Credit Card
Personal Debt Issues

Debit Cards vs Credit Cards

by Broderick Perkins

(7/8/2011) Erate Exclusive - To debit or to credit? That is the question.

Most consumers carry both a bank debit card and a bank credit card (or two or five) because they serve spending habits in two distinct ways.

Here's a quick look at their differences, including the good, the bad and the ugly for both.

This week, we examine debit cards. Next week, credit cards.

Debit cards are linked to a bank account, often your checking account.

When you slide your debit card at the checkout stand, the money you spend is yours and it's immediately deducted from your account.

Debit cards are a convenient alternative to withdrawing a wad from the ATM and walking around with cash, but they do facilitate cash withdrawals without going inside to the bank teller. They are also faster and more convenient than writing a check, especially if you shop online.

"The debit card has effectively replaced the checkbook when it comes to most retail transactions. It is rare to find someone who carries a checkbook with them today, it's the convenience factor." said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

A debit card can be a good budgeting tool if you use it to pay all your bills, cover daily expenses and make most other purchases. The monthly statement gives you a run down of where your money goes. If you know where your money goes, you can see where you can cut spending and perhaps balance your household budget.

Because your checking or other account balance shrinks with each transaction, there's a sort of built-in feature to prevent overspending. Once you've reached the bottom of the till, the bank must block further purchases.

In the past, the bank would approve the purchase and charge you an exorbitant overdraft fee of $25 to $35, no matter how small the overdraft. Carry an overdraft as small as a few dollars, for a few weeks and you got socked with fees and interest on what amounted to an unsolicited loan with an annualized interest rate of more than 3,000 percent.

The fees still apply, but only if you choose to"opt-in" for overdraft protection service. Banks, facing stiffer regulations forcing them to lower and disclose fees on debit and credit cards, have stepped up marketing campaigns to cajole many debt card holders into buying expensive overdraft protection.

That can be a convenience to some spendthrifts, but it ruins the built-in overspending protection that comes without overdraft protection.

In addition to overdraft fees, debit cards attached to checking accounts can also be at the mercy of other fees two studies recently detailed as being tough for consumers to ferret out when comparing checking accounts.

Debit cards attached to special checking accounts called "high yield" or "rewards" checking accounts also come with an added interest-bearing bonus. Interest rates on these special accounts can be higher than that of typical savings, checking, even certificates of deposit (CD) and money market accounts. The special accounts come with a host of requirements you must meet to get and keep the high rate of return.

There are hundreds, if not thousands of debit card-attached accounts with an endless variety of terms. Consumers must take great care reading the small print in order to choose the card best suited for their spending habits.

Debit card regulations may hamper benefits

Misleading, aggressive marketing boosts overdraft opt-in fee collections

Banks winning overdraft fee war, consumers losing billions

Disclosure laws protect consumers from more credit card debt

Due to CARD Act, Some Banks Cut Fees