Why Have Debit Cards Replaced Credit Cards?

by Beverly Bird
Debit cards can help consumers control their spending.

Debit cards can help consumers control their spending.

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Plastic has long been a staple of the American economy, but historically, consumers used credit cards, not debit cards, for purchases. According to the Federal Reserve Board, however, that's changed. Debit card usage has increased at a rate of about 20 percent a year since 1996. In 2006, it became official: more consumers use debit cards than credit cards.

Bank Cards

Debit cards normally link to your bank account – you make purchases against your balance, either as a "debit" or "credit" transaction. The term "credit" is misleading in this sense, however. It just means that you're signing for your purchase rather than punching in your PIN number. This is possible if your debit card has a Visa or MasterCard affiliation, but no one is lending you the money for the transaction. It still comes out of your bank account, although the deduction make take a day or two longer to appear than if you use your PIN.

Prepaid Debit Cards

You can also purchase debit cards from Visa, MasterCard, American Express and other lenders. You're still using your own money for transactions, however. Your charges deduct from whatever you paid for the card. For example, if you pay $100 for a prepaid Visa and you then make a $20 purchase, you've got $80 left with which to make other transactions. Fees for these cards are typically high, and they come in a variety of forms. You'll probably pay something for activating the card, and another fee for reloading it with more purchasing power.

Controlling Spending

Some consumers use debit cards rather than credit cards because they make it almost impossible to get in over your head. You generally can't spend more than you bought the prepaid card for, or more than you've got in your bank account. Impulse shopping is necessarily limited. For example, if you find a new television that would go great in your family room, and if it's on sale for $1,600 but you have only $800 in your account, you can't buy it. You can't wake up the next morning, wishing you really hadn't spent that money because the mortgage is due. Your purchases are limited to the money you have available at the time.

Interest and Fees

If you do buy that new TV with your debit card, it will only cost you $1,600. If you use a credit card instead, and if you don't pay off the purchase entirely within the lender's grace period, you could end up paying far more than the purchase price. Credit card lenders tack on interest monthly as long as you have an outstanding balance. Rates can vary, and depending on how long it takes you to pay it off, the television could end up costing you half again as much, if not more. Frugal consumers increasingly turn to debit cards to avoid these interest charges and paying more than is necessary. Of course, if you use your debit card and forget that you have checks outstanding on your account, you could be subject to overdraft fees when they hit. This is particularly true if you use the "credit" option on your card and the charge doesn't appear on your account for a few days.

Credit Card Advantages

You do give up a bit when you use a debit card rather than a credit card. Debit cards don't contribute to your credit record because you're not borrowing and repaying anything. Therefore, if you're looking to establish or improve your credit rating, using a debit card won't help. You're also more vulnerable to erroneous charges with a debit card. With a credit card, the lender pays the vendor immediately, then waits for you to repay the charge plus interest. If a charge appears on your account that you didn't authorize, your lender is out the money – not you – until the problem gets straightened out. If an erroneous charge hits your debit card, the money is typically lost to you until the problem is fixed and the money is restored to your bank account. This can be particularly inconvenient if the charge you're disputing is significant.

About the Author

Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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