You spend too much on your credit card and/or forget to pay off your bill on time and get hit with late fees. To commit to better behavior, you chop up your credit card and move to a debit card. You avoid late fees by definition and it should help you commit to less spending as your bank balance acts as a natural upper bound on expenditure.
Dream on – the banks and credit card companies are too smart to give away profits like this.
They do two things. First, you get “overdraft protection” meaning you can go over your bank balance at the cost of incurring fees of around $30/charge. They make it very hard to turn down overdraft protection so you get a “service” you don’t really want. In fact, it removes the commitment device you hoped to acquire by getting a debit card. Second, as a I learned from watching this video, on a given day they debit your account in the order that maximizes the number of overdraft charges you incur (i.e they charge your account with bigger debits before smaller debits whatever the chronological order of the charges).
There is another effect: the debit card selects for precisely those people who have the funds to pay their bills but lack the self-control to pay on time. This is why they switch from a credit card to the debit card. Credit cards are also used by people living beyond their means who might default. These people do not get a debit card as they can’t afford the fees and they do not get the large credit line they need to spend like crazy. This means a debit card is potentially more profitable to a bank than a credit card. Banks have a great instrument for extracting surplus from sloppy consumers while avoiding bad risks. So, confused consumers are still exploited, getting overdraft protection they don’t want and incurring fees that are unnecessary.
Cheap Talk 
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September 23, 2009 at 7:45 pm
Thorfinn
The journalism industry is moving to a model in which they give away content for free and rely on clicking ads to make all of their money. Banking seems to have a model in which you get checking for free, and they rely on behavioral mistakes to make money. MC = 0 is tough.
September 24, 2009 at 10:52 am
gappy
Interesting. I barely think about overdraft protection — I might have used it once, by mistake, years ago, and clamored to have the fee waived. For compulsive buyers who need to be restrained though, I really don’t see how this could be a sustainable incentive to keep a credit card rather than move to a debit card. After being hit by an overdraft fee a couple of times, compulsive buyers would bundle this with other fees (interest on outstanding balance, late payment etc), and be even more determined to switch to a debit card.
My experience is somewhat different. As a new credit card user, 13 years ago I thought that my balance would automatically paid from my bank account. I left the US for a 2-month vacation, and found out that I had been “delinquished” [sic]by my bank. I could not get a card anywhere, but the same bank offered me a secured credit card, as a way to rebuild credit and control my expenses. I honestly don’t remember if the card had a fee, but I guess that the bank would have profited from it anyway, through interest on deposit and commissions.
I have first-hand knowledge of commercial credit, but none of consumer credit. It seems likely that banks segment their customers in 1) “manageable credit”, i.e., stationary, whether in good or bad standing, but not getting worse. These customers get a credit card with varying T&C; 2) “high risk”, i.e., customers with a high probability of default in the near term, or high probability of being a steamroller (new customer, with purchases is the first credit cycle, and no payments at all). These customers get a secured credit card or a debit card. There is an incentive for customers to get a secured credit card, in that its transactions contribute to their credit history, and the type “customers who want to build their credit” isn’t directly observable by the bank (unlike current risk profile). Nonlinear pricing tariffs should help a bank maximize their surplus.
September 24, 2009 at 8:35 pm
mike
Debit is worse, because of the risks involved. With credit there is the ability to contest bad charges. Debit pulls the money out of your account immediately, and that is that. Also, you’re giving out your pin and card numbers to your bank account to some merchant. Think about that.
Technically one can use a debit card without a pin, ie: as a credit card, but that defeats the point.