Even More Debit and Credit Card Confusion

Time to circle back and discuss the cards, credit and debit, again.

If you are just joining us, I will recap. Debit card transactions now outnumber C Cards 2 (Andres Rueda) credit card transactions in America. Frank doesn’t get it. He has used a debit card maybe three or four times in his life. Although he can imagine several special cases in which a debit card would be preferable to a credit card for a person, he can’t wrap his head around the idea that the majority of people fall into those categories.

Wise Bread today ran a feature comparison of credit versus debit cards. Debit cards did not fare well in the head-to-head, besting credit only on the “Which is better for avoiding credit card debt?” criterion.

This, by far, is the strongest argument in favor of the debit card. If it helps you control your spending and helps you avoid credit card debt, then that one feature alone is as precious as gold. If you currently have credit card debt or are trying to get out of credit card debt, then cutting up the credit card and using a debt card is probably one of the smartest decisions you can make.

Actually, it is more than just the strongest argument in favor of debit, it is nearly the only one. And it is impossible to refute. If carrying a debit card helps you control your spending, then it makes sense. But the same can be said of lining your hat with tin foil. If it makes you feel better, then go right ahead. Nobody else needs to know.

I guess my confusion starts with not understanding why a person would find using a debit card to be a useful psychological crutch. To begin with, I am not sure that the fundamental premise, that a debit card limits you to spending the cash you actually have, is necessarily true. I see a lot of buzz about overdrafts out there.

Moreover, it seems to me that limiting yourself to spending every penny you have is not the best place to draw the line. It is like saying that sure, you snort a lot of cocaine, but you would never smoke crack.

Can it simply be that people, and apparently this is the majority of people, are a little more reluctant to spend “their” money out of the checking account than they are to incur a charge they will be billed for in a few weeks? Are we really that childish?

Yeah, I think so.

One of the several ways in which credit cards are clearly more useful than debit is in renting a car. I have to admit that I have been listing this as plus for credit without really thinking about it. Then the other day The Consumerist ran Why Won’t Rental Car Companies Let Me Use My Debit Card?

It is actually a good question, come to think of it. The post gives an inadequate answer.

Since you’re borrowing a car that likely costs several thousand dollars and the rental company doesn’t know you from the next person, the credit card is a guarantee of sorts that they’ll be getting paid no matter when — or in what condition — you return the vehicle.

Meanwhile, a debit card doesn’t offer the company the same protections, as it’s limited to whatever cash is in the associated account. So if they do take your card, you might have to jump through some expensive hoops.

Yes, but there is a spending limit on the credit card. It is not like they can just put the whole cost of replacing the car on your Visa if you never bring it back. (And I do hope it is more than “several thousand dollars.”) I presume that the rental companies have some way of checking that there is enough credit left on your card to pay for the rental and maybe a few extra charges, but it is hard to imagine that they think of a credit card as a blanket guarantee.

There is some finite number of dollars that the rental company can charge to your credit card, just as there is with your debit card. The rental company, I assume, can ascertain the amounts of both and, I believe, put a hold on an appropriate portion in both cases to make sure they will get paid. So why do they shun debit cards?

It is possible that this is ultimately no more profound than that they have not built up the systems and procedures necessary to take debit. With the vast majority of their customers being credit card wielding business travelers, they do not have a great incentive to bother. Or could it be that they are just more comfortable renting to somebody who carries proof that at least one bank thinks he is creditworthy?

My confusion continues.

(For the benefit of those who do not read The Consumerist regularly, you might want to check out this amusing pie chart. Also, I am apparently in grave danger.)

[Photo – Andres Rueda]

Credit Cards, PF Blogs | Frank Curmudgeon | September 15, 2010 11:59 am

20 Comments

By Noah, September 15, 2010 @ 12:37 pm

I think debit vs credit for rental car agencies is more of a quick credit check. If you can get a credit card with a high enough limit to book a car you probably have ok credit, if not your a risk. It think they use it as part of a risk matrix, much like insurance companies do.

You can usually pay however you want at the end of the rental, they just want the assurance of having a credit card on file. I’ve even seen people settle the bill in cash.
By Josh, September 15, 2010 @ 2:12 pm

The last time I rented a car, they put a hold on my card for quite a bit more than what I was going to pay. I think it was to cover them if I kept the car for a few extra days, or something like that. If that’s true, then the reason they don’t do it on debit cards is that the user will think that they’ve actually taken that money from their account.

