Debit card use on the rise
Paying by debit cards has become more popular than using cash, according to the Payments Council. For the first-time in any 12-month period, the total spend on debit cards (£272 billion) edged ahead of that spend using cash (£269 million) in the year to September 2010.
Debit cards are on a roll, as people increasingly turn to them not only as an alternative to cash and cheque transactions, but also in preference to credit cards.
To put it in perspective: summer 2010 saw debit card purchases up 10% over the previous year; the amount rose by 11% and there were an additional 1.6 million transactions a day.
Jemma Smith, spokesperson for the Payments Council , says there are several factors influencing their growth: "Almost everywhere takes credit cards these days; the advent of chip and PIN makes them safer; and they're so much quicker and easier than cheques."
In contrast, cash withdrawals from ATMs fell by 1.5% in the third quarter of 2010 compared with the same period in 2009. Cheques are declining more dramatically, with 104 million fewer being written over the past 12 months compared with the previous year.
Credit card spending, meanwhile, has barely increased at all since 2005, and the number of credit cards in circulation has fallen by 14%, despite expectations that people will be more likely to run up debts on their plastic when times are hard." People have clearly become more conscious of the risks of getting into debt, but also with interest rates so low they may be using other ways of borrowing," suggests Smith.
So what's the outlook?
For sheer convenience, debit cards are likely to retain their hold on the mainstream market. Cash remains the payment of choice for small value transactions, but new 'contactless cards' with no PIN and no need even for a cashier, designed specifically for small amounts below £15, are on the increase as an alternative.
Credit cards will not disappear, adds Smith. "They are useful for spreading the costs of high-value items - especially as they provide insurance cover against problems with purchases over £100." And with cashback deals and 0% purchase and balance transfer offers available, there's a strong rationale for many people to use them more.
Smith adds: "There's now more choice of ways to pay, so use the method that suits you best."
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.