Visa: Debit cards help keep mystery spending to a minimum

By Lynn Truong. Last updated 23 January 2009. 16 comments
Photo: Andrew Magill

Spending only the cash you have is the best way to maintaining financial independence. However, I've always wondered if the cash-only system works for people who suck at keeping records. I tapped my contact at Visa (who is one of our sponsors) to see if they did any research on the subject. They responded with some pretty interesting data on the different ways people keep records while using debit cards or cash:

Just last year we conducted a consumer survey and found that cash expenditures can be harder to keep track of than those on cards. We asked more than 2,000 U.S. adults about their cash spending habits and almost half of respondents admitted they suffered from “mystery spending” or cash they spend but have no idea where it went. The results also showed that 48 percent of Americans surveyed who use cash say they can’t account for almost one-third of it, spending an average of $120 in a typical week, but losing track of $45. In fact, more than half (59 percent) of respondents who say their mystery spending is out of control feel it would be worse without using a debit card.

Among debit cardholders we surveyed, the majority (64 percent) believe their debit card helps keep mystery spending to a minimum and four out of five say a debit card helps them track their spending. This feedback supports that debit cards can definitely be used as a money saving tool.

Paying with a debit card allows you to manage your money in real-time. For example, when you withdraw funds from an ATM or use your debit card at a register, most transactions are reflected in your account immediately. You can use this information to your advantage by closely monitoring your account. You will always have a sense of your balance and you will always have a ready record of your transactions.

Are there any other ways that using debit cards help you manage your money?

Definitely. First of all, when you use a debit card, you’re withdrawing funds that are already available in your checking account which means you’re spending the money you have. You also get a record of all purchases so you know where the money went. Most banks make debit statements available online, by phone or even ATM so you can check your account regularly to know where you are spending and how much you have in real-time.

While cash purchases — especially for smaller amounts — can be difficult to track, our research has shown that people believe debit cards can help them monitor spending more closely. Four out of five debit card users surveyed agree that using a debit card provides an easy way to track spending.

I always take corporate-sponsored research with a grain of salt and I recommend that you do the same. However, some of Visa's results make sense, especially if you take into consideration that online tools like Mint and Wesabe can help you track your debit card spending in interesting new ways. I would love to see more independent research on this subject from Mint and Wesabe.

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Guest's picture

This is one of the reasons I rarely carry cash. A little here, a little there, and next thing I know, it's all gone and I have no idea where it went.

Guest's picture
Guest

It is important to remember debit cards have few of the legal protections credit cards offer.

With a credit card your maximum liability by law is $50.

For debit card fraud, your liability is $50 if you notify the bank within two days of "noticing the fraudulent charges" (notice the grey area - they can always argue you should have discovered it sooner)

After only two days, your liability increases to $500, and up to your entire account balance after 2 months.

Currently many institutions issuing debit cards do not impose such strict limits, but their policies are voluntary and can change at any time.

Wesabe/Mint/Yodlee are better options for "disciplining" yourself instead of substituting a debt card for a credit card.

As a former (reformed?) banker, I'd never use a debit card.

BTW, plenty of institutions can code your credit card strip with your account information so your credit card also works as your ATM card (no need to carry a separate ATM card)

Guest's picture
Chase Saunders

A few prominent studies have shown that people tend to spend around 10 or 15 percent more when using a credit card (or really, any kind of plastic). This is, of course, why vendors are willing to pay for the privilege of offering them.

The overspending will affect many people who believe they are immune. So if you use a credit card, you'll get excellent documentation on exactly where you are uncontrollably spending more.

Guest's picture
Marc

Mint has been an extraordinarily helpful tool in tracking my spending since I started using it a little over 6 months ago. I realized about two months ago that I had a very large percentage of my spending going untracked -- the black hole of cash (it accounted for about 10% of my expenditures). Since Mint added an option to split transactions, I realized that I can split my ATM withdrawals of cash into all the cash transactions. You can use www.tweetwhatyouspend.com as a way to log your transactions, and then on your own schedule, add these into Mint. Now when I use Mint, the only "uncategorized" spending I have is the cash I have in my wallet.

