Credit Vs. Debit
Taking a break from Credit vs. Charge Cards, I want to touch on the choice between credit and debit cards. You would have trouble opening a bank account without receiving an ATM card that doubles as a Debit card. Typically, these cards are accepted anywhere a Visa is.
The USA Today, recently posted a rundown of the distinctions between credit and debit cards with a style that recalls their usual talent for distilling subtle distinctions into colorful bar graphs.
The article begins by pointing out that there were actually more debit card transactions last year than there were with credit cards. The author offers many possible explanations from the failing economy to the preferences of the younger generation. I think a lot of people have had it with their credit card company and they see debit cards as a better way to go, but there is also more to it.
Here is my take on some of their advice regarding debit cards:
They say that: “Make sure the funds are there. A $6 sandwich can wind up costing $46 if you don’t realize your checking account is flat-lining. Most merchants no longer reject a card if you have an inadequate balance; instead, you incur a hefty overdraft fee.” This is true, but you also must add up the interest that you might be paying on your credit card if you carry a balance. The interest can be massive if you carry a balance, as it occurs from the moment you make the transaction. Worse yet, with double cycle billing, you end up paying interest even after you pay for something. Fortunately, this practice will be outlawed when the CARD act goes fully into effect in February.
They also mention that “A security breach could mean trouble.” What this means is that charges that go through on your debit card, for better or worse, is like cash coming out of you bank account in real time. If you card is stolen, you have a good chance of coming out of it without much harm. Unfortunately, if the goods or services you purchased are not delivered, you are essentially in the same position you would be if you had paid cash. There are no charge backs with debit cards like there are with credit cards.
They bring up the subject of Usage Fees. Apparently some debit cards charge you a fee for each use. Run, don’t walk, if someone offers you such a card.
The article also brings up the subject of account blocks. I can’t tell you how many consumer complaints I have read about a hotel or rental car company freezing a cardholder’s funds with an account block. Do not ever rent a car or stay at a hotel with a debit card. A huge chunk of your bank account will be frozen faster than a Colombian drug lord, only to be released at some unknown later date when the hotel or rental car company feels like it. Should they decide that you touched the minibar or left a scratch on the bumper, and you will never see your money again. At least with a credit card, the burden of proof is on them.
What About Credit Cards?
They touch on the usual litany of possible expenses such as late fees and interest charges, no surprises there.
They point out that credit cards can “They tempt you to more than you can afford.” and to “Be careful with rewards” as they also can encourage overspending. Now we are down to the meat of the matter, and it is not that different than the Charge Card vs. Credit Card debate. The difference is the psychology of the cardholder. In one case, you have debit cards that have few if any of the features of credit cards such as charge backs and interest free float, yet people are tempted to purchase more than what they can afford to pay off, thus incurring interest and/or late fees. On the other hand, debit cards lack those features, have greater security risks, an can even result in your funds being frozen when you are traveling. Nevertheless, people like debit cards as it is a financial device that allows them to control their spending.
Where I Stand
I am not a debit card fan. One reason is rewards. Yes, there are some reward debit cards, but their programs are shadow of what you find with a good reward credit card. I can recall using them at Costco, long ago before they accepted Amex (or perhaps when I didn’t have an Amex, I can’t remember). I have also used them overseas to avoid foreign transaction fees. Other than that, I don’t see any need to ever use my debit card.
Because debit cards lack many of the features and consumer safeguards of credit cards, they also cost both the banks and the merchants less when you use them. Another big expense for the banks is rewards. In realizing these additional costs for credit transactions, banks are increasingly promoting debit transactions in order to increase their profits. For me, those efforts fall on deaf ears as I prefer paying my credit card balance in full and reaping rewards. For others, debit cards offer a stress free way to stay out of debt.
To each his own.
