Should I Use a Debit Card or Credit Card?

It’s time to talk to the man in the mirror: are you a credit card or a debit card type of guy (or gal)? Using plastic for transactions is inevitable in this day and age, so it’s important to take a hard look at your financial habits and make sure you are using the right type of card for your purchases.

Debit Cards—The Pros

A debit card withdraws funds directly from your bank account, which encourages responsible spending. You see your ledger account balance declining with each purchase, which offers an accurate (or sobering) picture of your spending habits.

Debit Cards—The Cons

If you do not keep a weather eye on your balance, you might overdraw your account. Most banks offer “overdraft protection” for debit card accounts, but this “protection” might come laden with interest charges and onerous fees. Be sure to read the fine print on your debit card agreement so you are aware of the bank’s policies on overdrafts.

Credit Cards—The Pros

If you are responsible in your use of credit cards—which means spending within your means and paying off credit cards completely each month—they can be better than debit cards in a few ways.

First, a credit card allows you to spend money you don’t have. I know this may sound like a slippery slope…but within reason, it’s justifiable. For example, if a major appliance is on sale early in the month, but you won’t be paid until the 15th, you can take advantage of the sale by using the bank’s money for the purchase. As long as you intend to pay off the balance at the end of the month, you come out ahead.

Second, many credit cards have great rewards programs. You can funnel all your expenses through your credit card, amassing loads of points that can be used for airline travel, free hotel stays, discount programs, or cash-back plans. As long as you still pay off your bill at the end of the month, you reap the rewards without losing anything.

Third, credit cards offer superior consumer protection. If your credit card is stolen, in most instances you will not be held responsible for the charges, save the first $50 (most issuers don’t even charge customers for this).

Read more on what to do if your credit card is stolen.

If you have a dispute with a vendor, the credit card company can withhold payment and mediate the complaint. This service is backed by Federal law, which empowers the credit card holder. Don’t recognize charges on your current credit card statement – here’s how to dispute a credit card charge.

When renting a car, many credit cards offer coverage for collision, loss of use, and towing charges. This can save you a bundle on car rental fees—just be sure to review the credit card company’s policy before declining or buying rental car insurance.

Credit Cards—The Cons

We are all familiar with stories of individuals and families struggling to overcome crushing credit card debt. We piled up a bit of debt ourselves a few years ago on excessive shopping, school tuition and related expenses.Fortunately, we kept our noses to the grindstone for a couple years and paid off our credit card and school debt.

Used irresponsibly, a credit card can blow up in your face like a personal finance grenade. Credit cards with high interest rates can turn inflate the costs of your purchases significantly as you pay for them over an extended period.

Be aware that credit card companies can raise your interest rate after your card has been issued. This practice has been reigned in somewhat by legislation enacted in mid-2010, but if you are late or miss a payment, the card issuer still has the ability to sock it to you. Check your monthly statements carefully to make sure your rate has not changed.

Self-Awareness Is the Key

Take an honest assessment of your spending habits, and then determine which card is best for you. In many cases a combination of credit and debit cards is the wisest choice, to maximize the benefits of each.

Comments

  1. To date, I’ve been strictly a rewards credit card users. This currently is the best option for me because I’m one of those that pay off their balance completely each month.

    But I’m really thinking about getting a reward debit card too.

  2. I am strictly a reward credit card user as well. I had a similar article on my site recently and a commenter left a really long comment about why debit cards are bad.

  3. We are not that 100% responsible credit card user, but we are trying! Whenever we buy major products or electronics, we like to use the credit card, as there is a little more protection there. And puchasing online, it may be a little safer because of the $50 limit of liability. All that being said, pay it off each month (pointing my finger at myself!)
    Bernice

  4. I use my checking card which is a debit and credit card… transactions come straight out of my checking account like a debit card but I get the protection and rewards of a credit card.

  5. I’ve switched back and forth throughout the years, but have always paid off my balance each month on the credit card. Biggest benefit to using the credit card has been the points. Biggest drawback is that each transaction doesn’t show up on my account for a few days, and being someone who tracks each expense, I find it a little more difficult to track if I’m under or over budget.

    Right now, I’m using the credit card more, just because I’m not buying much anyway, and I’d like the points. It seems that a few banks are starting to implement rewards programs for debit card transactions, so this is something to keep an eye on.