Guest's picture

I used a debit card for years. It's a great way to keep you honest in what you have in cash, especially when tied to Mint/Quicken/Microsoft Money. Then I had a mysterious charge appear for a Xbox Live membership. After a back-and-forth-and-back-again with the bank and Microsoft, I was able to charge refused by the bank, but only after I agreed to have them send me a new card with a new number. The entire process made me realize that using a debit card was like giving companies direct access to my cash. So I switched to a credit card to provide a firewall. But unlike most people, I pay off my credit card each week. This keeps me honest because my cash accounts now reflect what I actually have vs. what I think I have and what I've spent.

Ben

Guest's picture
Guest

It's through my account at Citibank and I get reward points for it. When I charge something I deduct it from my checkbook just as if I'd written a check (after all it's the same thing but with rewards points). I go online every day and check the charges that have come through and mark them off in my checkbook. Takes about a minute or two to do and I have complete knowledge over what's happening in my account.

Guest's picture

That's why I like my debit card. I used to be cash-only, years ago. Then I realized I didn't know where my money was going. Using my debit card totally changed that for me.

Guest's picture
UWSider

I find that cash is what works for me. I am much more careful taking bills out of my wallet than handing over a card, and the purchase of something more expensive has more impact. I also find that carrying less cash in my wallet, causes me to feel it is scarce, even right after payday, and I conserve more.

Once I worked in a bank branch, and a customer came in on a Monday and discovered five overdraft charges on her account for about $75 dollars in spending over the weekend on her debit card in excess of her balance. The bank was charging her $30 per transaction, even for a $3 transaction, or $150 in total fees. Banks will batch weekend spending on debit cards, so they may approve transactions even when there is insufficient funds. This kind of problem would never happen if you used cash.

Also, I had my wallet stolen once. My debit card was used for over $1000 in quick purchases. It took me over 3 months to get the cash replaced. This would never have happened if it were a stolen credit card.

Now, I carry cash and a credit card, which I pay in full each month. The banks are pushing debit cards. No thanks.

Guest's picture
Guest001

I'm definitely a cash person and live only on cash. Maby I'm old fashioned but I still use my cash, and my bank book. Just add your cash + your bank book balance and you know how much you have.
Keep the recipients when you buy stuff so you can figure out your "mystery expenditures". I'm pretty sure most mystery spending is something stupid like you ordered a pizza for $40 or a case of Beer with your buddies or something frivolous, or perhaps you buy a $2 coffee everyday at work. Since they are consumable items once you use it you will not have anything to show for it.

Guest's picture

Mint is perhaps the most amazing free software on the web!

Guest's picture

This is interesting research. I'm hopeless at keeping records of what I have spent using cash. I think if you want to avoid debt and therefore using a credit card then using a debit card and doing online banking every few days to track spending is the way to go.

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Guest

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Guest's picture
Linh

hey, good to see a Viet blogger.

anywho, i think cash works best. BUT it is like lifting weights or getting better at something: becoming Cash-Only is something to aspire to because it ain't easy -- at first.

this is what i do:

1) have a seperate account for spending, that way, you can keep track of how much you withdraw every month.

2) get a bank that doesn't have a lot of ATM's (sounds funny but works) to make it harder to get to your money.

3) carry 10's and 5's in you purse or wallet to keep total spending down. (having 20's and 100's makes you feel too rich)

Simple and it works ..... at least for me.

Guest's picture
Guest

An even better way is to go with a "Charge Card" (different from a credit card). A charge card gives you the same level of protection as a credit card but also forces you to pay off your charges in full at the end of the billing cycle. So you won't overspend knowing that you'll need to repay it back in 30 days or less.

I stopped using my debit card after a bad experience with TrueCredit where they kept charging my card even after I canceled it ... twice. I had to request a new card and number with my bank to avoid these recurring charges.

I knew I was not very disciplined so did not want to go the cash / credit card route for obvious reasons. I looked around and found the AMEX Green Card. The first year's fee of $90 was waived. I've been using it for 9 months now and my membership rewards are worth almost $150 so even with a $90 fee it's not a bad deal at all.