What's Behind The Debit Card

By Jean Chatzky

Americans are carrying record amounts of debt--and seem determined to do something about it. Two recent studies from Dove Consulting and the American Bankers Association show that credit cards have been overtaken by debit cards as the plastic of choice. Some 26% of consumers now pay for most purchases with debit cards, which draw money directly and immediately from their checking accounts, while 21% mainly use credit cards and pay some portion of the bill when it arrives.

Why is this happening? Consumers, feeling less flush than they did in recent years, say using a debit card helps them manage their money better. "It doesn't allow them to overspend," says Richard Crone, a Dove vice president. And while writing checks serves the same purpose, it's a much bigger hassle for you--and it's much less profitable for the banks. They make 60[cents] in merchant fees, on average, every time you sign for a debit-card purchase. And they don't face the risk of nonpayment posed by credit-card transactions. That's why they're giving debit the hard sell.

In particular, banks are trying to push debit cards onto those credit-card customers who avoid interest payments by clearing their balances every month--the so-called convenience users. But it's precisely these customers for whom debit cards make the least sense. Why?

--You lose the float. Use a credit card, and you will generally have 20 to 30 days to pay the bill. During that time, the earning power of your money is yours, not the merchant's or the bank's. That cushion also gives you time to return defective merchandise or dispute a transaction before you have to pay for it. Not so with debit cards, though issuers are so eager for consumers to embrace them that they routinely "give the customer the benefit of the doubt on a bad transaction," says George Albright of Speer & Associates, an Atlanta-based consultancy.

--You lose the miles. These days, points or miles collected on a credit card can be used to pay for everything from round-trip plane tickets to college tuition (on Citibank's Upromise card) to your teen's braces (on Diner's Club, which lets you choose a reward once you hit 100,000 points). Chase allows you to earn Continental Airline miles by using your debit card, but at a rate of half a mile per dollar spent--vs. one mile on the typical credit card.

--You lose some security. If your credit cards fall into the wrong hands, you're liable only for the first $50 of expenditures, and many issuers waive that. While the ultimate liability with a debit card is the same, a thief could clean out your checking account before you realize what's happening. (Some 42% of debit cards can be used without a personal identification number, or PIN.) Yes, your bank will give you back the money--Visa requires its issuers to grant you credit within five days, and many do so within 24 hours--but it's a much bigger hassle than losing a credit card.

That said, if you are the type of customer who charges one day and regrets it the next, a debit card probably does make sense. Rudy Cavazos, director of corporate relations for moneymanagement.org says there's no doubt that debit cards help keep consumers within their spending limits. "If you use a debit card, you know the money's coming directly from checking," he says. "You know you're not going to accumulate finance charges or fees. If every minimum payment has you feeling like you're spinning your wheels, debit cards are the way to go."

Jean Chatzky is editor at large for MONEY magazine. You can send her an e-mail at moneytalk@moneymail.com