Debit Cards Vs Credit Cards

A common way to prevent your credit card balances from getting any larger is to try to make all your purchases the old fashion way, with cash. An alternative to carry cash around is to use a debit card. When using a debit card you are not borrowing money that you agree to pay back at a later date, you are authorizing the store to immediately deduct the amount of your purchase directly out of your checking account. Banks across the country have been encouraging consumers to use debit cards as an alternative to credit cards promoting the advantages of a debit card over a credit card.

At first look this seems like a reasonable approach to rein in your credit card spending and at the same time eliminate the need to carry large sums of cash around. However, you need to recognize all the negatives of taking this approach before you decide to modify your spending habits in this way.

The first issue is that using a debit card doesn’t supply the same restrictions that using cash does. Remember you are making this decision to help you become more conscious of your spending with the goal of exercising greater control over your debt.

The reasoning behind making your purchases with cash is that you have limited your buying power to the amount of cash you’re carrying. If you don’t have the money, you can’t spend it. Using a debit card doesn’t have this very important restriction. You spending limit is not the amount of cash you are carrying at the time of purchase but the balance in your checking account, as well as any overdraft protection you have on the account.

If you plan on using a debit card you better keep track of the balance in your checking account at all times. The purchase you are making triggers an immediate transfer of money from your checking account into the merchant’s account. If you’re not careful you may find yourself bouncing checks that your recently wrote out as a result of a recent purchase. In reality you are not adding a true level of discipline to your spending habits when you move from a credit to a debit card.

Next there is a security concern when using a debit card. There is a major difference between a debit card purchase and a credit card purchase. In using a credit card a bank is entering into a loan agreement with you for the amount of the purchase. When you sign your name you are agreeing to the terms of the loan being offered. The bank is obligated to confirm that the person using the credit card is actually you. If your credit card is stolen and used by another person, you have little or no liability to pay the bank for that outstanding balance. Your maximum liability on a credit card that was stolen is $50.00 but it’s rare for a lender even to collect that from you. Their ongoing business relationship with you is more valuable to the bank than $50.00.

When using a debit card, an authorization is given by the holder of the card to the store to do an electronic transfer. Proof of this authorization is when the cardholder supplies the “pin”. It’s the cardholder’s responsibility to keep the “pin” private. In the event a thief was to gain access to the “pin” he could clean out your account. You are stuck with the loss.

The government has imposed an important level of responsibility on a lender when it issues a credit card. There is business relationship between the lender and the merchant making both entities responsible to you, the consumer. For example you buy a piece of furniture with your credit card and have it delivered. The furniture is damaged and the store isn’t being responsive in making the repair. Consumer protection laws permit you to dispute the purchase with the credit card company, who then withholds payment to the store until you are satisfied with the repair. Your credit card is credited with the full cost of the transaction and you incur no interest charges while the store addresses your problem. In your fight with the store to correct the problem you have a powerful weapon, being able to withhold payment.

If this same purchase were made with a debit card you would not have this weapon available to you. When making a purchase with a credit card you have a no cost insurance policy guaranteeing your satisfaction. Not something you should give up lightly.

My suggestion is to do the following. Take one credit card and use it for all your purchases. If you currently have an outstanding balance on that card concentrate on paying down the balance on that credit card first. Your goal is to have a credit card with no running balance on it and treat it as a debit card. Make all your purchases on that card during the month and pay off the entire balance when the bill comes in.

The benefits of taking this approach are:

  1. You have one less thing to worry about. Your checking account has one less way to be accessed by a thief.
  2. Should the card be stolen, your losses are minimized.
  3. You have all the consumer protections afforded to you by the government whenever you make a purchase.
  4. You don’t have to be concerned with overdrawing your checking account. All withdrawals are done when you decide to focus on paying your bills at the end of the month not every time you make a purchase.
  5. You have an accounting statement sent to you every month itemizing all your charges. This allows you to easily review your ongoing spending habits each month, making changes going forward as you see fit.
  6. When you pay off the entire outstanding balance on a credit card each month there are no interest charges. The bank that issued the card is giving you an interest free loan every month to cover your purchases during the month. It’s a nice feeling getting something back from a credit card for a change!

By taking this approach you have all the advantages of a debit card with none of the risks. What more can you ask for?

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