Debit or credit? Your favorite shoestore’s sale is begging for an answer.
You want to just use your debit card and not worry about racking up credit card debt. But what about those airline points you can use for that ticket to Tahiti?
Therein lies the lure of credit cards. And while both debit and credit cards have been around for some time, their incentive structures differ for key reasons.
Understanding why, and the perks each type of card typically offers, calls for a trip back in time.
The Evolution of the Credit Card
Diners Club was the first modern credit card. Launched in 1950, users had to pay off the balance monthly and paid an annual fee for the privilege. A few years later, American Express offered a card that let users carry a balance while incurring interest.
Back then, credit cards required carbon forms to be filled out in triplicate. These days, all using one requires is a swipe, an insertion, or a wave from a mobile wallet.
Thanks to the increase in card options and the decrease in work needed to process credit card transactions, perks have proliferated. Cards now compete for members based on their rewards.
Credit card perks also tie closely to their interest rates. The interest rate offered by credit cards varies, but most fluctuate based on indices like the prime interest rate. Cards that carry higher interest rates can afford to offer more perks.
The reason credit score thresholds vary between cards has to do with payer reliability. Exclusive card issuers use perks to attract customers who they expect to pay their bills. If those customers don’t, the cost of perks is offset by steeper interest rates.
What perks resonate most with today’s customers? Credit card companies respond to market demand. Credit card customers’ favorites include:
- Cash back rewards
Who doesn’t like getting that notification that they have $100 in cash back bonuses to use? It’s like free money, right?
Well, not exactly. But it’s still a great perk you don’t get with most debit cards.
For every dollar you spend using your credit card, a company may give you anywhere from 1% to 6% back in cash. That feature makes using your credit card tempting, especially when you’re making a large purchase, like a new fridge or a vacation rental.
- Heavy metal
One of the more recent tricks used by credit card companies is replacing plastic with metal. That platinum-colored plastic card simply doesn’t stand out like a palladium metal card. Cards can be made from copper, brushed stainless steel, brass, or even gold.
These cards don’t work any differently than plastic. But they sure look great when you whip it out of your designer wallet.
- Technology and security
Credit card companies were the first adopters of EMV chips, which make it tougher for hackers to steal the card. Chips are more difficult for fraudsters to copy, and they can’t be used in “skimmer” devices sometimes installed on gas pumps and ATMs.
Likewise, credit card issuers jumped into the mobile wallet game early. Now that the pandemic has made touching surfaces like a keypad potentially life-threatening, consumers have put a premium on mobile payments. With these systems, paying for a transaction is as simple as waving a device above a reader.
- Rewards of other kinds
To stand out, credit card companies have gotten creative with their rewards packages. Air miles, hotel vouchers, and rental car points are common.
What rewards are less common? Some cards offer free museum entry. Others come with free two-day shipping. Still others give access to exclusive events.
What all these perks have in common is that they promote extra spending. Museums are usually visited on vacation, which comes with all sorts of other expenses. Free shipping encourages online shipping.
Can Debit Cards Keep Up?
There are two main reasons the debit card can’t offer the same perks as credit cards: First, you can’t spend more money than you have in your bank account. Second, most credit card accounts turn a profit from interest and fees.
Debit cards do have the allure of not paying a credit card company interest. But they’re also beginning to offer more and more credit card-like perks to stay in the race:
- Security from fraud
Until recently, credit cards were much more secure than debit cards, largely due to chip technology used by the former. Most debit cards now come with the chip, making them just as secure.
On another point, however, debit cards still lag behind their credit counterparts: Most credit card agreements state that if your card is used fraudulently, you’re not liable for that use. But if someone hacks your debit card, your bank account could be empty before you know it.
Most banks will work with you to replace a thief’s ill-gotten gains. Still, whether and how much they reimburse you for can be context- and card-dependent.
- Contactless payments
More and more debit cards are featuring those four curved lines, indicating compatibility with mobile wallet apps. Before long, all of them will.
If your debit card doesn’t provide contactless payments, try hooking it to a platform like PayPal. While it might mean an extra tap or two, you can make payments from your mobile device through an app.
- Fee-free overdrafts
When you reach your credit card limit, your transaction is denied. But if you have a bank account with fee-free overdraft protection, your transaction may go through.
You don’t want to overdraw your account regularly. If you do, your bank may rescind the feature. But in a pinch, it’s a great feature to have.
- Cash incentives
Remember those annual fees and interest that make it profitable for credit cards to provide cash back rewards? The debit card has a much tougher time trying to reward you for using it. But don’t count it out entirely.
Some debit cards do offer incentives. Round-up cards deposit the difference between the transaction amount and the next dollar into a linked savings account. A couple of prepaid debit cards provide 1% cash back on transactions.
Finally, some banks have teamed up with restaurant and retail partners to provide perks for shopping with those partners. Buy lunch at a restaurant using your debit card, and you may get three bucks off your next meal.
Can the lowly debit card compete with the glitz, glam, and gifts offered by credit cards? Of course: Staying out of debt matters more to some consumers than any perk ever could. As is true in every market, it all boils down to what users want.