Holiday Spending With Debit Cards A Risk

The new found frugality of the average American consumer is going to be sorely tested this coming holidays. The holidays have traditionally been times of increased consumer spending as consumers go out to spend money on gifts, parties and decorations. According to the National Retail Federation, consumers are going to be spending $683 on average during the holiday season. A substantial amount though that is lower by 3% than last year’s estimate which was at $705.

Considering the state of the credit card industry, a lot of frugal and spending sensitive consumers are probably going to opt out of carrying their credit cards to the stores this year. Some are going to opt for paying in cash while a larger number are going to go for debit cards.

Debit cards have surged in popularity in the past few months as more and more consumers get disillusioned by their credit cards. To be sure, debit card popularity was already on the rise before the economic recession hit. However, when the recession arrived and credit card industries began hiking up credit card interest rates and fees in an effort to increase profits as write offs and defaults rose, credit cards became highly unpopular among consumers. Debit cards became popular enough that it recently overtook credit cards in terms of dollar volume spent.

Unlike credit cards, debit cards are connected directly to a card holder’s bank account and spends only the amount available in that bank account whenever a consumer uses it to pay for purchases. Credit cards, on the other hand, use loans to pay for purchases which earn the card holder interests and “interests” have become a common word of warning among consumers nowadays.

Debit cards have their disadvantages, however. Generally, debit cards have less protection standards than credit cards. Although major credit card issuers may promise consumers protection if their debit cards are compromised, there are some exceptions in the fine print. A compromised debit card could also take longer for its balance to get restored as well.

Privacy Rights Clearinghouse’s Paul Stephens said, “The problem is the consumer cannot control how a crook uses their debit cards”. Stepehens’ consumer advocacy group which is based in San Diego actually advise consumers to avoid debit cards altogether.

The argument that debit cards could help consumers avoid overspending and overdraft fees also has its flaws as well. Although a lot of consumers think that a plastic card whose payment powers are backed by the amount available in a connected bank account would not be able to overcharge, in reality, that is not the case. Last year, banks collected $35 billion in overdraft fees. Overdraft penalties average at $35, a hefty sum to consider. Although a few banks are now stopping the practice, a lot of credit card companies also allow consumers to overcharge multiple times a day, earning themselves multiple overdraft fees.