Many benefits associated with credit cards now apply to debit cards – so why risk the interest charges.
Irish consumers are ditching their credit cards in favour of debit cards, according to new research. A report by Lafferty Group, whose research centre is in Westport, Co Mayo, found that almost 70% of the 5.9m payment cards in circulation in Ireland are debit cards, while the remaining 30% are credit cards. In 2005, credit cards accounted for 60% of the payment card market, according to Lafferty.
“There has been a transformation in how people use their cards, with more now using their debit card to purchase everyday items such as their morning coffee,” said Lafferty’s deputy head of research Phathisani Khumalo.
Khumalo said that the rise in the use of debit cards was tied up with tighter credit-card lending from the banks, together with more backing for debit cards from international payment channels such as Visa and Mastercard.
The upsurge in the use of debit cards comes as KBC rolls out its new credit card — launched earlier this month. The bank, which entered the market for current accounts last year, said its credit card is an important step towards offering a competitive range of retail banking products.
But, with debit cards offering more benefits than ever before, we ask: should you ditch your credit card?
WHY KEEP A CREDIT CARD?
In terms of functionality credit and debit cards do most of the same things apart from the obvious difference: with your credit card you are borrowing from your bank whereas with debit cards you are spending your own money. Both can be used for purchases, cash withdrawals and online shopping.
Credit cards have an interest-free period of up to 56 days on purchases, so provided you repay your balance in time using your credit card won’t cost you anything. It’s the same for cash withdrawals unless your card is with Bank of Ireland, Ulster Bank, Tesco or KBC. These providers charge immediate interest on withdrawals, and, with the exception of Tesco, at a higher rate than the interest charged on purchases.
For most consumers the credit card is about convenience and having access to funds whenever you need them. “If you run into the red on your current account you have the credit card as standby,” said Úna Dillon of the Irish Payment Services Organisation.
ARE THERE DIFFERENCES?
Unless you qualify for free banking, there are charges for using your debit card whereas credit cards incur no fees. However, you’ll get hit with annual stamp duty of €30 on credit cards as opposed to the €5 annual tax on combined debit/ATM cards.
Contactless or “tap and go” payments of up to €15 are a feature offered only with debit cards — and KBC’s credit card. Cashback — enabling you to request up to €100 in cash when making a purchase — is another benefit of debit cards.
Both types of card are widely accepted, although in some cases, such as when hiring a car, providers insist on a credit card.
There can also be differences on the daily withdrawal and purchase limits allowed on the card. For example, the maximum single purchase you can make using a PTSB debit card is for €1,500 and there is also a daily limit of €2,500. There are no limits on credit-card purchases assuming you have the credit available.
Those in the industry say that credit cards are favoured by consumers for higher value transactions. “The average transaction value on debit cards is €58. Consumers tend to use their credit card for high-value purchases and then pay it off over a period of time,” said Dillon.
WHAT ABOUT REWARDS?
In other countries earning rewards for using your credit card is a popular feature. In Ireland, however, the rewards system is not at the same level.
“Some credit cards used to offer decent rewards where you could get cashback, but not many do that any more,” said Simon Moynihan of price comparison site Bonkers.ie.
Tesco cardholders earn one Clubcard point for every €2 spent on its credit card. Other rewards are limited to platinum cards. With AIB’s Platinum card you get 0.5% cashback on purchases totalling more than €5,000, to a maximum of €50,000, in each 12-month period. Bank of Ireland provides comprehensive multi-trip travel insurance when 50% of the total fare is booked using its Platinum credit card.
Both Mastercard debit and credit card holders can sign up for discounts with Priceless Ireland.
ARE CREDIT CARDS SAFER?
One of the big advantages credit cards had over debit cards were the extra “chargeback” protections you had when making a purchase. These included getting your money back if a supplier went bust or if the goods you bought weren’t delivered or were faulty.
Now both credit and debit cards give consumers the same protections. “Because all credit and debit cards are Visa- and Mastercard-branded, the same rules apply so your rights as a consumer are the same. If you pay for a deposit on a piece of furniture and the company goes into liquidation you have the same rights whether you paid with your debit or credit card,” said Dillon.
Protection against fraud is also the same regardless of whether it occurs on your credit or debit card. You may however be more inconvenienced if the fraud occurs on your debit card. “If someone captures your debit card details and uses them fraudulently the money comes straight out of your bank account and you will have to go through the process with your bank of getting a refund,” said Dillon.
WHICH ARE BEST ABROAD?
“People traditionally use credit cards abroad, but with EU harmonisiation this is changing,” said Khumalo.
To withdraw cash inside the eurozone you’re better off using your debit card, as it costs the same as when at home. If you use your credit card to withdraw cash inside the eurozone you will be hit with a cash advance fee, usually 1.5%, unless your account is in credit, in which case it’s free. Using your debit card to withdraw cash outside the eurozone can rack up costs as you will be hit with ATM charges as well as cross-border fees. For example, withdrawing €250 outside the eurozone using Bank of Ireland’s Visa debit card would cost €8.75. The same transaction using the bank’s credit card would cost €8.13 and you will be hit with interest on top.
The best advice for using cards outside the euro area is to load cash onto your credit card account and use it for withdrawals, to avoid the cash advance fee and any interest. Using this tactic, a €250 non-euro withdrawal using Bank of Ireland’s credit card would cost you €4.38.
ARE OVERDRAFTS CHEAPER?
Banks charge more for credit-card lending than they do for overdrafts, particularly in the case of cash advances. For example, the cheapest credit card currently available in the market is AIB’s Click credit card. It charges 13.6% interest on purchases and 19.68% on cash advances. By comparison, the bank’s approved overdraft rate is 11.95%.
If you don’t clear the balance on your credit card before the interest-free period runs out, you can save money by using your overdraft as your means of credit. Bank overdraft limits, however, are typically for the same amount as your monthly income, so the amount of credit made available to you may be less than what you would get with your credit card.
Using your overdraft as a source of credit may also cause you to end up spending more. “You might find it easier to spend out of your current account than on a credit card,” said Moynihan.
When debit cards come to credit unions, a move expected by the end of the year, using the card in conjunction with a credit union loan will be another cheaper alternative. Typical interest rates charged on credit union loans are 10.3% according to the Irish League of Credit Unions.
I’m a card-carrying member of the debit club
Keith Walsh hasn’t looked back since swapping his credit card for a debit card.
Walsh, from Cork, switched his current account to Permanent TSB deciding to get rid of his credit card in the process. He now uses PTSB’s Visa debit card for most of his purchases and says he feels no worse off since getting rid of his credit card.
“The debit card is superb because you can use it when you’re out shopping and online. It’s every bit as good as the credit card,” he said.
Getting rid of his credit card means that Walsh is no longer hit with the €30 annual government stamp duty that is levied on credit cards and instead pays the €5 that is levied on combined debit/ATM cards.
When he was with his previous bank Walsh used the old Laser card for making purchases in shops but still felt the need to keep a separate credit card. “I would have always used my credit card for internet shopping and booking flights. My previous card was not as widely accepted online,” he said.
Another reason Walsh felt he needed to hold on to his credit card was because it was more widely accepted abroad than his old card. Now, because his debit card is backed by Visa he knows it will work wherever he goes. “I was in Cuba last year and it worked perfectly. I don’t think my previous card would have been as widely accepted.”
Although Walsh was always careful to pay off the balance on his credit card, he said that that having a debit card helps him to manage his money better.
“With the debit card you know you only have what’s available in your account so there isn’t the same risk of overspending,” he said.