It’s a passionate debate in the personal finance world as to which type of card people are better served carrying.
I’m of the mind that both can be used responsibly to assist people with their money management and achieve their financial goals. The key word in that last sentence though was “responsibly” and of these two options, credit cards are by far the tool with the most potential for spending abuse.
I was one of those who succumbed to that potential for abuse. Consequently, my wife and I closed all our credit card accounts years ago and moved strictly to cash and debit cards. That little decision did more to change our spending habits and boost our success with money than anything else.
Advantages of a Debit Card
Banks and other financial institutions issue debit cards as a way for customers to access their accounts to pay for goods and services. The card is linked to your account at the bank. When it is swiped at the checkout counter, the amount of the transaction is withdrawn from your account to pay the merchant.
Boom! The transaction immediately shows up in your account and begins the process of being settled (or cleared). No going into debt for a purchase. No waiting for the transaction to be billed on a credit card statement. No guessing during the month about how much you have or haven’t spent. It’s all recorded in your bank register which you can easily see with access to online banking.
This immediacy of transaction forced me to monitor my accounts in real time – day after day. Much like a restrictor plate limits the power of a race car and thus how fast it can go, so a debit card limited the speed at which I spent money. It forced me to slow down and pay attention to how much money was in my bank account. In essence, the debit card limited the potential damage I could do to myself.
For me, this is one of the biggest advantages of a debit card
As I slowed down my spending and paid more attention to our bank account, discipline was developing in my life. The bad habits of spur-of-the-moment and excess spending were gradually being replaced by delayed gratification and frugality.
As these character qualities became more and more pronounced, I noticed two other noticeable changes occurring:
1) We began to stay within our budget every month and…
2) We began to save more.
Both of these changes were huge revelations for me. On account of my spending, our budgets had never worked before and we had saved very little month to month. In that respect, it was as though our decision to switch to a debit card had given us a raise. That’s what it felt like.
To summarize my thoughts, the three advantages of a debit card:
1) the immediacy of the transaction creates discipline as it demands I focus on the bank account,
2) there is a better chance of staying within the limits of the monthly budget and
3) more savings are created as spending is reduced.
A Word About Security
There is a great deal of confusion about the security surrounding a debit card. Many feel they do not offer as much protection to the consumer as a credit card. I heard all of these reports before we signed up for ours, so I did my own research at Visa’s website. Here is what I found and how we protect ourselves.
When we swipe our card at checkout, the screen presents two options to select – debit or credit. If you select the debit option, you must supply a PIN number given to you by the financial institution. This is where the risk comes in. If someone knows your card number AND your PIN, they could gain access to your bank account.
So instead of choosing debit, we select the credit option. Even though you select the credit option, the card still functions like a debit card in that it immediately records the transaction to your bank account. At that point a ticket is printed that you must sign to complete the transaction. That’s when the protection kicks in.
When we sign for a purchase we are protected under Visa’s Zero Liability Policy. It protects us from unauthorized charges and returns any funds that are fraudulently taken from our account. All these policies are documented at Visa’s website.
So for enhanced security, I never use my PIN when making a purchase. In fact, I don’t even know it.
Is a Debit Card Right For You?
I could throw down here with a bunch of “should-have” or “must-have-a-debit-card” statements. I’m not going to do that even though I know it’s the only type of spending card I’ll ever own. The answer to the question really boils down to what you value as a consumer.
If you value spending beyond your means, then don’t get a debit card. You will kill yourself with account overdraft fees. Those penalties come when you try to spend money on your debit card that’s not in your account.
If you value cash in your pocket and plan on going to an ATM three or four times a week to make a withdraw from your account, then don’t get a debit card (even though many would list this flexibility to access cash as a positive for debit cards). In the end, you will be feeing yourself to death at the ATM machine with so many cash withdrawals. (Yes, most ATMs charge fees to access cash.)
If you value building reward points for travel then debit cards are not for you. Debit cards typically don’t offer those programs like credit cards do.
If you value building your credit score for future loans then don’t use a debit card. Debit cards don’t help you build credit – that only comes through the paying off of credit card and other debt. Building credit is not especially valuable to me because I’m almost completely debt free and won’t be taking out personal loans for any purchases in the future.
If you are having trouble controlling your spending and want to create some discipline in your life, debit cards (or cash) are the way to go. You will find it easier to spend less and save more.
And that’s going to feel like a really good raise.
Questions: Why have you chosen to use either a debit or credit card? What other advantages of a debit card can you think of? Have credit cards hurt or helped you manage money? Do you know of any debit card reward programs?…I’d love to hear one.
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