Last month, a representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. It many ways, I find debit cards to be inferior to credit cards, but Visa claims the cards linked directly to bank accounts have some redeeming qualities. Here are three additional questions I asked Visa and the company’s responses.
What are your thoughts regarding Visa’s “defense” of debit cards?
Question 4: When using debit cards, do consumers generally spend more than they would
with cash?
Response: Debit cards offer a convenient, secure way to access funds that are already available in your checking account – which means you’re spending the money you have. You also get a record of all purchases so you know where the money went.
Paying with a debit card can actually a great way to manage your spending. Just last year we conducted a consumer survey and found that cash expenditures can be harder to keep track of than those on cards. We asked more than 2,000 U.S. adults about their cash spending habits and almost half of respondents admitted they suffered from “mystery spending” or cash they spend but have no idea where it went.
The results also showed that 48 percent of Americans surveyed who use cash say they can’t account for almost one-third of it, spending an average of $120 in a typical week, but losing track of $45. In fact, more than half (59 percent) of respondents who say their mystery spending is out of control feel it would be worse without using a debit card. Among debit cardholders we surveyed, the majority (64 percent) believe their debit card helps keep mystery spending to a minimum and four out of five say a debit card helps them track their spending. This feedback supports that debit cards can definitely be used as a money saving tool.
My comments: Keep in mind that this research cited by Visa compares using debit cards with using cash for payments. Also note that the survey asks about what consumers believe about their spending patterns, were they to opt with cash rather than debit cards, but doesn’t measure actual behavior. Many studies have shown that people spend more with plastic than they do with cash, even if cash expenses are often “mystery.” The company did a good job of not really addressing the issue raised in the question.
In November, I conducted a experiment to compare my spending with a credit card with my cash-only spending. Even though some of my cash transactions were not tracked to the cent, I spent a significant amount less than I did when I was using a credit card. I continued the experiment into December, and although I now I’ve ended the experiment and use my credit card, I am much more conscientious about my excess spending.
Question 5: One popular feature of credit cards is the availability of rewards, such as cash back bonuses, airline miles, etc. I have seen very few similar offers for debit cards. Are issuers interested in offering rewards to debit card customers?
Response: About 85 percent of U.S. households participate in at least one rewards program. Increasingly, consumers are looking for rewards and value for the transactions they make every day, like paying bills, buying groceries, or filling up their gas tank. As consumers turn to debit cards for these types of purchases, instead of cash and checks, more financial institutions are introducing debit rewards programs.
Often, issuers will pair up with a partner like an airline or hotel to give you the ability to earn points on a debit card toward rewards you care about. Some financial institutions also offer the ability to earn points for qualified purchases that can be redeemed through an online catalog, for items like gift cards, airline vouchers and hotel accommodations.
Many financial institutions also reward their debit cardholders for other relationships they have with the institution like a car loan, savings account, mortgage, etc., giving those customers the ability to earn additional points or other benefits.
It’s important to understand how you can earn points toward rewards: what purchases qualify, whether you earn points when you enter a PIN or sign for your purchases, etc. Make sure you ask these questions of your financial
institution, as policies may vary.
My comments: Reward programs are becoming more rare among credit cards, and even more so among debit cards. This is due to the state of the banking industry. I expect that once we definite signs of an economic recovery, and banks are concerned with making huge profits rather than avoiding bankruptcy, we’ll start to see more debit card reward programs. Until then, consider yourself lucky if you have a rewards program that you use to its fullest extent. Remember, banks that offer rewards programs do so to foster loyalty and above average use.
Question 6: To what type of consumer would you recommend debit cards over cash?
Response: Really, debit cards are a great tool for every one with a bank account. Some
of the benefits of debit over cash include:
- Money Management and Control. Debit transactions are deducted directly from a checking account and recorded in one place on a monthly statement. This allows cardholders to easily track where every penny is going and better spend within their means.
- Security. Debit cards offer better protections than cash or checks, and Zero Liability means consumers pay nothing for fraudulent purchases.
