The pros and cons of debit cards – boom or bust?

Many people are learning the hard way that credit cards can get them into loads of financial trouble, and the uptake of debit cards in recent times illustrates that consumers see debit cards as a useful alternative to credit.

What is a debit card?

The most important difference between a credit card and a debit card is whose money is being used. A credit card uses a bank’s money and so, in essence, is a high interest loan. Debit cards, on the other hand, use your own money – money you put into that particular bank account.

Debit cards differ from cash or EFTPOS cards in that they allow credit-type purchases to be made, making them extremely convenient for online purchases and the like. Complete with either a VISA or MasterCard seal, they can be used to purchase goods and services in most places where credit cards are accepted. Most major banks in Australia now offer debit cards.

When to use credit cards, when to use debit cards

Of course, as with everything, there are pros and cons to the debit card, particularly when it comes to fraudulent use.

Many banks will offer zero liability for fraudulent use, so becoming familiar with that particular bank’s policy is prudent. It’s a policy, after all, not law. While they may offer protection for signature-based transactions, they may not be so forthcoming with PIN-based transactions.

As debit cards are a hybrid of bank account and credit card in the way they can be used, making transactions with a PIN number is common. Many people fall into the trap of believing any fraudulent use will be covered by a zero-liability policy.

Using a credit card in some instances may be more beneficial than a debit card. Let’s take the example of Clinton Stuart. Clinton used his debit card to hire a car during his summer holidays, but what he didn’t take into consideration was that this meant some of his money was tied up by the car hire company as a form of guarantee. Any transaction that is suspended (i.e, doesn’t take place straight away), such as booking hotels or hiring cars, can reduce your access to the cash you had available and may lead to overdrawing.

Depending on the banks terms and conditions, overdrawing can cost a great deal of money. Sales rep Bill Trousand uses his debit card for business purchases, and made sure to arrange an overdraft with his bank when he opened the account. This has saved him a great deal of money, in a few ways – the debit facility and reduced overdrawing fees, and not having to pay high interest rates. His alternative was a business credit card and these types of cards can charge much higher interest rates than an overdraft.

If you do not plan ahead and arrange for an overdraft to be part of the debit offering however you may be surprised to find that at times you do overdraw on your debit card account. In these situations you may be hit with a hefty fee ($35 in some cases) or a very high interest charge as a result. It’s recommended that anyone who holds a debit card account regularly check their balance, which can also protect against fraudulent use.

Debit card advantages

Despite the shortcomings of a debit card, they offer greater financial risk management than their credit cousins. Because an account holder uses their money instead of the banks, getting into debt is almost impossible (unless an overdraft is arranged).

The biggest saving offered by a debit card is in interest charged. Credit cards often have rates as high as 19%, while debit cards do not charge interest. Many debit card users have also changed spending habits, leading to more responsible money management.

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