Debit cards have been rapidly gaining in popularity. People want to avoid debt, which is a laudable goal, and they see debit cards as a fool proof way to start a debt-free lifestyle. I have a major problem with debit cards in that they lack the security derived from a credit card transaction. Far from just providing payment and financing, credit cards act as an intermediary between yourself and the merchant. If the merchant fails to deliver the goods and/or services you have paid for, your credit card company will refund your money. Although it is rare that I have to request a chargeback, I know the possibility of a chargeback is what keeps many merchants honest. When they hesitate to do the right thing, merely the threat of a chargeback often obtains the desired result. With a debit card, once you authorize a transaction, you have no more recourse against non-delivery of goods or services than you would had you paid with cash or a check.
Furthermore, the security inherent in a credit card is very important to me. If my credit card is stolen, or it’s numbers skimmed, I am not on the hook for anything. If someone were to fraudulently obtain my debit card numbers and PIN, they could clear out my bank account very quickly, and the onus would be on me to prove fraud. In the mean time, I would be bouncing payments from my bank account to billers all over the country. If someone fraudulently charged huge amounts to my credit card, my bills would continue to be paid from my bank account, while I sorted out the mess with the credit card issuer.
One of the best arguments against going exclusively to debit cards is that credit cards allow you to build your credit score. These days, having a good credit score can affect more than just your ability to buy a house or get a car loan. Although I object to credit scores being used to judge people who are not asking for a loan, employers and insurance companies are increasingly using credit ratings to judge people. It is wrong, but it is reality.
There Has To Be A Better Way
I was thinking about this the other day, and I realized that there has to be a product that provides all of the protections of a credit card, but with none of the risk of debt. While, such a card would be of no use to people who are able to pay their bills in full every month, most people just don’t fall into that category. When think I have come up with a great idea, I always assume someone else must have thought of it first.
What I had in mind is called a secured credit card. Like a debit card, you can’t spend money unless you already have it in your account. It differs from debit cards in that you have all of the protections offered by a credit card, and you can build your credit score by using it. The Consumerist has an interesting article on the subject. Be sure to pay attention to this line:
BIG WARNING: Since secured credit cards cater to the unbanked and financially unsophisticated, this market is rife with hidden fees and punitive rates. Scope out potentially lenders super-carefully and take a fine-tooth comb to the fine print.
This sentiment echoed my impressions of the secured credit card market. I saw it as a fee ridden product that had more in common with the local payday loan store than a regular credit card. On the other hand, this is a great tool for people who want the purchase protections of a credit card, without the potential for debt. A quick internet search turns up this Secured Mastercard from CitiBank. With this product, you make a deposit into an interest earning CD, and that becomes your credit limit. You get many of the same purchase protections that you expect in a Mastercard, including rental car insurance.
Are secured cards the answer for everyone? Undoubtedly no. On the other hand, if you are not able to control your credit card spending, yet you still wish to have the advantages of a credit, this may be a product worth looking into.
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