Debit cards have become increasingly popular. People now spend more on debit cards than they do on credit cards. When you compare debit cards to cash or checks, then the benefits are obvious. For those of us who remember writing checks at the grocery store, or searching for exact change, then we know why we love debit cards. Gone are the days of balancing checkbooks (did that check clear or not?). Gone are the days of going to the bank to get cash, and then going to the store. Debit cards made things instant and easy.
But, when you compare debit cards to credit cards, the case becomes far less convincing. Here are 5 reasons why you should reconsider your debit card habit:
- Temporary authorizations: an excuse for someone else to hold onto your cash. When you book a hotel, open a bar tab or go to the gas station – the merchant may put a temporary authorization on your account. They do that to protect themselves against the risk that you don’t have enough money to pay. For example, if you give your card to a bartender – they may put a $100 temporary authorization (block) on your card. At the end of the night, they will then charge you for your drinks, and release the temporary block. But, it can take a few days for that block to go away. That is your cash! You now won’t be able to access that cash for a few days. With hotels, the numbers are even larger.
- Debit cards don’t have a lot of the benefits that credit cards offer. For example, many credit cards offer car rental insurance. Good luck finding that with a debit card.
- You do have fraud protection – but it will be very painful. If someone steals your credit card and makes unauthorized charges, they are using your credit line. If they steal your debit card – they are using your cash! Sometimes the appeal process can work very well (the bank credits your account immediately, and you win). But, it can go wrong and take a lot of time. Do you want your cash being held by fraudsters? And fraudsters don’t tend to steal small amounts.
- You give up the opportunity to have free money for a month. When you use a credit card, you are given a month to pay, without any interest accruing. You are – in effect – being given an interest-free loan. When you use a debit card, the money is gone immediately.
- You give up the opportunity to earn rewards. Credit cards give you the opportunity to earn very rich rewards that could be worth thousands of dollars a year. From cashback to free flights, credit cards can really pay off.
So, why are debit card rewards and benefits so few and far between? There is actually an easy explanation: regulation. With recent regulation, merchants pay banks a lot less for debit card transactions than they do for credit card usage. As New York Times article reveals, merchants only pay approximately 20 cents per transaction. For credit cards, they pay approximately 2% of every transaction. So, on a $500 purchase at Target – the bank would get $0.20 for a debit card transaction, or $10 for a credit card transaction. The reason banks give away more benefits on credit cards is because they can afford to do it.
But how much could that mean for you? One of the most popular ways to use credit cards is to earn frequent flier miles. To understand just how much you could get every year, look at calculator for a United Credit Card. Input how much you spend every month, and you will see how much you get back. In most cases, it is over $1,000 per year.
With a credit card, you can:
- Earn over $1,000 per year in rewards
- Receive benefits like rental car insurance
- Receive an interest-free 30 day loan on every purchase you make
- Receive real fraud protection – that ensures banks don’t hold your cash while they investigate
So, why do people still use debit cards over credit cards? There are a few reasons:
- They don’t understand how good the deal is with credit cards. Hopefully this article has helped.
- They don’t trust themselves with credit cards (will just max out their card and go into debt). We can’t help you with self-discipline, but there are plenty of tools available to help you avoid a debt trap. From text and email alerts, to calling the credit card company and asking for a credit limit decrease – you can find ways to make sure you don’t spend more than you should.
- They don’t trust the credit card companies. This lack of trust is well earned. But, with the Card Act, some of the worst practices (risk-based re-pricing, double-cycle billing and others) have been eliminated. For example, almost all issuers have completely removed the over-limit fee.
The credit card is still a great product, which offers incredible benefits when used properly. If you only spend what you can afford, and pay off the balance every month – you will be much better off with credit cards. Leave those debit cards at home!