How to Save Money Using Debit Cards Smarter

 by Lori Deschene

I pull out my debit card for everything from toothpaste to airfare. My worn checkbook chronicles the many unnecessary purchases I make throughout the day—$8.99 for two magazines and a Snapple, $5.25 for duck-shaped soap, $8.25 for cute child-size flippers, even though I don’t have children.
The thing about spending with cards is that it doesn’t feel like real money—and small purchases don’t seem like actual transactions. However, I realized something yesterday when a 7-Eleven worker added a $.50 fee to my slinky and pixie stick purchase: my debit obsession is costing me.
So I decided to do a little digging. Why have we forsaken cash? How do debit cards affect our spending habits? Is it worth the potential for fees and fraud?
 
What’s wrong with cash?
Cornell economics professor Robert Frank explains that parting with cash is a more vivid sensation than the abstract act of signing money away. Granted, his NPR podcast centers on the credit-versus-cash debate, but this translates for debit, as well. Just because you have it in the bank, that doesn’t mean you want to spend it.
ABC recently did a special on a family that switched entirely to cash and saved 24 percent over 30 days totaling $1,800. They sacrificed the simplicity of the digital era, but the plastic-to-cash conversation gave them a simpler framework for acceptable spending: if it’s not green and in my wallet, I can’t spend it.
 
Is debit really better than credit?
Many financial experts recommend using credit cards, so long as you can do it wisely. If you only use your card to spend within your means and pay your entire balance monthly:
  • The money in your account gains interest.
  • It will be easier to debate fraud because you haven’t spent actual money yet.
  • You’ll likely have access to a more generous reward program than your bank might offer.
  • You’ll build a credit history, which you can’t do with debit.
  • You can profit from 0% balance transfer credit card offers. Fivecentnickel.com outlines this nicely.
 
What are the disadvantages of using debit cards?
  • Fees can add up. If you enter your pin number at the register—which you generally have to do for a small purchase—both the merchant and your bank can charge you a fee. If it's under $10, you probably shouldn't go with debit. 
  • It’s easier to overdraw with debit than with checks. When you write a check, you have a window of time before it’s processed. That gives you some leeway if you have inadequate funds in your account. Debit transactions are processed far more quickly, giving you little time to compensate for an error in judgment.
  • Debit transactions can block funds in your account. Oftentimes a merchant will block an amount in excess of what you owe before you even process the transaction to protect themselves against fraud and other losses.  Hotels do this frequently when you reserve a room. This means you may have less available money than you think you do, making it really easy to overdraw your account. Whenever making a reservation, it's best to hold it with a credit card.
  • Fraud is a growing problem. Even if you never lose possession of your card, you still could be at risk for debit card fraud. According to Aurelia Cardamone, an FDIC Senior Technology Specialist, “…someone who learns your account number, security code and PIN may be able to use that information to access your account and create counterfeit cards.” Beyond the potential for an isolated identity theft incident, we also have to contend with computer insecurity. Just recently on August 5th the United States Justice Department charged 11 individuals for hacking over 40 million credit and debit card numbers from 9 major retailers. In the US, the Electronic Fund Transfers Act protects you against these losses. Still, it could take your financial institution up to 10 days to refund your account—and your landlord might not be willing to wait. Also, if you don’t notify the bank within 48 hours your liability could be as much as $500.
 
How can you reign in debit spending?
Blogger Ramit Sedhi, who maintains the site I Will Teach You to Be Rich, suggests using two debit accounts: one for bills, and one for discretionary purchases. At the beginning of the month, transfer a set amount into the discretionary spending account. When it’s gone, it’s gone. Then any excess in your bill account can be easily transferred to your savings.
 
I personally find Sedhi’s idea more appealing than quitting my debit habit cold-turkey, as I’m not quite ready to part with my shiny, Master-Card branded friend. But I can deal with using it a little smarter.

posted @ Thursday, September 04, 2008 2:44 PM

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# re: How to Save Money Using Debit Cards Smarter

Left by SBA at 9/5/2008 4:43 PM
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This is unfortunately a timely article for me. Just had to cancel a credit card I used regularly for small purchases --- someone stole the data (not the physical card) and made small (pre-)teenage type purchases. Second card in 4 months with 2 banks. The banks are pretty good at spotting this type of fraud and alerted me within a few days. So I was contemplating using a debit instead. Your post helped me decide reluctantly to take my chances again with credit cards!

# re: How to Save Money Using Debit Cards Smarter

Left by Mark - Productivity501 at 9/5/2008 6:26 PM
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If you keep track of your spending with a credit card the same way you are doing it with a debit card, I can only see the benefit of using a credit card.

