Differences between Debit and Credit Card
Pay now, or pay later with interest? That's the difference between a Debit Card (also referred to as a Debit Credit Card, Keycard, Handycard, Flexicard, Access Card or Cashcard, depending on the issuing bank) and a credit card.
Put simply, a Debit Card lets you spend your own money without carrying cash.
Debit card processing is often handled identically to credit card processing, requiring a signature to complete the transaction. The alternate EFTPOS system, requiring a PIN (Personal Identiication Number) to be entered into a machine to verify your identity, is regaining popularity since changes to Australian law allowed merchants to charge fees for card transactions. EFTPOS is free of merchant fees, but a bank fee may be imposed for each withdrawal, especially if the terminal used for withdrawal does not belong to the bank that issued the card.
Those who struggle to balance their budget, forget or struggle to find time to pay bills, or stress over owing money, should cut up their credit cards and apply now for a Debit Card from their preferred bank!
When you use a Credit Card, you are borrowing money from your bank, just as you would if your cheque account allowed an overdraft and you wrote cheques for more than the amount in your account. Within a month of your purchase, your bank will send you a statement and ask that you pay at least a portion of the total amount owing. If you pay the full balance immediately, you might not be charged interest. Otherwise, interest charges will be added to the total owing—usually at high rates! If you don't pay the required amount by the due date, heavy penalty fees apply! Unless you are careful of your spending and diligent about bill paying, using a credit card can be expensive. For many, using a credit card starts a 'debt spiral' that may be difficult to control and painful to end!
A great solution for those who like the convenience of a card, but don't want to incur debt, the Debit Credit Card lets you use a swipe card (or numbers and PINs for phone or internet purchases) to spend your own money! Immediately the seller processes your order, funds from your bank account are transferred to the seller. You still receive monthly statements, but, like a bank statement, they detail the dates and amounts of withdrawals and show the remaining balance. There is no bill to pay. There is no risk of penalty charges for late payment. No interest costs apply. For those without an established credit history, a Debit Card may be easier to get.
You can also use most debit cards to withdraw cash from your bank account. Conveniently, almost any ATM anywhere in the world will dispense cash in local currency on insertion of your card and entry of your private PIN. Travellers enjoy the convenience of access to foreign currencies on demand, whenever and wherever needed.
Of course, you can use most debit card to pay for purchases both at home and abroad, so you don't need to carry foreign money to buy goods and services when travelling. (If you are planning a trip abroad, forget traveller's cheques and apply for a Debit Card or Visa Passport instead!)
You can also use some Debit Cards to buy goods safely over the Internet, or to pay bills by telephone. It's quick, convenient, safe, and inexpensive (although most users pay some fees for the convenience.)
Especially for 'card not present' transactions—such as Internet purchases, where you can't physically insert your card into a machine—Debit Cards are safer than Credit Cards. Any fraudulent transaction can access no more than the balance in your account. Some security conscious 'net shoppers use a special 'prepaid' Debit Card account, keeping a nil balance until they want to make a purchase, then electronically transferring just enough to cover the purchase. If you are nervous about shopping on the Internet, you may want to apply for a Debit Card to use this way. Some banks even offer special debit card accounts (there may be no physical card involved) for Internet use.
Prepaid debit cards are also great for budgeting, and for managing spending allowances of dependants or employees.
Australian banks offer a wide choice of Debit Card accounts. Card features vary, so it is smart to compare cards to ensure you enjoy the best features available for your needs. Click here for advice on choosing the best card for your needs, then apply for your choice of Debit Card and start enjoying the convenience of debt-free shopping without carrying cash.
History of Debit Cards in Australia
Debit Cards date back to about the date of the introduction of e-commerce. The first 'Switch card' transaction took place in 1988. By 1995, Debit Cards had overtaken credit cards in popularity, and by 1998 Debit Card transactions were more common than cheque payments.
In 1990 there were already over 19 million Debit Cards in circulation. Rapid growth continued through to 2006, when circulation reached 27.8 million. Although growth has slowed a little because of the market reaching saturation point, it is expected that 34.4 million cards will be in circulation by 2016.
The most significant driver of growth in the Debit Card market was the advent of 'chip and PIN' technology, reducing the scope for fraud.
Visa say the Debit Card is the fastest growing consumer product ever released by their company, with over 115 million people carrying a Visa-branded debit card and about 70 million people using their card every month! By 2005, Debit Cards were used an average of 166 times per user annually.
