Money Talks, So Should You

To use a credit card or debit card? That is the question

Jessica Dickler
by Jessica Dickler, Dimespring Contributor  (@jdickler)

My husband hates it when I use my debit card in stores or restaurants -- it's like the money disappears from our checking account without a second thought and it makes it hard to keep tabs on our daily balance, but retailers love it.

And credit card issuers have their own agenda.

With banks pushing you in one direction, and retailers in another -- not to mention a spouse with an opinion as well -- what's a consumer to do?

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Last year, debit card swipe fees were basically cut in half by regulations in the Dodd-Frank law making it much less expensive for retailers to process those purchases on plastic.

Have you ever noticed how the cashier options point you to debit, whether it’s asking immediately for your P.I.N. or the extra steps you have to do to “opt-out” of debit and choose credit? Those hurdles are no mistake.

"From a retailer's standpoint, they want us to use debit cards, it's much less costly," says Bill Hardekopf, CEO of LowCards.com.

Credit card companies, however, want you to pile purchase on credit while they benefit from each swipe.

"They want customers to use credit instead of debit because at the end of the day the banks make more money when customers select that option," noted Odysseas Papadimitriou, CEO of credit card comparison site CardHub.com.

Swipe fees, also called interchange fees, typically range from 1.5 percent to 3 percent and are collected by the credit card processor and split with the bank that issues the card. Although it doesn't sound like much, those fees have taken a heavy toll on merchants, particularly during the recession and sluggish recovery.

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Now, because of the recent settlement with Visa, MasterCard and bank credit-card issuers, retailers are getting some relief. The settlement gives stores the right to tack on a surcharge every time you pay with credit, which is intended to cover the expense of those credit card swipe fees.

But as the settlement takes the pressure off of merchants, it creates an opportunity to put the burden on consumers.

"As with past regulations and rulings that affect bank revenue, this settlement could cost consumers," Hardekopf said. "If the merchant passes along the fee, cardholders could pay as much as 3 percent more when they pay with a credit card."

For example, that could mean a $15 fee on a $500 purchase, which is hardly just pocket change. And if a cardholder carries a balance from month to month, the cardholder will also pay interest on the surcharge, Hardekopf noted. "Budgets are tight for many households and these fees make it a little harder to make ends meet." 

For those just trying to stay afloat, Amber Stubbs, senior managing editor of CardRatings.com, recommends sticking with a solid credit card -- like one with a low interest rate and no annual fee -- and paying off the balance each and every month.

A credit card is almost always a better deal if you can use it responsibly and rack up some pretty great rewards but if the landscape changes and stores start charging fees, it's time to do the math and see if it's worth it, she said.

However, it will still be a while before any real changes take effect at the checkout. A judge in the U.S. District Court must still approve the settlement and there are 10 states that prohibit merchant surcharges altogether, including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

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Jessica Dickler is a freelance writer covering personal finance, budgeting and marriage & money. Jessica has previously worked for CNNMoney, The Wall Street Journal and SmartMoney. She lives with her husband and two children in Princeton, N.J.