- Acceptance. Debit cards can be used at millions of locations worldwide, and can be used over the phone and on the Internet.
- Convenience. Debit card transactions are quick and simple, getting you out of the store faster; automatic bill pay via debit eliminates worries about missed payments.
- Rewards. More debit cards are also offering rewards so purchases earn points toward travel, merchandise or even cash.
My comments: Visa is clearly focusing on the benefits of debit cards over cash, but the true showdown for those who use plastic is between debit cards and credit cards. The set of above reasons for choosing debit cards is a subset of the reasons for choosing credit cards over cash — and credit cards offer more protection, tougher security, broader acceptance, and more attractive rewards.
“Zero Liability” is a good policy, but if your debit card is stolen and used, your bank account can be overdrawn at a moment when you most need your balance to be there, like when your mortgage or rent check is cashed. Then you’re dealing with overdraft fees or bounced check fees and possibly other penalties. This is a deal breaker for me. I use debit cards occasionally, but I will avoid using a debit card as my main payment method.
I appreciate the representative from Visa taking the time to answer these questions. Are you convinced? What do you think about debit cards?
Photo credit: DeclanTM
Updated January 16, 2010 and originally published January 22, 2009.
{ 14 comments… read them below or add one }
The deal breaker for me with debit cards is that you risk basically giving control of your bank account to a thief. Yes, there is zero liability, but there is also lots of headaches such as overdrafting if a debit card is stolen. My luck, a thief would start buying plasma tv’s with my checking account right when all of my major bills are being sent out. It may be zero liability, but it is anything but zero headaches for several weeks sorting out all of the overdraft and late fees.
As a result, I like having all of my purchases “separated” onto another credit card. That way, if a bad guy gets a hold of my credit card numbers, worst thing they can do is charge a bunch of stuff that can be easily removed before my next bill.
I love my debit card and use it for ALMOST everything. I find that it is easier to keep track of spending and I can never go overboard and spend more than I have. I tried the ‘use a credit card for everything and pay it at the end of the month’ but it never worked. I didn’t have the discipline. Instead, I’d charge stuff to the credit card (that I had the cash for) and by the time the bill came I had spent the cash on something. I believe it was mixing the two, using cash AND credit cards, that made things worse.
Anyhow, I now use a credit card ONLY for online purchases where I am most vulnerable to identity theft.
What an interesting post! It would be good to see some peer-reviewed research comparing the amount people habitually spend with debit cards, credit cards, & cash. It’s hard to imagine how the psychology of a debit card would be much different from the psychology of a credit card, but maybe if you were aware that it was taking cash directly out of your checking account, you’d treat it differently.
Because I budget a certain amount each month for credit-card spending and don’t exceed that, in effect the credit card is doing the same thing — psychologically. Running a tab (on purpose) might be a different experience.
For me the problem with a debit card is that if it gets stolen a thief could, in theory, drain your bank account before you have a clue what’s going on. The first you’d know would be when your regular bills started to bounce, damaging your credit and inflicting late fees and ISF fees. Though you might be able to undo all that, it would entail a great deal of hassle and headache. With a credit card, you have the opportunity to review all the debits before you pay the bill.
I use debit cards for the majority of spending. I rarely use cash, have no major credit cards, and on rare (once a year at most) occasions use a Gottschalk’s credit card in order to get an associated discount.
It is good that one can dispute charges when using credit cards, and one can use the bank’s money for a month or so before paying in full. However, I had a couple of problems with online purchases with a debit card – like I ordered an item, never got it, and the website disappeared in the meantime. The bank refunded my money in that instance, and when I had a dispute with an internet service provider.
My method of operation now is never to use credit. Twice in the past couple of months, when I’ve gone to the bank, I’ve been offered to apply for a credit card by the teller. I have no interest whatsoever in obtaining credit cards or “owning” debt.
