Data breach highlights pros, cons of credit vs. debit

MINNEAPOLIS – The Target security breach problem has highlighted the advantages and disadvantages of credit cards versus debit cards. Both were involved in the theft of data by computer hackers.

"Let us understand a credit card transaction," said Dr. George John, Carlson School of Management Professor. "You buy something with a credit card. You are being given a loan, which means all the regulations and laws that govern lending come into play and those laws are a lot more friendly, shall we say, to the borrower than the laws that govern electronic transactions in general, which is what governs a debit card."

Debit cards deduct payments instantly from the consumer's checking account. Credit cards are basically a loan from the credit card issuing bank and is paid off in whole or in part in the consumer's monthly bill from the bank.

John insists that credit cards offer the consumer more protection. "If there is any dipute with a product that you have bought, it is much easier to manage that process if you buy it on a credit card because the credit card issuer is actually on your side of the dispute. Whereas, in the debit card, your money is gone. So, now, you are in a dispute with a vendor and the bank is sort of neutral in that."

However, in many, if not most cases, banks will cover losses to any customer who uses a debit card.

"The banks want you to move to debit card use," explained Professor William McGeveran, University of Minnesota Law School. "They do not want anything to scare people away from debit cards. So, it makes sense for them to cover those losses."

McGeveran said banks save money by customers using debit cards.

"There is a lot less administrative processing involved and just fewer steps involved in debit card procedure. You swipe it and the money comes out of your account," said McGeveran.

"With a credit card purchase, you swipe it. It goes to the statement. The statement goes to you. You either pay it in full or you do not. It is a lot more administration involved. So, there are reasons to want to encourage people to use debit cards, at least, if they are the kind of people who pay on time."

Credit card holders who do not carry a balance on their card, do not pay interest to the banks. Banks also make money through "transaction" fees. That is a fee attached to each swipe of a debit card at a checkout counter. Banks charge merchants for those fees. Retailers and banks have been at odds over those fees for several years.

John said there is a generation difference in the popularity of debit cards.

"If you look at the customers that use them, typically, it is the younger people who use debit cards," said John. "They see it as an alternative to cash. Whereas, I would probably see it as an alternative to a credit card. They (younger customers) are not as used to carrying cash around. They certainly do not want to write checks because that makes you look like your dad, walking up to McDonald's and writing a check for $3.78."

Of course, many consumers see debit cards as a way of controlling their own spending, as opposed to overspending on credit cards.

Still, John says when there is a dispute or a theft, credit cards offer advantages to the consumer.

"Generally speaking, when you cut through all the clutter, credit cards offer the holder more protection in the event of a dispute or in the event of something bad happening like stolen cards."


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