The Benefits of Debit Cards

As some of you may have noticed, Visa has recently become a sponsor of Free Money Finance. Specifically, Visa debit cards are the sub-segment of Visa that is sponsoring this blog. I've never really used debit cards (preferring to use cash back credit cards), so I was excited to ask a Visa rep a few questions about debit cards. Here's the mini-interview:

What are benefits of debit cards versus cash or check?

Consumers are increasingly using their debit cards for everyday purchases instead of cash and checks, because they’re convenient, easy to use, can be an effective budgeting tool, and provide benefits that cash and checks don’t offer:

• Money Management and Control. Debit transactions are deducted directly from a checking account and recorded in one place on a monthly statement.  This allows cardholders to easily track where every penny is going and better spend within their means. 

• Security. Debit cards offer better protections than cash or checks, and Zero Liability  means consumers pay nothing for fraudulent purchases.

• Acceptance. Debit cards can be used at millions of locations worldwide, and can be used over the phone and on the Internet.

• Convenience. Debit card transactions are quick and simple, getting you out of the store faster; automatic bill pay via debit eliminates worries about missed payments.

• Rewards. More debit cards are also offering rewards so purchases earn points toward travel, merchandise or even cash. 

My response: Ok, I agree that debit cards are probably a better option than cash or check, but are they better than credit cards? Not sure yet (see a bit below.)

Where do you get a debit card (does it have to be from your bank)?

Yes, debit cards are generally issued by a financial institution at which you have funds on deposit.

My response: I thought this was the case, but I wasn't sure. Told you I never used debit cards. ;-)
 
Are there rewards debit cards? If so, what are some of the more popular options?

About 85 percent of U.S. households participate in at least one rewards program.  Increasingly, consumers are looking for rewards and value for the transactions they make every day, like paying bills, buying groceries, or filling up their gas tank.  As consumers turn to debit cards for these types of purchases – instead of cash and checks – more financial institutions are introducing debit rewards programs.  

Often, issuers will pair up with a partner like an airline or hotel to give you the ability to earn points on a debit card toward rewards you care about. Some financial institutions also offer the ability to earn points for qualified purchases that can be redeemed through an online catalog, for items like gift cards, airline vouchers and hotel accommodations.  

Many financial institutions also reward their debit cardholders for other relationships they have with the institution – like a car loan, savings account, mortgage, etc. – giving those customers the ability to earn additional points or other benefits.  

It’s important to understand how you can earn points toward rewards – what purchases qualify, whether you earn points when you enter a PIN or sign for your purchases, etc. Make sure you ask these questions of your financial institution, as policies may vary. 

My response: From this answer, it seems to me that rewards programs with debit cards are just emerging and aren't up to the level of those for credit cards. Am I right? Does anyone know for sure?

Overall, I think that debit cards are best for people who 1) are working their way out of debt and need the convenience of a card without the "credit" aspect and 2) those who don't want credit/debt "on principle" and prefer to pay with "cash" (through a card.)

Do you agree or disagree with me?

Comments

[rwh]

I agree with you. I like to pay cash and be done with it. I have a debit card through my credit union and love it because I can bank on line and check my balance at any time. Also, my checking account currently pays 4.75%. I've received about $1000 in dividends so far this year.

But I also like reward credit cards and was recently approved for the Schwab card I first heard about through your blog. Thanks! I have not yet received the card but I will get 2% cash back on all purchases. There are no limits. The money has to be linked to a Schwab brokerage account that only pays 0.15% on cash, but I put about 15k/year on my credit card, so I'm expecting to earn $300 in cash back rewards this next year.

I prefer to pay cash, but for 2% back I'll make as many routine purchases as possible with my credit card and keep the money sitting in my 4.75% checking account a little longer each month.

[Kevin M]

I get something like 0.1% rewards with my debit card, so I never use it - except at Sam's because for some stupid reason they don't accept Visa. My Chase Freedom Signature is my go-to card, earning me over $500 this year.

[Claire]

I totally agree on the Schwab card and am excited to start using mine (I just got it in the mail). It's also great that it automatically gives you the payment into your CS account.

As for rewards for debit cards...I think the answer is to do a rewards checking. I signed up through Charter Bank for their 6.1% APR interest rewards checking account (so I would be using debit cards but making interest). It is - so far - quite amazing and I now heartily recommend Charter as opposed to the dozens of others I looked at. The customer service is far superior to anything else I have seen at banks of late, and although you *cannot* call on weekends due to the bank's small size, they are excellent at responding promptly to emails, etc.