Every cent spent by this household is logged with a DayTimer system and in the associated checkbook register – pen and ink! One thing I’ve gotten bad about is reconciling accounts the way I used to do when I received paper statements. I got tired of the statements piling up, because I kept them for years, and signed up for online statements. But when I received them, I tended to the matter before sticking the envelope in a drawer. Now I am very lazy about doing it online. I sometimes delay for a couple of months.
I have had a heck of a time getting my bank to issue me a non-debit ATM card. They can issue debit cards from any branch, but non-debit ATM cards have to be mailed from the central office. I’m not sure they are actually mailing them, because more than one has gotten “lost” in the mail. I don’t use my debit card for purchases, but it seems to me that carrying it around in my wallet is nearly as dangerous – if my wallet gets stolen, I could be in the same situation as you’re all describing, with checks bouncing etc.
I have had similar experiences trying to get the cash-advance limit on my credit cards removed. One credit card company told me all I could do was tear up the letter containing my PIN when it arrived in the mail. They claimed there was simply no way in their computer system to remove or lower the cash advance limit.
I use a debit card for most of my day-to-day purchases and always use a credit card on-line. Since I usually download transactions into Quicken daily I can easily spot unauthorized activity. As for the loss of a debit card, the card uses a PIN number that must be entered at the time of purchase. If you are careful with your PIN -and who might be watching – the risks are lowered. As far as the spending aspect I do think the extra step of considering my checking account balance decreases the chances of impulse purchases and overspending. As I try to impress upon my kids. “A credit card is a great way to spend your money but the absolute worst way to borrow money”.
If it’s a Visa or MasterCard debit card, you can call the transaction “credit”. That is what I always do, but I was disheartened awhile back when I used a card at Long’s Drug and found out that purchases under $25 do not even require a signature. It’s a bit disturbing that some places allow only a swipe and nothing more.
There is a missed opportunity in Q6 to ask Visa about Debit vs. Credit, rather than debit vs. cash. Flexo – you go on to comment about this very thing, yet the question you asked was specifically about debit vs. cash…see below:
Question 6: To what type of consumer would you recommend debit cards over cash?
My comments: Visa is clearly focusing on the benefits of debit cards over cash, but the true showdown for those who use plastic is between debit cards and credit cards. The set of above reasons for choosing debit cards is a subset of the reasons for choosing credit cards over cash—and credit cards offer more protection, tougher security, broader acceptance, and more attractive rewards
Greg: You are right, but prior to asking the questions, Visa made it clear that they were not prepared to discuss debit vs. credit, only debit vs. cash. That is telling in itself.
I’ll stick with using a credit card and cash thank you very much. I think I’d rather have a small amount of cash stolen than my debit card.
Well, to be fair to Visa, some of us DO go the other way on the “mystery spending” issue. While I know about those studies showing excess spending happens much more often with plastic (and I’m sure it’s true for many people), I’m one of the ones who just loses track of cash. I try to take cash out of my account as little as possible, because I find it easier to spend, and then afterward I have no idea where it went! Using plastic seems much harder to me — you have to put in your PIN, or sign, and I feel silly doing it for purchases < $5 or $10, etc. Whereas if I have cash, I’ll spend a couple bucks here and there — on snacks, tipping subway musicians, whatever other randomness.
Anyhow, at least if I use my debit card, I can track my spending and figure out what I’m wasting money on. I’ve tried in the past, but come to the conclusion that I never will track cash spending consistently. I’m just too lazy for any system that requires a lot of effort on my part! :)
I have a debit card ICOE, but I think I have used it maybe twice ever? Debit cards are just asking for trouble, in my opinion.
I use a credit card whenever possible and pay off at the end of the month. Hubby and I have a budget and track all expenditures as we make them, so the payment method isn’t relevant. We also have a small amount of “fun money” that we keep in cash and can spend on whatever. The total is in the budget, but each purchase out of it is not. Typically, that’s the only cash either of us carries.
what is the difference when using a debit card when you’re asked if you’re using it as a debit or a credit?
A.: That question was asked and answered in the first interview with Visa.