The concept of a temporary hold works great when your card balance doesn’t matter until you pay the bill at the end of the month, but it doesn’t work at all if the hold shows up on your online banking site as soon as you drive away.

On an unrelated note, the reason I use my debit card is that my credit card limits are too low to cover my monthly spending, and it’s too much trouble to get another one. If I’ve got a big buffer in my checking account and positive cash flow overall, it’s annoying to have to remember to switch cards halfway through the month because one is maxed out.
By Neil, September 15, 2010 @ 2:31 pm

In addition to being a form of credit check, most credit cards have limits that are some multiple of a typical bank balance. My credit card lets me borrow up to $12,500, even though it’s rare for me to have more than $3k in my chequing account.

So the size of guarantee is usually larger on a credit card.

And I’m not sure how preauths work on debit cards. It seems that putting a hold on a couple grand in a bank account is much more paralyzing than putting a hold on a couple thousand of your credit limit.

I am, however, glad you’re coming around to my world view and accepting that yes, the general public really is that childish.
By Neil, September 15, 2010 @ 2:32 pm

Oh, yeah, and to cover the rental company’s risk, they don’t need to hold the whole value of the car on your card, they just need to hold their insurance deductible.
By SophieW, September 15, 2010 @ 3:11 pm

Up here in Canada the debit card has been around for over 20 years. It is a huge part of our financial world and is unlikely to ever go away. I don’t know the exact numbers, but I’m pretty sure that debit card transactions rival credit card ones.

As soon as we open a bank account we are given our debit card – it is our bank card too. This includes young people and those who don’t qualify for a credit card. So right there you have a huge benefit to the debit card.

Our banking system is exceptionally integrated thanks to our ‘big 5′ banks. As a teenager – a very long time ago – I could go to any ATM and withdraw money, which was so handy.

I find it awkward in the States to remember I can only use cash or credit cards at most stores. I’m too used to pulling out the debit card and being able to use it for no fee whatsoever.

One final plus is my local gas station. If you purchase gas with cash or a debit card they automatically drop 2 cents off per litre (3.5 on thursdays) because they are saving the transaction fee charged to them by the credit card companies. More businesses are starting to do it too.

It’s like carrying cash any of the hassles of carrying cash. I can understand using a credit card for big purchases, especially ones that you don’t have enough in the bank to cover, but for every day expenses? It’s definitely the way to go!
By Kosmo @ The Soap Boxers, September 15, 2010 @ 3:17 pm

“Yes, but there is a spending limit on the credit card. It is not like they can just put the whole cost of replacing the car on your Visa if you never bring it back. ”

Well, since there is an “over the limit” fee on most cards, it’s definitely possiblty to go over the limit.

Does that mean that Avis can charge the replacement cost of a Hummer to your card? I don’t know (probably not).
By Frank2, September 15, 2010 @ 3:26 pm

Frank,

Question – how to you manage your savings? Checking, savings, brokerage, 401k, CDs, etc? Do you have multiple accounts for different purposes or do you have one large account with a physical or mental accounting system to determine what is allocated for what?
By jim, September 15, 2010 @ 5:07 pm

Sophie, Do your ATM cards have a visa/mastercard logo? The ATM cards in the USA all seem to work on Visa/MC network now. Basically everything you say is true in the USA with the exception of using an ATM card as an ATM card (no signature) is not accepted every store. People just use it like a Visa/MC and sign for the purchase here, theres no cost to customers for that. Grocery and gas stations generally accept the ATM card with use of a PIN.
By jim, September 15, 2010 @ 5:08 pm

Hertz.com explicitly says debit cards are accepted but does say they’ll run a credit check. creditcard.com and bankrate.com have articles stating that you can use debit cards to rent cars but you may get the run around and the initial answer may be ‘no’. If you do use a debit card they may run a credit check and put a $200-$500 ‘hold’ on your account for up to 14 days.
By RL, September 15, 2010 @ 5:27 pm

The reason why rental car companies are all fussy about debit cards is the same as they are all fussy about those under 25 years olds. Debit card holders are just being the victims of statistics.

They know from experience that people who rent with a debit card statistically run a higher risk of returning late/not returning/damaging the car.

