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.

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