Annual debit card spending (in 2009) exceeded credit card spending for the first time in history. I know that we have been consistently moving towards a pay by plastic society, away from paper cash and checks, but was under the impression most of these moves were on credit cards.
I’d like to think the increase in debit card spending is triggered by an active effort to be more financially responsible. I know that last year I tried to start using my debit card, which is a big step for me (I’m very attached to my rewards credit card).
It turns out that consumers were given some help by banks which chose to massively reassess credit limits. Unused portions of credit lines were reduced, and some cards were just closed due to inactivity. Some consumers had no option other than to increase debit card spending.
The glitz and glamour of credit cards is now gone. Even the commercials for credit cards have decreased, and the glamour is focused on the rewards these cards provide. I know I enjoy those Chase Sapphire commercials. From what I remember, one is focused on what the points can be used to buy, and the other is about the excellent customer service Chase provides to its Sapphire cardholders.
After the CARD Act (Card Accountability, Responsibility, and Disclosure Act) was put into effective in February of this year, many of the banks are now charging annual fees to card holders, especially ones that do not carry a balance, because the bank misses out on interest and finance charges. In the move to using debit cards by choice or to avoid credit card fees, there are a couple debit card risks to look out for:
Risk of Closing a Credit Card
No matter what interest rates the credit card companies want to charge, or what they did with the rewards program, don’t close that credit card. We discussed how closing credit cards negatively impacts the Debt to Credit Ratio and your Credit Score as a whole. Moving to a debit card for everyday spending does not have to be a one for one swap with closing a credit card. Leaving a credit card open ensures it is still an option in the future. The only time I would advise against leaving the card open, is when an annual fee is charged on the card.
Some merchants will freeze funds on a card (debit or credit) until a transaction is completed. This is not a big deal at restaurants when they freeze an extra 20% of the bill on a card to ensure there are enough available funds for tip. This particular transaction is complete minutes after initiation. Its a different story when a card is used at a car rental agency or at a hotel. For example, if on a one week vacation, hotel and car rental are both paid for using a debit card, both companies will freeze more than the cost of the one week rental to cover incidentals. The additional frozen amount can be more than double what you may actually pay, and the impact is that these funds will not be available during the vacation, since the transaction will not be complete until the end of the trip. So when on vacation, consider carefully what type of card is used to pay for major expenses.
There are some quirks related to liability coverage on debit card transactions according to whether they are signed for or a PIN is used. Each card maker can have individual rules when it comes to liability coverage for debit card transactions, with only the requirement of providing provisional credit within 5 days of initiating an investigation. If anything were to happen to a debit card, all of the funds linked to it can be tied up for who know how long. At least with a credit card, the liability coverage is usually 100% and its not checking account funds that are tied up.
This doesn’t discount that a debit card is usually tied to a checking account and overdrafts can occur. Overdraft fees average about $34 per occurance, and these can add up over time.
These are ideas to think about when considering how to pay for transactions using plastic. Please add a comment if there is another debit card risk that we should be made aware about.