More info on why I chose Charter and their requirements here. If you do want to do Charter, you should do so before February, when their APR will drop to 5.1% for new accounts.

[her every cent counts]

Hey thanks for this post, and congrats on the sponsorship from Visa!

I used to be a big fan of debit cards because I was too scared to let myself get into credit card debt. But then I found that if I pay off my monthly balances, I can get better rewards by using my Chase cash back credit card. I still keep my debit card around, though, as it's always good to have when I need easy access to cash near home or anywhere around the world.

[Greg]

There are a few reasons to use your debit card instead of your credit card, mostly because you are in a bad financial situation to begin with:

1) If you are a credit card revolver at 12%, you pay 1% interest per month on a new purchase and you'd earn roughly 1% of rewards during that month as well. So, if you revolve for more than a month, the interest charges outweigh the rewards benefit. Then, it makes sense to use your debit card and use your monthly leftovers and savings to pay down your debt.

2) If using a credit card makes you spend more than you normally would if you used a debit card instead, and you have an interest in keeping more of your money, then you should consider using a debit card.

3) You are spending money at a family-owned store or with a merchant you really care about. They will save money if you use a debit card instead of a credit card (but then you should just give them cash...)

However, if you pay your credit card in full each month and you are disciplined with your spending and savings, there are many more good reasons to use your credit card instead of your debit card:

1) The rewards you get using a credit card are greater because the interchange the issuer collects from the merchant is greater.

2) You will earn interest on the money in the bank you will eventually use to pay your credit card while your purchases sit on your non-revolving credit card balance.

3) Unless your credit line is maxed, transaction disputes won't affect your purchasing power. With a debit card, you will not have access to your money until your dispute is resolved. Most credit and debit cards offer zero liability protection though, so you are safe, but debit fraud is far more problematic for you.

4) Many debit cards have daily limits, so if you are really racking up points and purchases, you might run into situations where a bill or purchase does not go through because you've reached your limit for the day.

5) In the event of bad financial times you can always default on a credit card, but you can never get the money back that you've spent with your debit card.

[Frank]

I will use a debit card again once they decide to afford me the same chargeback privileges as a credit card..

[Todd]

One huge issue and why I do not use debit cards is the problem if your account number is stolen. Sure it can happen with a credit card but the threat to your debit card is greater. They can empty your checking account. Then, for the 24-36 hours it takes to get this cleared up, YOU HAVE NO MONEY. If you have a recurring bill, big problems. But I would think the simply having no money for a window of time warrants not using debit cards. If your credit card is stolen, you are not responsible and you have no actual cash loss.

I don't even carry my debit card anymore. It is not worth the risk. Give my my Amex Blue and my airline Visa and I am a happy camper. I pay it off every month so there is no interest to use it and I get great rewards plus no risk. Credit cards vs. Debit...CC FTW.

[sturat]

Woo... Lots of benefits. I'm thinking to get credit card as soon as possible. :)

[Mary]

My bank debit card gives me the option of using it as a credit card or as a debit card. I use my bank debit card all the time as a credit card. The difference is by choosing credit I save the .50 pin fee on every transaction. My husband and I have no outstanding debt. I like the convenience of using a card for the grocery store, the gas station and other needs. I don't like paying an additional .50 for every transaction as this could quickly add up. I don't have to carry a lot of cash and I don't have to write checks. Choosing to use the card as credit instead of debit takes 2-3 days to clear the bank instead of right away but I much prefer this for budgeting purposes since it can take up to a month to receive a credit card bill. Stores do make it a bit difficult to choose credit over debit. With debit you enter your pin number. For credit, you have to push the credit button and it depends on the machine what the next steps are. Usually you then hit clear or cancel for it to process as a credit, then either sign on the credit card processing pad or a paper printout.

[Kelly]

We always use debit cards.
We get 1% cashback on all purchases which is deposited in our savings account.
Like Mary above we use it as a credit card, never a debit card.
My account number was stolen once and while it did overdraw our account, Visa was fantastic. They put a hold on my account after only $200 in small purchases were made, when the thieves went to spend $650 in a Walmart in California they flagged the account and declined the card.
They refunded every penny of the fees incurred and the $200 within 24 hours.

