Why Debit Cards Should be your Second Option

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April 11th, 2006

One of the newest inventions in the banking world is the use of bank cards (formerly an ATM card) as a kind of credit card. The idea is that you can use your debit card just like a credit card, except that it is connected to money you already have in your account, not to a credit account. In theory, this is a helpful tool, but here are the reasons to avoid become debit-card dependant.

Not Rewarding
Debit cards are very convenient for consumers, but not for a bank. The bank’s objective is to keep as much of your money in their bank for as long as they possibly can. This means that now and in the future banks will be hesitant to offer rewards programs as liberally as credit card companies do.

This might not seem like such a big deal, but let’s look at the case of someone who makes $40,000 per year and spends $20,000 using either a debit or credit card.

With one of the common cashback programs for this tier, the user could receive a check for $1,000 at the end of the year. Or even more when the rewards are in gift cards for specific stores (how about $2,000 at Home Depot?).

With the debit card, that money is gone.

Vicious Cycle
Many people have begun using debit cards because they do not have the credit or income to get a very good credit limit. The problem with credit is that it is a “use it or lose it” system, the longer your credit history, and the more credit you use responsibly, the more you can get in the future.

The widespread use of debit cards, especially among young people, paints a bleak picture for the future when these people try to purchase homes, or cars, or start businesses.

Debit cards do serve a valuable purpose among people who really, absolutely cannot manage credit cards, but that population is really so small that there is no practical reason so many people should use debit cards over credit cards.

As an analogy, using debit because of lack of credit (or the perceived inability to manage it) is like wearing a helmet everywhere because you don’t want to hit your head and look foolish.

The helmet keeps you from your goal much more so than just keeping your eyes open for low-hanging objects.

So, while some people may disagree with the credit system as it stands (and it does have its problems), it is the system in which we live, so it is better to take advantage of the system than to be abused by it.

Entry Filed under: Financial Myths
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