A Financial Revolution 


February 18, 2006
Debit Cards: What's the Point?
I recently read that debit cards are the fastest growing payment method. Why? I've never understood the allure of these "plastic checks." They look like a credit card, but, as the name implies, debit cards deduct the cost of a purchased directly from your checking account at the moment of sale. The cards benefit merchants (instant payments) and banks (processing fees), but I fail to see how they benefit consumers. Let's look at the pros and cons of these cards:

Pros
  • More convenient than checks.
  • No bill to pay (or forget to pay) at the end of the month because charges are deducted from your checking account at the time of purchase.

Cons

  • Fewer consumer protections than a credit card (see this Bankrate article.)
  • No rewards - miles, cash back - for purchases.
  • No float - buy-now-pay-now compared to credit cards buy-now-pay-later approach.
  • Greater consequences of fraud - it depletes your checking account directly, may take time to correct, and it isn't covered by the Fair Credit Billing Act.

Why would anyone use a debit card over a credit card? That's a question I cannot answer.



11 Comments:
Anonymous kalbzayn said...

No interest payments. No penalties if payments are late. If I can't afford it, and it is not an emergency, I won't buy it. Credit cards are for covering the emergencies...for me anyway.

2/18/2006 11:45 PM  

Anonymous Jeremy said...

Kalbzayn, Thanks for the input. I agree with your points and I understand why some people might feel more comfortable having the money debited from their account so they don't overspend. But... I have the same benefits (except the late fee relief) if I pay off my credit card in full every month. By doing this I have the added benefit of better buyer's protection and rewards (i.e., cash back.)

If I didn't pay off my balance each month, I could apply for a second credit card and use it as a debit card; making sure that it is paid in full every month (my bank offers automated payments for e-bills.) That way I have the best of both worlds.

2/20/2006 2:33 AM  

Anonymous RS said...

I have often wondered this same thing. I have never used a debit card because there is no benefit for me. That is because I pay my entire credit card bill off each month anyway. It would seem that debit cards would be good for someone with not much discipline...if they buy stuff they cannot afford right now and if they don't pay off the CC each month. It forces them to only spend if they have the money in their checking account right now.

2/26/2006 9:03 PM  

Anonymous Kim C said...

I'm a math person. My mathematical mind knows that credit cards are a better deal for all the reasons listed above, but...
We prefer debit cards for several reasons - basically psychological reasons.
Debit cards force you to consider each purchase, as you're paying for it *now*, unlike a credit card where payment and the accompanying pain can be deferred for almost indefinitely.
The nature of a debit card is, in my opinion, closer to cash than it is to a credit a card. Studies show that cash-users consistently spend less than credit card users; I would suspect that debit card users fall somewhere between.
Obviously, those of us who don't run close to the line on our bank account balance can sink into using debit cards like credit cards, never knowing what we spend until the statement comes in. But we can all mess up our finances and waste money in any number of ways if we're not careful. The point is to develop habits that make it a little easier to do things the right way. For us, that includes debit cards. Maybe cash would be an even better option for us, but we're still a bit enslaved to the convenience of flipping out the ole plastic.

2/27/2006 9:23 AM  

Anonymous Kim C said...

Just to clarify, we don't use debit cards to keep from *over* spending (in the past we nearly always paid off our credit cards each month). It's to cut down on unnecessary spending. We don't want to spend everything we've got every month just because we can. We want to stop and think about each purchase before we make it, and this habit is more strongly cultivated when you know you're paying for it right this instant.

2/27/2006 9:31 AM  

Anonymous Mark Askey said...

Here is why:

Replace the word debit with Check. It isn't a debit card to most people, its a Check Card. It allows us to quickly pay for a sale without pulling that stupid checkbook out. I have not written a check in years.

And all those miles and cash rebates? It isn't worth my time to pull out a credit card so I might be able to get an extra $20 this month on cash rebates or a few more miles on an plane ticket I will probably not have the time to use anytime soon. And don't forget the time it takes to make sure I get a payment in on time so I dont get charged interest.

The consumer protection and fraud protection are valid points, but most American's probably don't think that it will happen to them.

Not really sure if you can make a comparision on Credit Card to Debit Card use as they are really used in different ways.

2/27/2006 11:13 AM  

Anonymous TM said...

A couple thoughts:
Credit cards benefit banks and cost merchants because of interchange income and processing fees. This makes merchants raise the costs of goods, which in the end hurts consumers as well.

There was an article in the WSJ that said rewards programs actually cost consumers more in the long run because they feel the need to spend more in order to rack up points.

Personally, I prefer debit because I don't like to have any kind of credit card debt.

2/27/2006 12:58 PM  

Anonymous Harold said...

Using a debit card is counter intuitive for one reason: If your debt card is stolen or some product, etc you bought is worthless, YOU are out of money. Any time YOU are out of money it is harder to get it back. If yur credit card is stolen or some product, etc you bought is worthless, AmEx, Citi, etc are out of money. THEY will get THEIR money back.

Also TM, debit cards cost merchants as well. I would guess equally to that of a credit card.

2/27/2006 2:16 PM  

Anonymous Dave said...

I don't use a debit card for another reason. There are quite a few merchants that are charging a fee for paying with a debit card. The typical amount the last time I checked on it was $1. I don't care who that fee is going to; I'm not going to pay a higher price to use a debit card than I would have paid with any other payment method.

2/27/2006 2:37 PM  

Anonymous Ginny said...

Debit cards are great for folks who got in trouble with overusing credit cards. As others have said, they make me think about what I'm spending. A debit card with a credit card logo can be used as a credit card to avoid debit card fees but the money still comes out of the checking account. Some credit cards are eliminating the float and begin charging interest immediately if you are running a balance.

3/19/2006 9:52 AM  

Anonymous Activemind said...

well this is something I have also wondered for a long time. I have talked to a couple of my friends and they gave *some* reasons but somehow I am never convinced. I exclusively use my credit card for ALL my purchases even for the ones below a dollar. But yeah, I ALWAYS pay off the entire amount at the end of the month. I also like that I have all my transactions at one place rather than some on the checking account and some on the credit card and does not clutter up my bank statement and makes my balancing easier but thats just me. But yeah, its nice to know that I am not the only one who does not see a point of debit cards, if you are responsible with money then I would say, go for the credit cards but in the end whatever rocks your boat :-)

3/29/2006 10:21 PM  

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