[Susan]

I love my Visa card from my credit union. I only use it as a credit card and it keeps me from spending as much as I would with cash. Don't ask me why that is, but apparently I am not disciplined enough with greenbacks. I don't get rewards of any kind, just the one that warms my heart as I reduce my debt considerably and stay solvent. Merry Christmas to All.

[Paul]

Debit cards are definitely better for your budget than credit cards. But I think cash is even better. Plastic tempts you to buy things more frequently... things you might think twice about buying if you have to use cash that is dwindling in your wallet.

[Kevin M]

Greg - it only helps the mom & pop store when using debit if you enter your pin. Simply swiping the debit card is no different than using a credit card. But you're right...in this case cash would be best.

[Miss J]

Debit cards are not better for people who are having trouble managing their money. If theirs happens to be one of the banks the allows overdrafts for the "convenience" of the customer, then if they make a mistake in subtraction they will get hit with a $30.00 overdraft fee for every purchase they make. While a credit card might have one overlimit fee for the month, the bank overdraft fees accrue with every purchase, and three $10.00 purchases could ring up $90.00 in overdrafts. I had a friend who wound up with over $400 in overdraft fees in the period of a week before she realized her mistake. The bank refused to decline purchases at the point of sale. So beware, if you have trouble managing money in the first place. Find out your banks policy.

[Marcus]

First, great post.. I am a huge user of debit cards, I rarely have cash nor do I need it. However, I would of liked to see some of the negative of debit cards touched on. One problem that I have ran into (I'm NOT disciplined at all, but I am working on it, hence reading this blog) is when using the debit card you have no visible gauge on how much money you have like you do with cash.. "Hmmm wallet empty, no cash left." I was the "check your account every day" guy. I found out this also has its problems.. Places such as restaurants and gas stations don't submit your transaction instantly like some stores. They swipe it for approval then submit it later, sometimes days later... Well I would forget about the transaction, and it would cause overdrafts. I know i am breaking all the personal finance rules so please spare the harsh advice, im just trying to point out one downside to debit cards. My New Years resolution is to deploy the envelope method... Merry Chirstmas all.

[Greg]

Lots of feedback! I forgot to list the chargeback privileges the credit card gives you over the debit card (ty, Frank). One person described saving $0.50 by using PIN debit - technically a merchant isn't allowed to charge you for a credit transaction, so you wouldn't even have this issue if you used a credit card. Another good point – if you are living paycheck-to-paycheck and are trying to pay down your debt, using your debit card can lead to overdraft fees, which can be VERY expensive - $39 for a $5 Starbucks Latte. And Kevin, read below - the PIN debit is the best for the merchant but signature debit is still better (for the merchant) than credit.

The merchant pays the least interchange when you use your PIN debit. If you sign for your debit purchase (or use it online), they pay a higher interchange. If you use your credit card, they pay the highest interchange. And even then, they pay different interchange rates for different credit cards - rewards cards charge the highest interchange of all. This translates into higher rewards for you, because the issuer gives you back some of this interchange in the form of rewards. That's why using your combined debit/credit card probably doesn't give you any rewards when you use your PIN, gives you some rewards (if you have them) when you sign your debit purchase, and gives the most rewards when you use it as a credit card. It is also why merchants hate MasterCard and Visa, for that matter, and why they try to "steer" you to use your PIN debit - sometimes you don't even notice, but try going to Walmart and signing for your debit purchase, it's not easy!

Also, your bank (not Visa or MasterCard - they are just the payment processing network) may be quick to resolve fraud/disputes, but you still have to wait for them to do so before accessing your money - plus, it relies on you to actually notice the fraud right away! With a credit card, you might see it months after the incident and the issuer will take care of you.

Again, if you manage your finances from a purely rational perspective and have self-discipline to spend what you have to (or want to, if you have enough money), there is really no reason to use debit.

[Frank]

NP Greg, I have been burned once before and vowed to use credit cards for all major purchases where a chargeback could potentially be useful.

I also use credit cards to float my money. Like cost averaging :p
If I get paid in a week, rather than have my bank account dip down then back up... I wait til I get paid and have it go up, and then dip down for a net up.

Mostly psychological... but if something serious happened I guess it would be beneficial to me to do this. :)