Just a quick question to any readers out there who use a debit card on a regular basis.
Why?
I've had this discussion with Danielle and many others and still don't understand our fascination with using debit cards to pay for things! I have NEVER used a debit card as a form of payment, but I believe I understand the gist of what it is. It's basically a card that allows you to pay for things out of your checking account without actually having to physically write out a check, correct? So I ask you again, why? I've opened up accounts at two new banks since moving to Vegas and the bank employees usually looked at me like I was crazy when I told them I was not interested in having a debit card!
I've never been accused of being an economic wizard, but I'll share with you my personal financial preferences.
First, I NEVER deposit money into my checking account....always my savings account. My current savings account is an FDIC insured money market savings account which has a fluctuating interest rate, but right now its around 1.5% compared to the tiny .2% for my bank's regular savings account. The interest gained in my checking account.....ZERO %! Unless other banks do things differently and have awesome interest rates for their checking accounts, why would I want to keep the majority of my money in my checking account. For those of you who directly deposit your paychecks into your checking accounts, why are you doing this?
So how do I pay for things if I don't use cash or a debit card? Credit cards of course! Gas, groceries, dining out, car insurance bills, everyday expenses, etc. etc. etc. Heck, when I lived with Mikey, I paid the entire rent every month on my credit card and just got his portion from him separately. Why pay for everything with a credit card? Why not?
There are three main reasons to pay for things using credit as opposed to debit:
1. You're not paying any more using credit than debit, unless you actually get a credit card with a monthly fee, which seems to be rare. The gas you put on your credit card costs no more than the gas you pay using debit. Same goes for groceries, etc. The only way the credit card would cost you is if you kept a balance on it instead of paying it off in full every month. As long as you don't buy any more things using credit per month as you would have using your debit card, there should be no difference at all!
2. Paying using credit and paying off your credit card every month helps your credit score! That cannot be said about using your debit card. I'm proud to say that my credit score is well above 700 right now, thanks in part by using some of my available credit every month and then paying off that debt immediately as soon as the credit card statement comes in the mail.
3. Using a credit card can get you free stuff. Currently, I have two credit cards. One card has a rewards program that funnels a small % of each of my purchases to the alumni association at Bowling Green. The other card, which I primarily use, earns me approximately $120-$150 in free groceries per year. There are plenty of credit cards out there with all kinds of reward programs that can earn you frequent flier miles, free hotel stays, free gas, etc. Why use a debit card that gets you absolutely nothing?
One other advantage to my personal strategy is that it forces money management upon me whether I like it or not. I write exactly two checks every month. One is my rent/utility check to my roommate who pays all of that stuff himself. The other is the check to my credit card company when the statement arrives in the mail. I obviously pay it in full thus avoiding interest charges. Each time I write one of these two checks, it forces me to transfer just enough money from my savings account to my checking account to cover these checks, and no more since I want all of my cash in the money market savings account. I do these transfers online which allows me to also see my direct deposits into my savings account. If the amount to write these two checks each month is MORE than what I've directly deposited into savings, I know that I've spent too much that month and I need to tone it down. The only time that's happened though was when I was "working" at Sunset and barely getting 3 days per week (as well as the brief period after being laid off).
So that's my little question of the day. For the life of me I can't understand America's infatuation with debit cards!
Wednesday, December 10, 2008
Debit Cards.....why???
Posted by Rob at 1:17 PM
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5 comments:
And - I don't think you covered this - using a credit card protects you against faulty merchandise and scams - a debit card will not do that.
And I agree with you Rob, I don't have a debit card and don't undertand the facsination with them either.
Jay from Ohio
As someone with a credit score somewhere in the low-to-mid 700s, I use a primary credit card (Amazon Gift certificates as a reward ... nearly $300 this year). However, when my credit score was somewhat less than stellar, I couldn't get a credit card. And for many online transactions, a check simply won't work.
If you buy on the internet or rent a car (and many hotel rooms, too) you need a card with Visa or MasterCard on it, and many folks with bad credit have no alternative but to use a debit card. I have no idea why anyone with the ability to carry a "real" credit card would use a debit card.
As for the way you manage your accounts, that's probably your mid-western sensibility kicking in. Since I'm married, my financial situation is a bit more complex, with 3 checking accounts in the house, several savings accounts, 401Ks, IRAs, etc. Basically, we deposit pay into and spend our money out of joint checking for most household stuff, and I use my credit card for a lot of stuff to get points.
The card carries a small balance (but has a huge limit so no ding to my credit) and everything else gets paid in full each month. The left-overs are transferred into a money market savings account. Not necessarily as efficient as your system, but it works for us.
Jay, very good point about that extra "insurance" when purchasing things with a credit card. I forgot about that little bonus!
Lars, I guess I should have prefaced my post with the fact that its based on the fact that I'm still single with no kids, so no joint accounts or anything like that to worry about.
I think the underlying point that I am making is that no matter what financial strategies you have, you should make sure you are always living within your means and spending less that what you're taking in. I realize that using a debit card cuts out the steps of transferring the money and writing checks, but those steps take me a grand total of about 20 minutes a month...which is a small investment of time to ensure my financial stability.
Lars, thanks for the mid-western sensibility comment, I take that as a nice compliment!
Rob,
You are correct. As an accountant here in North Carolina it is amazing how many people overspend their DEBIT cards and really get stung. Also as Jay wrote, the insurance factor is a good one, especially in large purchases.
I use a credit card for miles on an airline. Is is really easy to rack up some points. I purchased my last car in August with my Credit Card. That was a great bonus.
Of course, the most important thing to ALWAYS remember is you must pay the card off each and every month. With the Banks ripping everyone off these days, they can up your rate at any time.
Keep up the good writing
We use our debit card or cash for everything versus a credit card because we made the decision two years ago to be a cash only family. Of course, we do have available credit and use it for things like online purchases, airline tickets, hotels, etc. Our checking account also has a better interest rate than our money market account due to the fact that our checking account is with the same bank as our mortgage. We budget ALL (even have reserves for unexpected expenses) at every pay period. When the allotted funds for those two weeks runs out; it runs out. In my opinion, a credit card provides you the option to spend money you don't have. You have to think more carefully when you spend money and it is going to be gone, just like cash. It sounds like your plan works for you and that is a good thing.
Sheri from Ohio
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