The Lure of Debit Cards

There are two types of plastic in the world today – credit cards and debit cards.  Most financial gurus would say that debit cards are better than credit cards:  while credit cards increase one’s debt liability, debit cards use money you already have, coming straight out of your checking out. 

The advent of debit cards certainly has made life easier.  It fits in with the instantaneous, I’ve-got-a-million-things-to-do-so-hurry-up philosophy of our society.  Check-outs go faster since people no longer have to spend 60 to 90 extra seconds writing checks after their purchase is totaled.  You’d be amazed how much time that saves over the course of a day in the grocery store.  Most of the time, you don’t have to sign a slip of paper to finish the transaction; you merely enter your PIN – and you can do that before the total is rung up.  You don’t even have to do any of that at the fast food drive-through.

The Hidden Cost

But is a debit card really better than a credit card?  Studies have shown that we spend more when using a credit card.  You’d think that using a debit card would alleviate this problem, since you know that you’re using your own money to make the purchase.  This isn’t true.  Some smart college students I know have figured out they do indeed spend more using a debit card, and now use cash for most purchases.

Think about it.  If you use cash, you are physically limited to spending only up to the amount of cash you have on hand.  Cashiers are reluctant to take less than the amount of the bill, darn them.  If you don’t have enough cash to cover the entire purchase, you have to put something back.  Unlike as portrayed in a certain old movie, the guy behind you probably doesn’t want to cover your shortfall.

In contrast, debit cards usually have an over-the-limit feature, which is tied to a savings account or a credit card.  Which means if you don’t have enough money in your checking account, the purchase amount is still covered because the bank can use money from your savings or credit card to fulfill the purchase amount.  They offer this “benefit” for fee, of course, for each such transaction; hence you’re using more of your own money.

And let’s be honest.  Remember how you subtracted each purchase from your checkbook balance at the point of sale?  (Well, at least you conscientious types did, taking an extra 30 seconds or more.)  With debit cards, you don’t really keep a running balance in front of your face, do you?  This makes it hard to keep track of how much you’re really spending.  Likewise, when was the last time you did a monthly reconciliation of your account?  Yeah, I thought so.

Six of One, Half Dozen of the Other

Debit cards have changed the type of fraud we see.  With checks, the fraud was check kiting.  This was where retail establishments unknowingly took checks written on accounts with insufficient funds.  Some people did this deliberately.  A thief could also steal checks and forge signatures; some even went so far as to print false checks.

If your wallet is stolen, the thief is limited to spending to the amount of cash on hand.  With a debit card (like a credit card or check), the thief can run up untold amounts before you can call the financial institution to report the loss.  I’ll admit to one benefit of debit cards over cash – in theft situations, some financial institutions will limit your loss to a certain amount (generally relatively small), bearing the burden for the rest of it.  You’re out of luck with stolen cash.

Another benefit is the ability to make online purchases; at least with a debit card, you aren’t increasing you debt load as with a credit card.

So Which is Better?

Am I advocating avoiding debit cards altogether?  Not necessarily.  In some cases, debit cards are necessary – such as for online purchases, as mentioned above, or when buying food on an airplane (now that is aggravating, isn’t it?).  For day to day budgeting, however, cash is king.  If money is tight, it is easier to stay within your $300 wardrobe budget if you only take that amount of cash to the department store.

It is best to use cash when possible. Obviously, you’d most often use your debit card at the ATM, of course, to get this cash.  If/when you do use debit cards for other purchases, the key is to use them prudently.  Total up your debit receipts each day – even tie them to budget accounts – to keep track of how much you’re really spending.  This enables you more quickly realize if you’re going over budget in a certain area, and to adjust your spending accordingly.  Be sure to tie your cash purchases to these budget accounts, too, for an accurate picture of your spending habits.

All in all, debit card are a necessary evil.  It behooves you to use them with caution.