As major banks continue to pile on debit card fees, many consumers are re-evaluating their decision to use debit cards. As a free product, debit cards were a great way for consumers to avoid debt and interest payments while retaining instant access to cash. But with most large banks contemplating debit card fees, the benefits of using debit cards over credit cards are growing more dubious by the day.
The majority of credit card holders carry a balance. Unless they are doing so on cards that offer a 0% APR on balance transfers and purchases, this means they are incurring debt and paying interest while borrowing money for purchases they cannot afford. To break the cycle of indebtedness, debit cards have become increasingly popular in recent years. With a debit card, customers can only spend money that they already have, which is always a wise limitation.
Because debit cards prevent debt accumulation, a five dollar a month fee, like the one Bank of American plans to impose, can be seen as just a drop in the bucket compared to the thousands of dollars in interest and fees many credit card users are likely pay over their lifetime. Furthermore, the new regulations that are the supposed justification for these new fees only affect a few dozen of the nation’s largest banks. If a consumers has a debit card from one of the thousands of small banking institutions that are not subject to this law, it is unlikely that he or she will see any fee increases from their debit cards.
Finally, it is not as if banks do not impose fees on credit cards as well. Beyond interest, cardholders often pay annual fees, late fees, over the limit fees, and foreign transaction fees. For these reasons, Americans will continue to use their debit cards long after this controversy has blown over and, while the idea of paying a fee to use a debit card is irksome to most, $5 a month is a small price to pay for the convenience debit cards afford.
Personal finances are all about personal responsibility. Without it, the finest products in the world will still land their account holders in trouble. With a minimum amount of responsibility, credit cards are clearly superior to debit cards, especially in light of recent fees imposed on debit card users.
When paid in full and on time, credit cards offer their users valuable benefits with very little and often no cost. First, credit card users can enjoy close to thirty days of an interest free grace period on their purchases. Next, they can earn tremendously valuable rewards in the form of cash back or loyalty points and miles. Since credit card rewards are seen as a discount, not a form of income, they are not normally subject to taxation. And, given that most credit card offer at least a 1% rate of rewards, consumers who use credit cards essentially get a small discount on every purchase. With some cards, this discount can range as high as 5%. As long as bills are paid in full every month, this makes credit cards a much better form of payment.
Lastly, most credit cards come with a host of travel insurance and purchase protection policies. As long as customers are able to keep their spending within their means, credit card users can earn rewards and avoid the fees that are plaguing so many debit card products.
In many ways, the imposition of debit card fees are a way for banks to get consumers to switch from low margin debit card products to credit cards. And many banks are adding extra perks to incentivize consumers to switch from debit to credit. These perks range from 0% interest rates on balance transfers lasting up to 21 months to credit card sign up bonuses of up to $500. The passing of the Durbin Amendment will likely mark the end of the debit card era and the resurgence of credit card use. The key thing for consumers is to manage their credit cards like debit cards to avoid interest charges and benefit from credit card rewards and other perks debit cards simply do not provide.
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