  6. I have a debit card and at the register they ask credit or debit. I have talked to friends who seem to have some weird ideas on why one is better than the other. Any suggestions on which is better? I can’t seem to see a difference on my bank statement.

    • The only difference that I know of is which network the transaction runs over. I think that credit transactions run over Visa’s network, and debit run over Shazam’s but don’t quote me on that.

      The immediate difference, is that any ‘credit’ transactions on a debit card need to be ‘posted out’ by the retailer, meaning that they don’t show on your account for a few days after the transaction takes place. I’ve had some not show up for a month at times.

      Debit transactions are immediately withdrawn.

  7. Great analysis FD.
    We are fastidious about paying off our CC every pay cheque, so we use that card for everything due to the cash back options (3% on gas/groceries and 1% on everything else). I love when I get the $50 cheques from mastercard!

  8. I’ve been using my debit card for the most part, but recently signed up for PerkStreet, and looking forward to the rewards that way, as I pay off my credit cards all the way.

  9. Will never, ever catch me with a debit card. In fact, my husband and I insisted our check card be changed into ATM cards only. Debit cards immediately take the money from your account and put the onus on you and the goodwill of your bank to get it back if there is fraud. The consumer protection part of this huge. If your credit card is messed with, you have a lot more rights and don’t have to pay the money while you are disputing the charges. If it’s your debit card, you are at the mercy of your bank to get it figured out. They may or may not be particularly interested in getting it fixed. This happened to a friend of mine. Fake charges on a debit card and no idea how thief got the numbers. It took some doing to get the bank to act even though the charges were obviously fake.

  10. I think this post only holds true to those who actually pay off their balance monthly. For people like me who struggle with this, I quit using credit cards and have not touched one for 18 months. Spending only what I have helps me to be more responsible.
    That and I’ve always viewed the point you get from cc’s as simply being a way for them to suck you in and have it blow up in your face when you pay way more in interest than you ever earned in points.

  11. “Using plastic for transactions is inevitable in this day and age”…….WHOA!
    Ya know, most places still take good old fashioned cash… so it’s not totally inevitable.
    Around town, I use cash. Groceries, gas, personal expenses, etc.
    I even paid my property taxes with cash this year – green backs not a check.

    Online and traveling, cards are a convenience…and it there may be a warranty issue involved, I use credit….. but most of my recent road trip from Florida to Oregon was paid for with cash – gas, motels, and food. I did find only 1 motel that would not accept cash – or actually it would – but I needed to put a $150 deposit on a credit card to pay cash for the night…. kind of weird… but I get their point.

    Cash keeps me focused and frugal :)
    I put just $400 in my wallet the first of the month, and that’s it. When it’s gone, it’s gone, but rarely does that happen…. I am a lot more careful when I use cash.

  12. I try to use my (cash back) credit card for everything that I can, from groceries to vacations to utility bills, etc. I’d put everything on it if I could. However, if I wasn’t as good at paying off the card, the combination of fees and interest could easily make this a losing proposition.

  13. A good analysis! More people should take the time to learn about credit and debit cards before they actually use them. Too many people spend more than they can pay for at he end of the month.

  14. I use one Master Card for basically everything. It is a Marathon gas card and I love getting those little gas cards in the mail periodically. Oh, by the way, I pay off my card in full every month so NO INTEREST CHARGES.

  15. I really enjoyed this post. It does help. Currently I’m a recent graduate with a pretty lucrative job and crushing credit card debt. I’d say between a debt consolidation loan and credit cards all totalled it’s about 15,000. My student debt is just as rough too. In any case, your post definitely gave me a few pointers. I’ve decided to chronicle my get out of debt story on my blog.

    http://commonsensemusings.com.

    Thanks for the info,

    Steve

  16. @Jonathan Thanks. I always wondered what the difference was between running something as a debit or credit card. I also wonder, do stores have higher fees for one or the other?

    I’m glad to see that debit cards are starting to pay higher rewards. For people who are tempting to overspend with a credit card, but want the rewards, that’s a good change.

  17. So easy to overthink this question – just make a sound decision and stick with it. Sure, there are pros and cons to both, but in the end you need to do what works for you.

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