Crossing Over: Moving from Credit to Debit


Call it the “new frugality.”

Increasingly, card transactions of the plastic variety are more likely to be made with debit than credit, as millions of Americans adopt a “pay-as-you-go" approach to personal money management.

No doubt, the numbers back that up. It used to be that credit was king. According to The New York Times (Stock Quote: NYT), in 2006, more than 1.5 billion credit cards were active in the U.S. (The Times estimates that if you stacked those cards on top of each other the pile would reach 70 miles into space and be as tall as 13 Mount Everest’s).

But as the song says,  the times they are a changing. According to a March 2009 survey by Javelin Research, debit card usage increased from 2007 to 2008, with 66% of consumers using a debit card in September 2008, compared to 57% of consumers a year earlier. ¿Even younger people are getting the message on paying as you go. Javelin says that 71% of Americans aged 18 to 24 said that they had used a debit card in the month preceding the September 2008 survey. Just 51% of that same age group reported using a credit card in the same period. ¿

For consumers age 25-34, the numbers are also up. Seventy-six percent indicated they had used a debit card in the month preceding the September 2008 survey. Sixty-three percent of that age group said that had used a credit card in the same period.

But there’s an art to using debit cards. Sure, debit cards can do some of the same things that credit cards can do, like rent a hotel room or even rent a car, but they need to be handled differently than credit cards, which tend to be more secure and are immune to things like overdraft fees (although late payment fees are another story).

So what should you look for in switching from credit to debit?

Watch for fraud. Above all, be vigilant. Keep your PIN to yourself, and make sure you either collect or destroy all debit card receipts. Identity fraud thieves are remarkably adept at using such receipts to gain access to your card.

Keep an eye on overdrafts. Debit card overdrafts are a cash cow for banks – the research from Moeb Services says that banks will earn $38.5 billion in such fees in 2009 alone. If you don’t have enough money in your bank account, any transaction you make using a debit card could trigger a big overdraft fee of up to $35. To avoid that fate, aim for a minimum of $500 in your bank account at all times. Also, check with your bank to see if you can link your savings account to your debit card as a back-up for funds.

Watch out for deposit “holds.” While banks will grab your money from a debit transaction lickety-split, deposits made to your bank account may not hit right away. Best bet: sign on to your bank’s online site and check to see when deposits hit your account. And don’t use your card until you see the deposit is cleared and the cash is in your account.

Get creative about rewards. One area where debit cards just can’t compete with credit cards is in rewards programs. Some banks, like JP Morgan Chase (Stock Quote: JPM) and Citibank (Stock Quote: C), are catching up with rewards programs linked to debit cards, but you need to ask. Note that debit transactions that require a signature are your best bet for acquiring rewards points.

There are other steps you can take, like limiting your daily authorization limit to $500 or $1,000 – that will minimize the amount of money that can be taken out of your bank account. Also, when using a debit card for gasoline, always pay inside – card fraud artists are known to “spy” on debit card consumers plugging in their PINs at the pump.

Debit cards are a convenient way to pay for goods and services, but they’re a different animal than credit cards. Get to know the differences so you get the maximum benefits from your new piece of plastic.

—For a comprehensive credit report, visit the Credit Center.

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