Photo: reallyboring via flickr
Debit cards rose to power for two reasons: convenience and affordability.They provide a direct link to your existing funds that is quick and (used to be) free. But with the proliferation of bank fees, debit may be on its way out.
The Durbin Amendment was intended to cut retailers and consumers a break by reducing interchange fees.
When merchants accept debit as payment, they pay the corresponding bank cut of the money.
Before Durbin, the average interchange fee was 44 cents per debit card purchase. The amendment caps interchange fees at 21 cents plus .05% of the transaction (and another cent if certain security measures are taken).
This might initially sound like a feasible strategy for easing the strain on merchants, but card networks and banks won’t let their money slip away so easily.
To make up for lost interchange fees, banks are imposing debit card fees, shifting the burden from merchants to consumers. Starting next year, Bank of America will charge debit users $5 every month they swipe their card.
Some banks, like Wells Fargo and Chase, are currently testing similar monthly fee programs. Nobody is thrilled about shelling out $60 a year for a service that was once free. If you’re not a fan of losing money to frivolous fees, you’ll want to start looking into alternatives.
Perhaps the most obvious answer is to revert to cash. You’ll have to contend with all the inconveniences that led people away from paper money in the first place, but it’s a surefire way to avoid fees. The trick is not letting your change go to waste. If you pay exclusively in cash, odds are you’ll earn your fair share of pennies, nickels, dimes, quarters and even the occasional 50-cent piece. If it all ends up under the floor mats in your car or cushions on your couch, you might pay more in wasted change than you would debit card fees. Coins are valuable, too. Don’t lose track of them.
Be wary of ATMs. One of the major downfalls of cash is its limited accessibility. With a card, you have unlimited access to the whatever’s in your checking account. It’s not always wise to carry thousands of dollars wadded up in your back pocket or to stash it away in your sock drawer. You can still use your checking account without paying debit fees as long as you only use your card for ATM withdrawals. Surcharges from out-of-network ATMs get expensive fast, so figure out where and when you’ll be able to make free withdrawals before you hit the town.
The Durbin Amendment left credit card interchange fees alone, and banks are sweetening credit card rewards to steer customers away from debit. Credit cards have always had a couple advantages over debit. They generally offer better rewards programs and grant greater financial flexibility to meet your immediate needs. Of course, you’re spending money that’s not actually yours, so you do have to factor in the risk of debt and interest rates. But when used responsibly, credit cards make for a very viable replacement.
Signing up for a credit card with a high annual fee would defeat the purpose of switching over, but luckily there is an abundance of options with low or no annual fees. Even free credit cards can earn you substantial rewards. People with bad credit might have trouble qualifying for a card without an annual fee, but there are a number of cards for limited credit with fees far below the $60 Bank of America will soon be charging.
Credit unions are a great alternative to big-bank debit cards. They’re not-for-profit and run by members, meaning they treat you a little more like a human than a number. They don’t demand the steep fees you’d pay at big banks, and you won’t have to worry about the Durbin Amendment spoiling that. Credit unions often offer low-interest loans, high-yield checking accounts and reasonable credit cards for people with limited credit. Switching from your bank to a credit union or local bank can be a smart move if you aim to dodge the oncoming debit fees. The only real drawback is that their credit cards tend to have less enticing rewards programs, but if you’re looking to cut down on fees, there’s no better way to go.
Deposit More Money
If you’d prefer to stick with your bank and hold onto your debit card, you might be able to do so without succumbing to fees. Depending on your bank, you might be exempt from debit fees if you keep a certain amount of money in your account at all times. If you can afford to stay above that particular number, it’s not a bad way to go, especially if you’d normally stay above it anyway. Sometimes, you can also get free checking if your checking balance, savings, investment accounts and mortgage/credit card debt add reach a predefined sum. Banks like customers that trust them with more money.
Tim Chen is the CEO of NerdWallet, a personal finance website that rates and reviews the best credit cards of 2011.