Monday, August 22, 2005

Why Credit Cards Can Be Helpful ... And Debit Cards Perilous

Readers may recall that last week, I purchased a new Dell laptop. I wasn't the only person I know to pad Dell's bottom line last week, either. A coworker — my guru-in-training, actually, who goes by the name of Matt — here at work bought one also. (Although his notebook will be tons nicer than mine.)

When I purchased my laptop online, I charged it to my rewards-paying credit card. Everything went ultra-smooth. Matt, conversely, billed his order to his debit card. (Without a general-use credit card, he didn't have much choice.) And thanks to that, he received a first-person lesson in why debit cards can lousy choices for large purchases.

I detailed this problem with debit cards in another article, entitled "Death of a Debit Card." I'm sure not the first person to note that big purchases and debit cards don't always get along real well.

Since this particular instance hits a little closer to home, I'd like to run through it here. The blow-by-blow went something like this:

Tuesday, Aug. 16
  • Matt visits his bank, depositing funds in bank account and requesting withdrawal-limit raise.
  • Places order for computer, using debit card.
  • Dell attempts to withdraw entire purchase amount (~$1900) from account. This fails.
  • Matt receives email from Dell, notifying that the withdrawal failed.

    Wednesday, Aug. 17
  • Matt checks his account. Full balance shows as available. Calls Dell.
  • Over the phone, Matt authorizes Dell to withdraw one transaction of ~$950 (roughly half the invoice amount) from his checking account. He is to call back the next day to authorize the second installment.
  • Later, another email arrives from Dell, identical to that of Tuesday. They had attempted to preauthorize the funds, it said, and failed.

    Thursday, Aug. 18
  • Matt's account now shows two separate $950 transactions from Dell, for a total of ~$1900. He calls Dell, checking to make sure that everything is okay — and that he isn't going to be billed for yet another $950, as per the previous day's phone call. Dell says that everything is fine, and that they will resolve any problem with his bank.
  • Matt calls the bank to explain the situation. The banks tells him that Dell attempted to debit the full order amount ($1900) from his account, then later tried to debit half the order amount ($950). The bank tells him that the 50% amount is just a preauthorization, and that it may not go through. Even if it does, they assure him, they will not charge any overdraft fees.
  • At roughly 10:30pm, Matt attempts to use his debit card at a restaurant. It declines.

    Friday, Aug. 19
  • Matt tries to use his debit card for lunch; it declines again. He heads for the bank to withdraw some cash via teller. The teller informs him that his balance is -$441.
  • Back at work, Matt checks his account. It now shows three preauthorized charges of $950 each. The bank tells him he must wait another 24 hours before he can have access to funds. (Standard banking procedure to allow for any preauthorizations to clear.)
  • Evening finds Matt borrowing money from a friend for gas and food.

    Saturday, Aug. 20
  • Checking account returns to usable status.

    So what might one do to avoid a mess like this?

    (1) Use a credit card for large purchases. And pay them off before interest accrues, of course. Even though guys like Dave Ramsey swear there is absolutely no need to own a credit card, I'm here to say that that's a stupid idea. Thanks to Matt's situation above, as well as my job, I've seen debit-card users unnecessarily inconvenienced way too many times. So I cannot encourage a debit-card-only existence. A general-purpose credit card, coupled with some financial discipline, takes care of the issue entirely.

    (2) Open a second checking account, and use it for nothing other than large purchases. Another coworker employs this plan, and it's been successful for them so far. Whenever she plans to make a big purchase, she transfers money from her savings account to a second checking (debit-card enabled) account with the same bank. She uses the debit card associated with that second account to make the purchase. This way, if there are problems, only the second account is tied up, leaving her main checking account free for all the usual stuff.

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  • — Posted by Michael @ 12:28 PM


    My condolences to Matt. I had the same issue two and a half years ago when I purchased my Dell Inspiron 1100 - a noble laptop that's still going strong.

    We now use a CC for everything. The bank autodrafts our balance in full each month to pay the sucker off. We swipe the same amount of times, don't have the matt-hassle, and get 1% cashback - which works out to be a month's worth of groceries in a year.



    Thank you for this and the previous post showing the Dell coupon. Matt isn't the only person that you know who purchased a Dell laptop last week (thanks to you!)... We had been planning on ordering one for weeks and even had the system in the "cart" but never could bring ourselves to pull the trigger... that is, until we saw your post for the coupon. I, like you, used a CC for the purchase and was wondering what rewards card you use. Since becoming incorporated and needing a second credit card for the business I've been scouting out the options and have been a bit overwhelmed. Any advice?


    I have two 'cash rewards' credit cards that I use. The primary one is a Citibank Dividend Platinum Select. Pays 5% at gas stations, grocery stores, and drugstores, and 1% everywhere else. Annual reward limit of $300.

    I also have a Citibank UPromise card. Pays 1% back on everything, with a very few exceptions. I'll use it once I hit the $300 limit on the Dividend Select card.

    If you do a lot of driving, I think Citibank has some sort of 'Driver's Edge' rewards card also. I've never had one. MM at Pfblog discusses it here.


    You can see some of the credit card deals at

    Anonymous Anonymous
    , at 9:19 AM, August 23, 2005  

    I can say how perilous it is to have a credit card.1stly,see the charges.They say between 2% to 3 %,but never say its is monthly,that
    means 24 to 36% PA.Now the cost of purchase.And you will agree, any thing purchased through credit card,the outlets or MEs never sell it without their cost added, and then declare a percentage off.And we fool stay happy with it.Has any one gone through the billing charges please and analytically examined the same?Happy with 60 or 45 days free credit as if they are throwing away money at free.How much you get out of your savings and the rate of interest you get.There I believe friends will find the answer.


    The charm of credit card is when you take and when you use.Charmer it is when the bill ultimately comes.Wait watch and see.I have thousand and thousand of examples as well as experience to put forth.


    I currently have a Student Visa from Royal Bank that pays me 1 point for every dollar spent -- I can even redeem my points for RRSP's and other financial products. As long as you have cash before you buy on is free perks


    Ummm...what is Matt doing buying a 1900 dollar laptop when he can't cover 950 bucks with his checking account. If he had NO MONEY, he should never have purchased the item to begin with. THE PROBLEM is not with the credit or debit card, the PROBLEM is that Matt did not NEED to spend this much money on something like this. We are a culture that creates NEEDS, when they are really just WANTS.


    The problem with using a rewards credit card is that you spend more than you would if you had to pull the cash. This is the reason fast food places like Wendy’s and Mcdonalds accept credit cards. People using credit will spend a little more. If you have will power and spend wisely the cash back is great. If money is tight this can be a budget buster.


    ** Comments Closed on this Post **

    Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

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