Debit cards: Starting to look a lot more like credit

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In the final quarter of 2008, amid lingering excitement from the presidential election and continuing worries about the economy, a highly significant historic moment quietly came to pass: credit cards began to die.

While it would be months before the controversial, much-maligned C-CARD act would place wide-ranging limits upon card issuers, many Americans began their own battle against the card companies. Rather than reaching for Visa (V) or American Express (AXP), they increasingly paid with debit cards.

The following May, Visa released the numbers: during the last three months of 2008, debit card purchases had totaled $206 billion, while credit purchases had totaled $203 billion. While these numbers don't seem particularly stark, they represent the first time that debit expenditures exceeded credit expenditures. More importantly, nearly 70 percent of transactions during the period were made on debit cards, suggesting that, while consumers continued to finance major purchases with credit, they reached for debit far more often.

It isn't hard to figure out why this happened. While credit cards have increasingly become a minefield of varying interest rates, massive fees, and potentially devastating credit reports, debit cards represent relative simplicity. By drawing from bank accounts, they are fundamentally limited by the amount of money that a user has. Moreover, they aren't dependent upon credit rating and have a relatively transparent fee structure. They are accepted in most places that take credit cards, and getting a cash withdrawal is very simple.

Of course, there are some drawbacks: if the security of a card is compromised, it can be devastating, as thieves could easily ransack a bank account. For that matter, some stores charge a fee for debit card usage. However, having personally faced both these problems, I can attest that they are easily overcome. In the case of a compromised number, I found that my bank was incredibly quick to fix the problem. As far as fees are concerned, I usually present my debit card as a credit card, which everybody allows without fees.

In order to encourage more debit usage, many banks are offering rewards programs for debit users. Some are giving extra interest for accounts that use debit cards a certain number of times, while others offer discounts at popular retailers. It isn't hard to see why banks want to increase debit usage: for every debit transaction, stores pay banks up to 2.1 percent of the total sale price.

Unfortunately, debit card users may soon find themselves in a tough spot: while some banks are offering rewards programs, they are also trying to find ways to trap customers. Most have begun permitting overdraft spending, enabling customers to wipe out their accounts without warning. While this makes splurge purchasing a lot easier, it also makes it a lot easier to blow the rent money on a new toy. Beyond that, overdraft spending doesn't come cheap: with a $35 fine for each instance, it is getting easier and easier to get in trouble with debit cards.

All of this points to a larger trend: as consumers trade the dangers of credit for the convenience of debit and legislators make credit fees less lucrative, it seems likely that many of the classic tricks of the credit trade will migrate over to debit. Is it too early to start talking about legal protections for debit card users?

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