In the US, 82% of bank account holders have an ATM debit card. Worldwide, it is estimated that seven out of ten consumer households now have a Debit Card, and 53% of households use their card to make retail purchases monthly. On average, consumers use their Debit Card nineteen times each month. Figures released in the UK show that 109 billion pounds was spend using debit cards in 2007, compared to only 84 billion pounds cash and a measly 7.4 billion pounds using cheques.
In Australia, EFTPOS-enabled cards have been operating since the 1980s, and are now accepted at most swipe terminals that accept credit cards.
June 2008 surveys revealed 13 million credit cards on issue in Australia, and 28 million debit cards. The Commonwealth Bank is the largest issuer of debit cards, topping $10 billion in purchase volume.
With more than 20 billion transactions of less than $10 value now made yearly using plastic cards, we may be close to the point where cash will follow cheques into oblivion. The popularity of Debit Cards, combined with rising global concern about credit card debt, might well see the Debit Card become the global standard of payment.
What fees can I expect to pay?
If you want to use a debit card, it is likely you'll have to pay fees of some sort to your financial insititution.
These fees are generally for the account linked to the debit card rather than the debit card itself. So often they may be similar to fees charged by the banks for a typical every day account. As with all financial products it's important to take fees into account when choosing as a few dollars a month can make a significant difference to your choice - after all why pay something when you don't have to.
It's not all bad news though - in general the debit card accounts that charge higher fees tend to have more features so if you do make use of these features, it can represent good value. Some debit cards will also waive their fees subject to the user making regular depsoits or keeping a minimum amount in their account. To get a quick idea on debit card fees in Australia, check out our comparison table on the homepage.
What is the best Debit Card for me?
Debit Cards come in many 'flavours', so it is important to examine the features of each offering and choose the right Debit Card for your needs.
List your answers to the following questions to clarify your needs before considering the available choices.
o Do you need a card for use on-line only (eg as a PayPal Debit Card), or do you want a physical card for use in stores and to withdraw from ATMs?
o Will a prepaid Debit Card better suit your needs? (Prepaid Debit Cards are easier to get, often more secure, and great for special purposes like travelling, managing spending allowances for children or expense allowances for employees, and separating funds for budget purposes)
o Do you travel often? Will you use your card abroad?
o Do you do most of your banking via the Internet (including using PayPal), or do you prefer over-the-counter transactions?
o How do you plan to top up your account with funds? Can you arrange a regular direct deposit of salary or investment income, or will you be depositing cash or making electronic transfers from other accounts?
o How many ATM and branch withdrawals do you expect to make monthly?
o Do you need to give other people a Card to access your funds?
o How important are special benefits like purchase insurance, travel insurance, and extended warranties?
o Are you a lover of entertainment? Would special access to entertainment events enhance your lifestyle?
Fees are of key importance to most people, but advertisements referring to 'no fee' or 'low fees' can be confusing. Check the fine print and think about how you are likely to use your card. Will you be making frequent withdrawals from ATMs? Are you likely to be able to get to an ATM owned by your own bank for most withdrawals? Will you be travelling and using your card in foreign countries? What transaction fees apply for these services? Fee-based accounts might work out cheaper than free accounts with higher transaction charges.
If choosing a fee-based account, ask about fee concessions. Students, pensioners, and veterans should take particular notice of fee concession offers.
Most issuers offer good security features, but it is wise to consider the reputation of the issuer carefully. Is the issuer likely to honour guarantees to refund losses from unauthorised transactions? Can you rely on the issuer for prompt and helpful advice and service if the card is stolen, you lose it, or you note suspicious transactions? You should also consider how easily you can contact the issuer, especially if you plan to travel.
Consider the features of the linked account(s). Does the account suit your general banking needs?
A choice of card colour and design is probably a minor consideration, but consider optional benefits— like discounts or special access to entertainment, insurances, and extended warranties—carefully. These benefits can be valuable! Frequent travellers, for example, could save hundreds of dollars on travel insurance just by choosing the right Debit Card and using it to pay fares! And how good would you feel if a costly item you just bought was stolen from your car and your Debit Card issuer offered to pay for full replacement?
How can a Debit Card get me out of debt?
Switching your credit card for a debit card is one of the best things you can do financially.
It means that whenever you use your debit card, you're spending your own money - not borrowing from your financial institution for your purchase. It helps you to not spend beyond your means as a debit card will not work if there are not sufficient funds in the linked account. Of course, using a debit card is not a silver bullet for getting out of debt - you may still have an existing credit card to pay off or perhaps have other forms of credit such as a car loan, personal loan or mortgage. However with credit cards typically providing the most expensive form of finance, switching to a debit card is a big step and will save you money immediately. Not to mention it's symbolic and a sign of someone who is in control of their finances.