Debit cards are overtaking credit cards as the most prevalent form of electronic payment at the point of sale, yet the determinants of a ubiquitous consumer choice—"debit or credit?"—have received relatively little scrutiny. Several stylized facts suggest that debit-card use is driven by behavioral factors. The popular view is that debit-card use presents a puzzle for canonical economic models. However, we should not overlook standard cost-based motives for using debit cards. Principally, the 50 percent of debit-card users who revolve credit-card balances would pay interest to charge purchases on the margin and hence might rationally choose to use debit rather than credit to minimize transaction costs. Debit-card use might also be rational for consumers lacking access to a credit card or facing a binding credit limit. I document robust effects of these types of credit-card use on debit use and show that such effects are consistent with a canonical model of consumer choice. This paper also shows, however, that it is difficult to distinguish sharply between canonical and behavioral motives for debit-card use in publicly available data. More generally, I develop analytical frameworks for testing competing canonical and behavioral models and find evidence consistent with important roles for both pecuniary and psychological motives.
FAQs
Why Use Debit Instead of Credit?Consumer Choice in a Trillion-Dollar Market? ›
Principally, the 53% of credit card users who revolve balances incur interest costs to charge purchases on the margin (i.e., they don't get the float), and hence might rationally choose to use debit rather than credit in order to minimize transaction costs.
Why do people use debit instead of credit? ›Principally, the 50 percent of debit-card users who revolve credit-card balances would pay interest to charge purchases on the margin and hence might rationally choose to use debit rather than credit to minimize transaction costs.
Why do you think people choose debit over credit when it comes to shopping at supermarkets? ›The bottom line on both types of cards
If this is a concern for you, a debit card may be the way to go for routine expenses like gas and groceries because it forces you to spend within the limits of your bank account.
This means with the 'credit' option you do not have to worry about remembering your PIN, or someone fraudulently capturing your personal PIN # with your debit card data – having that PIN # can potentially give them more immediate access to the funds in your account for fraudulent purchases.
Why are debit cards beneficial because the consumer? ›Debit card advantages include flexibility, security, and the ability to use them almost anywhere. Debit cards can help some consumers manage money.
Why do people prefer debit? ›Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an overdraft fee.
Why do people still use debit cards? ›No Debt – With a credit card it's easy to purchase anything you want, even if you don't have the funds. With debit cards, the money comes directly from your bank account, so you avoid spending more money than you have. Plus, you don't have to remember to pay the credit card bill once a month.
Why do merchants prefer debit cards? ›Debit card payments are usually better for merchants.
The processing fees tend to be lower, the disputes and chargebacks easier to handle, and the money is available quicker. Even when charged as credit, debit cards will still be easier to handle.
Nowadays, credit cards are accepted almost everywhere, and some people never carry cash at all. In general, NerdWallet recommends paying with a credit card whenever possible: Credit cards are safer to carry than cash and offer stronger fraud protections than debit.
Why do some people prefer physical money to debit? ›Swiping a credit card (or even a debit card) is easy. But withdrawing and handling physical cash can make you more aware of your spending and how much is in your checking account or savings account. Some people feel counting and handling money makes them appreciate their savings more and be less likely to overspend.
What are the disadvantages of a debit card? ›
- You can't charge purchases with a promise to pay later: One of the benefits of credit cards is that you can make charges now with a plan to pay off the balance later. ...
- Large purchases can be a hassle: Some debit cards have spending limits that can complicate efforts to make large purchases.
The debit card is an electronic form of a checkbook for the bank account. It will stay open as long as the account has funds, if you don't take action to close it, or the bank finds something wrong with that account. By itself, the long period of unuse does not invalidate a debit card. It's not like a credit card.
Why is it not good to use a debit card? ›A debit card doesn't offer the same fraud protection
You don't get the same level of protection with a debit card if someone steals your information. If a stranger were to find your debit card, they could essentially use all the money in your linked checking account.
If you are tempted to overspend, and you are racking up interest on credit cards with high revolving balances and steep interest, a debit card may help you manage your finances as you won't be able to spend more than you have in the linked account.
Why might someone choose to use a debit card? ›Debit cards take money out of your checking account immediately. Debit cards let you get cash quickly. You can use your debit card at an automated teller machine, or ATM, to get money from your checking account. You also can get cash back when you use a debit card to buy something at a store.
What are 5 pros of using a debit card? ›- Convenience. ...
- Security. ...
- No Incurred Debt or Interest. ...
- Few or No Fees. ...
- Holds You Accountable for All Spending. ...
- Makes It Easier To Stick To Your Budget. ...
- May Offer Perks or Rewards. ...
- Credit Score Doesn't Matter.
Debit cards let you buy things without carrying cash. You can use your debit card in most stores to pay for something. You just swipe the card and enter your PIN number on a key pad. Debit cards take money out of your checking account immediately.
What is better to use debit or credit? ›Bottom line. Credit cards offer the most benefits and protection against fraud, making them the overall best payment option. However, credit isn't for everyone. If you have a track record of overspending, it may be better to stick with a debit card until you can responsibly manage credit.
Why don't people use credit cards? ›Key Takeaways. Credit cards make it all too easy to overspend. Buying on credit can also make your purchases more expensive, considering the interest you may pay on them. Getting into too much debt can not only hurt your credit score but also strain relationships with family and friends.