Debit Cards – Take Them or Leave Them?

by Ryan Guina

I recently read an article on MSN Money about how Debit Cards are improving. I planned on writing about it, but Might Bargain Hunter beat me to it! :)

MBH’s article “Debit, schmebit!” is in response to the same MSN article. For the most part MBH decides not to use debit cards and makes three good points on why not to use them:

  1. Money is spent immediately; credit cards are a free loan for a month.
  2. No rewards programs.
  3. Potentially get charged to use the card.

These are all valid points, especially if you have a very good rewards credit card, good credit, and the ability to pay your credit card bill in full every month. But if all of these do not apply, a debit card may be a good deal for you.

When debit cards are good to use:

  1. When there are no fees involved. Most major banks have eliminated fees altogether.
  2. When they have similar fraud and return protections as credit cards do.
  3. If your bank has a rewards program for its debit cards.
  4. You want to get cash back because your bank’s ATM is not convenient and you do not wish to pay $3 to get $20 of your own money.

The last item on the list is one of my favorites. When I first joined the USAF, I moved to a location where my bank didn’t have any local ATM machines. I paid $3 in transaction fees one time (I pulled out $140 so I wouldn’t have to do it often!). After that, I went into Wal-Mart, gas stations, or grocery stores and bought a $1 pack of gum to get $20-40 cash back. I did this until I got a local bank account established.

I’m not cheap. I’m frugal! :)

Other times debit cards are worthwhile: If you have no credit, bad credit, or are paying down your credit cards and don’t wish to add more debt, then debit cards are likely a good option. If you have no credit, I would consider establishing credit by getting a credit card and regularly paying the balance in full.

Why debit cards have a bad reputation: Debit cards have a bad rep for several reasons. When they were first released, almost all banks charged customers to use them. The fees were either per purchase or a flat monthly fee. Stores charge banks a fee every time the customer makes a purchase using their PIN. However, when customers make a purchase as though the debit card is a credit card (either by selecting the credit button or by signing for it) the store pays the bank a fee! That is the main reason many banks now have rewards programs with their debit cards. Most cash register workers automatically ring everything through as though it is a credit card. (I’m sure their employers hate that!)

Debit cards originally had very poor fraud protection. In some cases only $50-100. Now, most of them match credit card protection.

Debit cards also have a bad rep because sometimes merchants can ‘block’ a certain amount of money in your account when you make a purchase or reservation. An example would be a hotel or rental car reservation. Often times the hotel or rental agency will block several hundred dollars in the event of incidental charges. Many times this money is locked up for several days before it is released. If you have plenty of money in your checking account, it’s not a very big deal, but if you have just enough to pay for your purchase, having your money blocked can cause some serious problems!

What do I use and why? Personally, I use my debit card almost exclusively. Why? My bank’s debit card program meets all of the above criteria (no fees, fraud protection, and reward program – 0.5% cash back for signature purchases).

I do have a rewards credit card, but I took advantage of a free balance transfer offer. I am paying 0% interest for 12 months. If I charge anything else on the card I will have to pay interest on the new charges, but all payments will go toward the balance with 0% interest. For me, that’s a great deal! (I can pay the card off in full, but I choose to leave the debt in place because I earn interest in my money market account).

Note: I have since paid off my credit card, and I now use my credit card almost exclusively, and I pay my bill in full every month. Read 10 reasons why credit cards are good.

Conclusion: Debit cards are not for everyone. But, just like most things, they have their place. I love my debit card, but as soon as I pay off my interest free loan on my rewards credit card, I will start using that again. 😉

Note:There is some good information in both the MSN article and the post on Mighty Bargain Hunter’s website. I recommend reading them! :)

Published or updated December 9, 2010.
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1 dima

Just wanted to add that one should look at the debit card rewards carefully. I just got an offer for my Wachovia debit visa card to register it for visa rewards program. 5000 points just for registering (free). Well, unlike you, the only time I use mine is when purchasing a money order to pay for the apartment. Still, I decided to register just to get 5000 points. Woohoo! Free money/gift cards! Right? WRONG! Unlike most rewards programs that you can get a decent reward for 5000 points ($30-$50 cash or similar amount in gift cards), 5000 points in debit card rewards program is worth… wait for it… $4!!!!!! Of course, YMMV, but watch out for these!


2 Ryan

I have USAA Federal Savings Bank, which is a great bank. (It’s only open to military members and their families.)

Their debit rewards is pretty decent as far as debit rewards programs go. I get 0.5% cash back per purchase that is rung up at the register like a credit card. It’s not a lot, but it is usually a couple dollars a month.

Thanks for the good advice! Folks, check the terms of your rewards card! :)

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