My Debit Card Confusion

I have a debit card. I think. It’s the ATM card my bank gave me. It’s got the MasterCard symbol on it, so I think that means I can use it to buy stuff. Of course, this is just a theory. In the ten years it’s been in my wallet I’ve never thought to test it out. Why would I?

Credit-cards Lotus Head I am going to admit right here that I am pretty obviously missing something when it comes to debit cards. Debit card transactions now outnumber credit card transactions. This mystifies me. I can think of only three reasons to carry a debit card rather than a credit card.

1) You are considered a poor credit risk and cannot get a credit card.

2) You can get a credit card but will not because of ethical or religious objections.

3) You find it too difficult to overcome the temptation to borrow more than you should if you carry a credit card, so carry a debit card that will limit your spending to cash you actually have.

I can’t get my head around how half the transactions in the country could be made by people in one of these categories. I know credit standards are tighter than they used to be, but I am sure that the vast majority of folks can get a credit card if they ask nicely. Ethical and religious objections can’t cover very many more.

And the third reason, that debit cards limit your spending, doesn’t usually pan out. As a plaintive article in yesterday’s Times points out, what generally happens if you run out of money in your account is not a denial the next time you try to buy something. What happens is the same as what happens when you write a check that overdraws your account. For most people at most banks, the check is covered but the bank charges interest and a significant fee for its trouble.

So if you bottom out your cash on hand in the account, your debit card doesn’t stop your profligate ways, it just turns into a really bad credit card.

(The Times article has a loopy defense of the fees charged, quoting an economist who says that 3,000 banks and credit unions would go under if they lost this fee income. "That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits." That just means that 45% of banks either lost money last year or roughly broke even. Just about any single source of revenue will be bigger than the profits they made. And I thought credit unions weren’t supposed to make a profit at all.)

To be fair, some banks (including Citibank and INGDirect) do not automatically cover debit overdrafts. So a person could legitimately carry a debit card as a means of spending self-control, provided he shopped around for a debit card that worked that way. But my basic confusion remains. Most debit cards don’t put a practical limit on spending, so my reason #3 above can’t account for very many more users of debit than #1 and #2.

In a more perfect world, debit cards would be cheaper to use. There is no credit being provided, so it’s a service that should be cheaper to supply. In fact, the messy reality is that you pay exactly the same amount for something purchased with a credit or debit card. The big difference being that with the credit card you’ve got a few weeks to pay.

And if you’ve got a "rewards" or rebate credit card, using credit is actually cheaper. There are debit cards with rewards programs, but they are much less generous, because the banks get lower transaction fees from merchants and so have less to share in rebates.

And yet more than half of transactions are debit, projected to hit 60% by 2015. I don’t get it.

[Photo: Lotus Head]

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