The Rise of Debit Cards

June 28, 2009 by  
Filed under Debt and Credit

Can this be the U.S.? Visa is reporting that in 2008, American consumers spent more using debit cards than they did with credit cards.

Mr. ToughMoneyLove is pleasantly surprised. Shocked might be a better word.

My hope is that this development arises from a different consumer mindset, that credit-based spending is bad for your personal economy. The likely reality is that it’s a combination of financial maturity and tightening of credit standards by credit card issuers. Consumers are maxed out and can’t get any more credit, so they are forced into the debit card zone to do their shopping with plastic.

The credit card fans are likely aghast at this news. These poor debit card users are missing out on the rewards, the extended warranties, blah blah blah. A lot of good those rewards and extended warranties did when the recession caused layoffs and other financial crises for those carrying balances on their cards.

Fraud protection is another feature used to promote the use of credit cards. The article I linked to mentions that specifically. I don’t think that argument carries the day.

By law, credit card holders are limited to $50 liability for unauthorized transactions. That law doesn’t apply in the same way to debit cards. It can be harder, the credit card advocates say, to get your money back.

That’s not true, if you pick the right bank. Many banks provide the same or better fraud protection to users of their debit cards. I have had experience with that myself. Our bank allows their debit card customers to dispute transactions in the same way that credit card users can.

Some folks are concerned about using debit cards for online transactions because in the case of a stolen account number, an entire bank account can be wiped out. First, don’t do business with a bank that would permit this to happen to your account without recourse. Second, if you are really nervous about this, use a firewall account for your online transactions. Open a debit card account at your bank that is different from your primary account. Make it easy to transfer money into that account. When you want to make an online transaction, transfer enough money into that account to cover the transaction. Very simple.

Is that more complicated than using a credit card? Perhaps a little. But look at it this way. You won’t be sending a credit card payment later and you will know where you stand financially at all times, in real time. There is one more significant benefit from adding a little complexity to an online spending transaction. While you are considering that extra step, you might decide not to spend the money at all.

Have any of you decreased credit card usage in favor of debit cards?

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3 Responses to “The Rise of Debit Cards”
  1. kitty says:

    The main difference between the debit cards and credit cards in terms of fraud protection is that regardless of how good your bank is, the moment you (or someone else) swipes the card, the money is taken from your account. By the time you notice – even if you call often to check your balance – your account may be wiped out and a bunch of good checks will bounce. Sure, you can get the money back – after the investigation, and you may even get your overdraft fees back, but then you’ll have to call all the people whose check bounced and get them to waive the fees as well.
    With credit cards, you have a chance to notice the fraud before any money left your bank account. Even if you use automatic payment of the full balance, you still see the bill before the money is taken. While the fraud is investigated, the money itself is “in limbo”, and you still have all the money on your account.

    Additionally, with credit cards you can dispute the charge if the merchant failed to deliver, for example. Can you do this with debit cards? Maybe, but you are still doing it after the fact.

    Really, I don’t see any advantage for debit cards at all. Maybe for shop-aholics. Still, one can always use this very convenient feature of credit cards for automatic payment of the full balance. Psychologically, I fail to see any difference between debit cards and credit cards with automatic payment: in both cases you know the money will be taken from your bank account. The only difference is this moment vs end of the month.

  2. avery says:

    I used my debit card exclusively for smoe years (1999 – 2005), because I cut up my credit cards upon realizing I was living to service debt – I felt like a tame sheep working to grow wool that was regularly sheared. Debit only worked fine, no problems at all. Once I knew my habits were solid, my vigilance and zeal slipped and I signed up for a credit card to get an extra discount at an end of season sale when I was buying clothes for a new job. Then I signed up for another one when it gave me a deal on getting an xbox. Then another at Target. But as it turns out I never used, or even signed, the cards I acquired from the xbox transaction or from Target and the issuers eventually closed the accounts. Eventually I closed the clothing store visa and switched to a visa from my credit union where I can easily log on to transfer $ from checking to pay off the visa.
    Maybe I’m atypical in that I acted on what I learned from sensible personal finance types, but in a lot of ways I’m typical. Maybe the Suze Ormans and Dave Ramseys and popular types like that are having an impact on behavior.

  3. AC says:

    >Some folks are concerned about using debit cards for
    >online transactions because in the case of a stolen
    >account number, an entire bank account can be wiped out.

    Some banks allow you to generate alias numbers for your account (or credit card) that can only be used for a certain number of transactions or for transactions with a specific merchant. This eliminates the need for (and hassle of maintaining) a separate account.

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