Hence the extra credit checks and holding higher amounts of money on the card.
By Stagflationary Mark, September 15, 2010 @ 7:44 pm

For what it is worth, I don’t get it either.

As a related topic…

I had a coworker who used an American Express card many years ago. I asked him about it. If memory serves he paid a $75 annual fee. I asked him why he didn’t pick a card without a fee. He told me…

“American Express forces me to pay it off every month.”

He paid $75 a year for that? Seriously? That mindset is just so foreign to me.

Meanwhile, I had a credit card that actually paid me to use it. I also paid it off every month AND had the option to not pay it off if something truly tragic happened. It was an option I never used, but I was glad it was there. It had value to me.
By Hibryd, September 15, 2010 @ 8:04 pm

Mark: “He paid $75 a year for that? Seriously? That mindset is just so foreign to me.”

Well, that might not be his only reason. I did light bookkeeping for a lady who put as many of her expenses as possible onto her Amex, and she had a HUGE pile of reward points sitting in her account.

Besides, part of being disciplined is sometimes knowing what your weaknesses are and avoiding them rather than fighting them all day, every day. (Some people can’t trust themselves to act responsibly with a card, so they cut them up, I can’t trust myself eat responsibly in a bakery, so I stay out of them.) Maybe the guy *was* saving himself $75 in either headaches or actual money every year by having a card that forced him to behave.
By frank2, September 15, 2010 @ 10:01 pm

“He paid $75 a year for that? Seriously? That mindset is just so foreign to me.”

What would you suggest he do?

As Hibryd mentioned, isn’t it better to put hard stops in place if they will keep any issues under control?
By Stagflationary Mark, September 16, 2010 @ 8:32 am

Hibryd,

It was his only stated reason. He was not a highly compensated worker. The card’s perks were more than likely not primary factors.

frank2,

“What would you suggest he do?”

I suggested no alternatives nor did I make any attempt to let him know that I found it odd. He obviously thought it was worth the money. As you say, maybe it was (at least to him). I certainly didn’t think any less of him.

I can certainly understand the addictive nature of credit. My addictions lie elsewhere though. I was a computer game programmer and you can probably guess my addiction, lol.
By Boston Steve, September 16, 2010 @ 10:27 am

Here’s a guy who knows how to use a credit card:

http://www.businessweek.com/bwdaily/dnflash/oct2001/nf20011029_1083.htm
By Frank Curmudgeon, September 16, 2010 @ 2:36 pm

Frank2: A brokerage account and his and hers traditional IRAs with a well known discount broker. Wife has a 401(k). I would if I had a job. None of the savings is allocated for anything specific mentally or physically. Why do you ask?
By brian, September 16, 2010 @ 4:59 pm

Most credit cards have car rental insurance built in, among a few other forms of insurance. So the credit card company has both you and the rental company covered. Learned it on iwillteachyoutoberich.com
By Frank2, September 16, 2010 @ 5:22 pm

Frank,

In the ten years it’s been in my wallet I’ve never thought to test it out. Why would I?…None of the savings is allocated for anything specific mentally or physically

I think most people have a far larger number of accounts that they use to manage and meet their savings and spending goals.

People often have different debit cards, credit cards, savings accounts, brokerage accounts, etc.

An Amex for business expenses, an Amex for personal expenses, a visa for places that don’t take Amex. A joint checking account for household expenses (with debit card), a seperate personal checking acount(with debit card), a joint brokerage account (with debit card) for long term savings. Not to mention bank CDs, IRAs, 401ks, 529 accounts etc.

Could one try and move to a different more streamlined system? Sure, but if you’ve built a system that works over 10 or 20 years of marriage – why rock the boat?
By SophieW, September 16, 2010 @ 10:37 pm

Jim – No, our debit cards are not associated with a credit card company, they are associated with the bank. All our banks are part of the Interac system.

Debit credit cards (VISA and MasterCard) only became available here in Canada last year or so, and they don’t seem to be taking off, not surprosingly… The fees are outragous!

Another type of card that is available in some places is a gift card that is useable in any store in a particular mall, now that’s a good idea!
By Zoe, September 17, 2010 @ 4:49 pm

At the credit union where I bank, my checking account balance up to $25K earns 2.5% if I used my debit card 12 times each month and have direct deposit. It used to be 3% but the rate has decreased recently. Still, it’s the best rate I’ve found where I can still have access to my money when I need it.