Also if your money management program will automatically download your credit card purchases it is really easy to keep track of where you are vs. what you have in your checking account.

I heard of someone who bought some fast food with a debit card. It came to $9. They accidentally hit some extra zeros and took out $9000. She eventually got her money back, but it was much much more trouble that it would have been had she used a credit card.

Depending on your personality you might actually spend more by carrying cash. I think you are better off trying to be wise in your spending than using the amount of cash in your pocket as a guide to how much you can spend.

# re: How to Save Money Using Debit Cards Smarter

Left by cory huff at 9/5/2008 9:47 PM
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My wife and I use cash budgets. We set aside envelopes for budget items, and when the money is gone, we don't spend anything else. Works out pretty well for day to day expenditures, but we still use debit cards for large purchases. I like the idea of setting up credit cards for the large recurring charges like rent, student loan repayments, etc. Good plan!

# re: How to Save Money Using Debit Cards Smarter

Left by janelle at 9/6/2008 6:04 AM
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Really informative article! Debit cards (and credit cards) are definitely tricky. I made the all-too common mistake with 2 credit cards by treating them as if they were free money. The result? I now have two astronomical credit card bills to pay down for at least the next few years. It's easy to make the same mistake with debit cards since they're so similar. However, I find that since I utilize my check register to record the things I spend money on, it sort of forces me to slow down and think about the purchases I'm making.

# re: How to Save Money Using Debit Cards Smarter

Left by Austin, TheOrangePaper Guy at 9/7/2008 1:45 AM
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A really nice and informative article. In my opinion using credit cards wisely and within means is a great way to manage your finances. As long as you don't end up paying interest on your credit card bills you are safe.

On the other hand, debit card spending really gives you the limit upto which you can spend, especially if you're a spend thrift. Fraudulent transactions are another reason why I don't prefer debit cards.

# re: How to Save Money Using Debit Cards Smarter

Left by Wayne Smallman at 9/7/2008 1:52 AM
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Perception is a great and powerful thing.

I was surprised by the amount of money saved by the family switching to cash. However, this is just one example. It would interesting to see a fuller study involving more families.

In times like the ones we're experiencing right now, the so-called "Credit Crunch" could well force such things on people.

And if the banks want to be friend rather than foe to their customers, it would behoove them to encourage better financial planning.

For all the reasons outlined, I don't have a personal credit card. I have one for my business, but that's out of necessity.

Some wonderful advice, Lori...

# re: How to Save Money Using Debit Cards Smarter

Left by Lori at 9/7/2008 12:50 PM
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SBA--I'm sorry to hear about that. I know how it feels! I've had my debit information stolen twice and it was just a huge hassle...even though I got the money back.

Mark--That story about the fast food is pretty crazy. I think people forget sometimes that human error can come into play. Scary when it comes to your money!

Cory--I'm trying to learn your discipline! I always find a way to justify going over my budget...because it's just small purchase.

# re: How to Save Money Using Debit Cards Smarter

Left by Lori at 9/7/2008 1:01 PM
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Janelle--Having a check record definitely makes it easier to monitor your spending. I find myself going to my bank and credit card websites every day or two just to keep track and make sure there are no errors. The perks of the digital era...

Austin--I agree with you. The benefits of using credit cards justify going that route, as long as you have the discipline to spend within a predetermined range.

Wayne--I'm with you there! I did a lot of digging, hoping to find that kind of study. I wanted to make a broader analysis of the way debit cards affect spending habits, but I couldn't find the data. In response to your second point, I think financial planning should be taught in schools as a subject all its own. It doesn't matter how lucrative your chosen career is if you don't know how to manage your money.

# re: How to Save Money Using Debit Cards Smarter

Left by James at 9/23/2008 7:41 PM
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Lori,

Excellent advice - it's true that spending cash has a more realistic feel of spending your hard earned money than debit/credit cards. One of the best pieces of advice I've heard related to this is to fill up envelopes for all your expense categories with your budgeted cash for the month. Seeing the amount of cash dwindling down from the envelopes is often enough to prevent you from overspending.

# re: How to Save Money Using Debit Cards Smarter

Left by SpyGadgets at 10/4/2008 8:52 PM
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We see a lot of fraud every week with online orders we get. While it's on the decline because security measures are getting better it is still a problem for honest, hard working people.

Crooks often want orders shipped to an address different from where the credit card bill is sent. We take extra measures to contact the real card owner and I can't tell you how many people have thanked us for going the extra mile.

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