Why Debit Cards Are Better Than Credit Cards
Yesterday a couple of credit card related articles showed up on Get Rich Slowly. One article was by JD himself and had a few people surprised, the other by a guest. Both articles have caused quite a bit of conversation in the comments.
As my readers know, I hate credit cards and am a strong advocate of debit cards. It seems a number of people agree with me as a recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60% of consumers prefer using debit cards to credit cards as a payment vehicle, because using debit cards feels more like “real money.” Debit cards are also gaining in popularity for online purchases as well. Based on data from JupiterResearch in American Banker, debit cards will account for 46% of all online purchases by 2010, compared to 41% in 2006. The same data forecasts a decline in credit card use to 35% of all online purchases in 2010 from 41% in 2006.
You are spending your money
A debit card is directly linked to your bank account. It works very much like paying cash or like writing a check. If you want to buy something for $100, you have to have $100 in your account. When you swipe your debit card and enter your PIN to purchase something, the money is electronically deducted from your account. Depending on your bank, the transaction may or may not show up immediately, however the funds will be immediately “held” and that hold will be reflected in your available balance.
I bank with Wachovia and have found that 90% of my transactions show up in my online checking account register within a few minutes of making a purchase. The remaining 9% show up in under the “Check Card Holds” link. Very few if any don’t show up the same day.
You aren’t getting a loan every time you buy something
Let’s be honest here, when you get approved for a credit card, you are being given a card that gives you access to a line of credit, a loan. Each time you use your credit card, you are borrowing (Proverbs 22:7) money from the credit card company. Granted, if you pay off the balance in time, you don’t get charged interest but you are still borrowing money.
They are more secure
How many times have you purchased an item with a credit card, signed your receipt and the merchant never verified the signature or checked your ID? I cannot count the number of times this has happened to me. How did they know I was really the card holder? They didn’t. With a debit card, your PIN is required. To be fair, a debit card transaction can still be run as a credit card transaction and require a signature, but I have seen more and more merchants detecting the type of card you are using and automatically defaulting to a debit transaction if you are using a debit card. I think this trend will continue. Merchants prefer PIN based transactions, as it reduces their risk and costs them less in service fees.
Here are some common myths related to debit cards:
Myth: They don’t provide the same level of protection as a credit card.
Reality: Credit cards are protected by the The Fair Credit Billing Act and debit cards are not. Policies instituted by banks
do* can give you the same* similar levels of protection. While not law, I don’t expect these policies to change given the number of people migrating to debit card use. For those of you that may not know, The Fair Credit Billing Act basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise, or for merchandise that was never delivered.
Also, debit card transactions can be disputed just like credit card transactions. In my past experience with this, I always received an immediate credit to my checking account for the amount in dispute.
Myth: Debit cards don’t provide rewards
Don’t ever forget, credit card companies are in business to make money. They want you to screw up, they want you to pay only a portion of your balance, they even want you to pay your payment late or go over your credit limit. When you do these things they make money through interest, fees and even by increasing your interest rate. They won’t forgive and won’t let it slide. This is the whole reason they gave you those rewards in the first place, in hopes you would screw up.
The credit card proponents will say, “so don’t screw up”. Well, we are human, that happens once in a while. Plus, you have a whole company of people working to find ways to increase your chances of screwing up.
Life is stressful enough without adding the worries associated with a credit card. Buy things with your money from your account and don’t be servant to the lender (Proverbs 22:7) even for 30 days just to get a “free” toaster or some “cash back”. Nothing in this world is free, don’t let the credit card companies make you think otherwise.
* Since writing this article, I have changed the content based on a really good and informative discussion in the comments below. At the time of writing, I incorrectly assumed that all banks had similar policies on providing credit card “like” protection. Thanks to the information provided by a few readers, it would seem this isn’t the case. It was never my intent to misinform my readers and hopefully this will clarify the article. Thanks in particular to Justin and MITBeta for being diligent and patient while we worked through this discussion and for keeping me accurate and honest!