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Why Debit Card? Why Cash?

Contributed by mm | January 28, 2004 4:33 PM PST

This CardWeb article mentioned that a study shows that debit card usage increased rapidly over the last four years from 21% of in-store purchases in 1999 to 31% in 2003. In contrast, credit card usage is almost flat (from 22% in 1999 to 21% to 2003).

I can understand some people do not have credit card can only use cash or debit card, and both medium ensure one will live below his means, but I cannot understand why people prefer to use cash or debit card for other reasons. For me, credit cards offers the following advantages compared to cash and debit cards:

1. Thanks to the different fee structure the financial institutions makes out of credit card transactions vs debit card transactions, credit card users can be entitled to around 1% rebates in cash or other rewards. It amounts to hundreds of dollars per year for a typical family.

2. With credit card transaction one is using others' money and as long as one pays the entire credit card balance every month no interest is charged. This essentially means a long-term interest-free loan up to the amount of an average month's spending. Assuming $3,000 monthly spending and a saving rate of 2% (your opportunity cost of investing the additional cash), this benefit is worth $60 annually.

3. The revolving credit line allows flexibility for short-term cash crunch.

4. Credit card usage helps to build one's credit history, which will be meaningful when one has to buy a house or new cars someday.

5. If credit card is lost, the cardholder liability is at most $50 (or $0 in most cases), but if one loses debit card or cash, the loss can be up to the checking account balance or the total cash amount.

6. Credit card (and debit card) helps to keep a record of everything one spends. Don't think of that for cash.

7. Credit card purchases are protected because one can always raise credit card dispute if one is not satisfied with the service or product quality. Not for cash or debit card.

8. Credit card companies usually throw in additional benefits like secondary auto insurance, common carrier life insurance, among others.

So, why debit card or cash?

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