So, with the financial crisis in full swing (debatably with some “green shoots”) many people are now becoming more and more wary of taking on too much personal credit.  As a result banks have seen a noticeable increase in debit card transaction volume.  There are definitely advantages for consumers to switch to debit cards, the main one being that it requires less personal credit management since debit cards tap into one’s existing savings or checking balance and uses money that one also possess right?  WRONG!

True that transactions tap into existing deposits but customers must stay aware of their balance since just like credit cards the banks charge excessively high overlimit fee averaging around $35 for going under your deposit balance as opposed to over your credit limit like credit cards. Consumers must also stay aware of clearing times for their deposits since checks can take days to clear and using your debit before a check clears can also lead to additional fees if insufficient funds are in your account.

Another down side of using debit cards is that you are not building credit history since this is almost similar to spending cash you already have.  Also, there is not “grace period” like in a credit card.  This means that there is no time between when you purchase and when you pay.  If properly managed, this grace period can be a consumer’s friend.

Banks love it when you use your debit card since there is no credit risk and they are not taking on additional lending for your purchase but also pocketing the lower interchange fee.  The fees are also substantial to a banks revenue line and given today’s economy they will be far less willing to reverse these fees.

The new credit card legislation does deal with overlimit fees and forces banks to ask a consumer whether they want to be allowed to go overlimit.  It is still questionable whether this will effect debit cards but if it does expect a lot of retaliation particularly from small regional and credit unions.  Many of these smaller institutions, according to the New York Times, get more revenue from debit card fees than all other revenues combined.

Share This


Tags: ,