Last March, we did a breakdown of debit cards vs. credit cards to show you the differences between the two plastic doppelgangers. Fast forward two years, and suddenly, the ying is starting to look and act a whole lot like the yang. Debit cards are accepted everywhere a credit card is, have rewards programs and, hey, they even have hidden fees and nefarious traps. But why are debit cards acting a lot more like credit cards these days? According to DailyFinance, it’s because credit cards are dead. And it wasn’t even Obama who killed them.
It was you! You and me, that is – the consumers. We were fed up with the wavering interest rates, devastating fees and bruises to our credit history. But instead of kicking the plastic, we eased down to a reasonable facsimile: the debit card. It works like a credit card, it looks and (probably) tastes like a credit card, but because you’re drawing from your own bank account and not being charged any interest, it’s a much smoother ride with less surprises.
Debit Cards Close the Gap
According to eCommerce Journal, Visa customers’ debit card spending surpassed their credit card spending in 2008. Visa cardholders spent $206 billion in debit purchases – mostly on necessities, like food and clothing – and $203 billion in credit purchases. Those figures aren’t widely different on theri face, but consider this: this is the first time in history that debit card spending has exceeded that of credit spending for Visa. The paradigms are shifting.
Debit vs. Cash: No Contest
While consumers cite greater convenience and security over cash and checks as one of the main boons of debit, card issuers are doing their part as well to promote debit card usage. With features like Zero Liability from Visa and PayPass from MasterCard, debit is simply the easiest way to pay. While a thief can nab your wallet or forge a check, your debit card has certain built-in protections that safeguard your assets in the case of identity theft. Even if you are victim of a skimming or phishing scam, you can quickly control your damage with a quick call to your card company – in most cases you’ll be liable for less than $50, even if the crook wipes you out. Plus, when you pay with a debit card you don’t ever have to deal with those pesky pennies.
You’ve Got Rewards!
But perhaps more significant to the shift is in rewards. One of the main hooks of credit cards has always been the opportunity to accrue points, cashback and other free stuff from your spending. These perks drove shoppers to use cards even when they had the cash on hand. The most responsible ones would simply pocket the points and pay off their balance as soon as they got home. But with card issuers offering rewards programs for debit purchases, there’s no need for this slice of the cardholder pie to even bother with credit cards. Things work out nicely for the issuers, too – retailers have to kick back upwards of 2.1% per debit transaction.
Here Come the Catches
Still, that 2.1% per swipe is, apparently, not doing enough for the card companies’ bottom lines. Those fees from over-the-limit spending, finance charges, late fees and membership costs that caused cardholders to flee from credit in droves are exactly what were making card issuers weathy. But like rats abandoning a sinking ship for one that’s afloat, those parasitic caveats and gotchas have followed the crowd to debit cards.
Since the beginning, the danger of overdraft has existed. But now, instead of reeling you in when you overstep your checking balance by denying your card, banks and issuers are automatically fronting you the money so the transaction goes through. You won’t know your overdrawn until the next time you look at your statement. Meanwhile, the bank charges you a hefty $25 to $35 fee per transaction for the “convenience” of covering you while you were short. It’s a racket that’s earning banks upwards of $38.5 billion in overdraft fees.
This may be preferable to having your check bounce and your utilities or mortgage payments become delinquent. But anyone who has come to the cold revelation that they are overdrawn only to next discover that they’ve been charged hundreds of dollars of overdraft fines on top of it is unlikely to rejoice.
Push Me, Pull You
Meanwhile, while debit cards are starting to resemble credit cards more, so too are credit cards changing. One of the main reason why debit wins over credit is the danger to a consumer’s credit rating, or a credit history that is already prohibitive of a traditional credit card. But with new prepaid credit cards, even those with little or bad credit can carry a card. The credit limit of a prepaid credit card is commensurate with how much the cardholder pays into the account. So, if the holder prepaid $1,000, he or she could spend $1,000 – after that, the card would be denied.
But wait a minute – isn’t that exactly the same as a debit card? Replace “credit limit” with “checking account balance” and basically, yes, it is the same. But the important difference is that, as of now, the credit bureaus still consider prepaids credit accounts. That means you can slowly build your credit using them (though likely no better than with a secured card). However, as with all cards for those with bad credit, there is a circuitous labyrinth of fees and terms. Plus, the system is somewhat rife for exploitation – meaning that FICO might take preventative action, much like they did in order to stop piggybacking.
But the moral of the story is this: as restrictions on issuers (such as the C-Card Act) continue to make debit cards more competiitive, card companies will begin making changes in order to keep their earnings up. And until Obama comes up with a Debit CARD Act, you may have to be just as vigilant with your debit card as you were with your credit card.
