Debit Cards Take the Lead Over Credit

Consumers easily spend more of their money with plastic cards than they do with cash. This has been the case since 2003, when the number of credit and debit card purchases surpassed the number of cash and check transactions.

There are a couple of obvious reasons why we prefer plastic. First, internet shopping has skyrocketed, and you simply can’t spend cash and checks online. Second, people have learned the convenience of paying with a piece of plastic rather than cash. It’s easy, instantaneous, and safer than carrying a huge wad of cash in your wallet.

With the convenience of plastic, however, comes risks (at least as far as credit cards are concerned). Credit card spending has gotten out of control in recent years. Our consumer debt loads have grown too steep, and played a major part in bringing about the current credit crunch.

In a recession where every dollar matters, people simply can’t afford to live beyond their means anymore. That’s where debit cards come in.

The best of both worlds

Debit cards bring both the convenience of credit card transactions and the discipline of spending only the money you own. It’s impossible to spend more money than you have with a debit card, since the money is directly "debited" from your bank account. If you do spend more than the amount in your account, your bank will charge you an overdraft fee and possibly freeze your card until you pay the fees and replenish your account.

Who’s using debit cards?

MasterCard’s debit card transactions rose 13% last year, while credit card transactions declined 2.2%. This is a significant and striking contrast. And Visa reported that debit card use surpassed that of credit cards in the last quarter of 2008.

The people who use debit cards tend to be younger consumers. Even longtime credit card users are switching to debit cards, preferring the discipline that debit card spending can instill. It’s becoming increasingly popular to live on a budget and to live within one’s means. Websites such as Mint.com upload debit card transactions directly into an online budget, making it easy and convenient to track your spending.

Since credit is scarce in a recession, and credit card companies are wary of extending credit too loosely, some people who are using debit cards are doing so simply because they have no choice. These people weren’t approved for credit cards, so they have taken the next-best option: debit cards.

What’s in the future?

As consumer spending decreases, it’s likely that we'll use our debit cards more often than our credit. And we can expect the credit card companies to try as hard as they can to sell customers on their debit card programs. While not as lucrative for the banks as credit cards, debit cards still bring in revenue each time we use them (via merchant fees) and represent little to no risk.

Banks don't report your debit card usage and bank account information to the credit bureaus, so using a debit card will not affect your credit score positively or negatively. But you should still be responsible when using debit. Overdraft fees can pile up quickly if you spend more than what's in your account, and banks can deactivate your card or shut down your account if you try to use it for purchases you can't afford.