Used right, debit cards can save money
|By Greg McBride
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
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is made and when the money is actually withdrawn from the account.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
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.