mostly business but some governmental like a school district or such. Non-personal = less regulatory protection, small = less able to buy security products/services or even learn/train security practices. – dave_thompson_085 Dec 11 '15 at 3:08

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