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As debit cards lose their shine, credit cards bounce back

by Peter Andrew

You probably won't like it, but next month sees the implementation of the Federal Reserve's new regulations concerning "swipe" (also known as "interchange") fees. These fees are the cut of each transaction value that a merchant has to pay to your bank or credit card company every time a debit or credit card is swiped in their store. The Fed's new rule imposes a cap on the amount that banks get when you use a debit card. And, as a result, many banks are scaling back their debit card rewards programs, and imposing fees on checking accounts and/or debit card use to make up the lost income.

The great debate over swipe fees

On Friday, The Augusta Chronicle quoted David Oliver, a spokesperson for Georgia Bankers Association, as saying: "As a result of the Dodd-Frank Act, the cost of debit card payment services has shifted from retailers and merchants to consumers."

And that's certainly one valid way of looking at it. Another is that few merchants ever shouldered the burden of swipe fees themselves, but instead raised prices to cover them. And those higher prices were paid by all customers--including poor, unbanked ones who use cash. Looked at that way, you could see such fees as a sort of private-sector sales tax by which the poor subsidized better-off people's free banking and rewards programs.

Which view is correct? You pays yer money and you takes yer choice, though you'd probably be better off using a credit card when you do so.

Credit cards are better

That's because, generally speaking, credit cards have always been the best way to pay for purchases. Toward the end of last year, this credit card news blog identified 7 ways in which credit cards beat debit cards, and three of those were:

  1. Better statutory protections if you're a victim of fraud
  2. Better statutory protections if you need to dispute transactions because of shoddy, misdescribed or undelivered goods or services
  3. Better benefits from rewards credit cards

As banks scale back or abolish debit card rewards, that last point is likely to become even more significant. That's because rewards credit cards (indeed, all credit cards) are exempt from the Dodd-Frank Act's provisions, so there's no reason why they shouldn't remain as generous as ever.

Rewards credit cards improving

Indeed, as this blog recently pointed out, the rewards on offer from many credit card companies are actually getting better. In particular, recently launched cash back credit cards and travel rewards cards often offer superior benefits compared with older ones.

Published 09/06/11 (Modified 10/19/14)


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