Used right, debit cards can save money
By Greg McBride • Bankrate.com

The growth of debit cards has confused some consumers about which is the better brand of plastic -- debit or credit.

All in all, growth in the use of debit cards is a positive development. Each debit card purchase represents a balance that is not being financed on a credit card. Every year, scores of holiday purchases linger on a credit card statement long after the holiday cheer has subsided, generating finance charges throughout the new year, and possibly longer.

With the debt load of many American consumers rising and job losses mounting, the use of debit cards restricts the purchases to those items consumers can pay for right now.

Drop the debt habit with debit
For those carrying a debt load, debit cards are a wise choice. Using a debit card requires some discipline -- some forced and some not. For starters, the money must actually be in the account prior to the purchase.

Second, just as with ATM withdrawals, the consumer must be particularly diligent about noting such purchases in their check registers. Failure to do so will eventually result in a bounced check and trigger the nasty nonsufficient funds (NSF) fee. Bankrate's checking account pricing study pegged the average NSF fee at more than $28. Even one such fee more than negates the finance charges evaded by using debit over credit.

In addition to avoiding finance charges, the consumer is likely to rein in spending by foregoing the "buy now, pay later" attitude. Further, the majority of institutions do not charge for debit card transactions, making this a no-cost way to practice some financial discipline. Such attributes make using debit instead of credit a sensible, and money-saving, alternative.

Convenience users, keep charging
For those without a debt burden, however, debit cards lack allure. Convenience users of credit cards -- those who pay their balances in full each month -- can enjoy up to 40 days of free float. This is the term used to describe the time period between when a purchase is made and when the money is actually withdrawn from the account.

In addition, many cardholders favor the use of a particular card to rack up frequent flier miles or a cash rebate. For this consumer, "buy now, pay later" takes on a whole new meaning and has some tangible advantages. These advantages can be reduced, or outweighed entirely if an annual fee applies to the card. Someone who charges $5,000 per year to the card, earning one mile per dollar spent, will take five years to reach the 25,000 mile plateau and putting them in free ticket territory.

However, if the card carries an annual fee of $50, the "free" ticket actually cost $250. And this assumes the cardholder never a paid a dime of interest.

All cards not protected equally
While consumers enjoy protection from liability due to fraud on both credit card and debit card purchases, the reality can be far more stressful.

With a credit card purchase, the cardholder is not required to pay any amount that may be in dispute. Until the matter is settled, the victim retains use of funds for the amount in question. With a debit card, the protection is like closing the barn door after the horse is already out. After all, if a stolen debit card was used for purchases, the victim often finds out after the fact -- once the money has been withdrawn from the account. Some period of time may elapse before the victim recoups the money.