Debit or Credit: Which Card to Use?

Consumer Reports notes that 52% of all payment-card transactions will be on debit cards in 2010 -- and they expect the trend towards more use of debit cards to continue. But they note (kinda) that there are times we should use debit cards and times when we should use credit cards. Here's how they break the two down.

Use a credit card:

• For big purchases. Credit cards allow you to withhold payment if something goes wrong with your purchase, and the card issuer often investigates the problem for you. Some credit cards add up to a year to the manufacturer's warranty on the products you buy with them. You may also get additional protections against fraud, damage, identity theft, or plain old theft.
• For gas, hotels, and car rentals. Some hotels, gas stations, restaurants, auto rental companies, and retailers put a hold on the money in your checking account until a debit transaction is processed, which might take up to several days for signature-based payments. What's more, the amount that's blocked can significantly exceed the amount of your purchase. These holds can prevent you from accessing the funds in your bank account and result in bounced checks, declined transactions, or overdraft charges.

• To earn rewards. Fewer debit cards have rewards programs, and the programs of the ones that do aren't as good as those of credit cards.

When safety is paramount. Under federal law, your liability for fraudulent charges on a debit card can be greater than it is for a credit card. You're responsible for up to $50 in unauthorized purchases on your credit cards. But with a debit card, you can lose up to $500 if you don't report the theft or loss of your card or PIN within two business days of discovering the problem.

Use a debit card:

• For budgeting. You may be inclined to spend less using debit, since you generally know how much money you have in your bank account.

Ok, so much for the benefits of using a debit card. If you can't keep a handle on spending, use a debit card. Otherwise credit cards are always better. Is that what they are saying?

Personally, I prefer credit cards, especially for the rewards. I'm going to rack up a boatload of extra cash this year by using my 2% Schwab Visa on things I would have paid for by check or cash -- so why not get the extra 2%? I'll give you the final details at the end of the year, but I'm  guessing it will be $600 or so by the time the year is over. I'll take it!

Comments

[Robert M]

I only use debit for two situations, gas stations that make you go into the store to pay or use debit at the pump, and purchases where I would feel guilty making the owner pay the fees of my CC.

For example, my local pub has great atmosphere, beer, and food at rock bottom prices. I feel guilty paying less than $20 for dinner for two and then hand them an Amex card to pay for it.

[Traciatim]

The hold on your debit card should generally only be the amount of the transaction plus an overage just in case, generally 5-15%. This is to ensure that services that you pay for at the end are trusted (like pumping gas, or staying at a hotel). At the gas pump generally you select an amount up front, your card is authorized for the amount selected, the actual amount is settled, and the authorization is released. It's generally under 24 hours. The same things happen on a credit card, you just don't see it. If you have a credit card that you are using to stay at a hotel and you only have a $500 dollar limit, but you are staying 5 nights so they auth your card for 450 bucks at check in, and that night you go out to the theme park and try to buy 100 bucks worth of tickets it isn't going to work, even though the hotel hasn't actually charged your card until day 5.

If these options weren't available, you'd have to pay up front and pay a deposit in case of overages, like renting a movie or using the phone at a hotel, or paying for the most gas your vehicle could hold up front, pumping the gas you need and then going back in and get a refund of the difference . . . or probably merchants just wouldn't allow these types of transactions. Ever wonder why at a hotel if you are paying cash you pay up front and pay a phone deposit to turn your phone on . . . but you don't with a credit card?

[Traciatim]

WOw, I should post after I wake up . . . generally.

[BillV]

I used to use only a credit card or cash. (paying off the full amount each month of course, used them for reward points)

I now use a debit card in lieu of cash and some credit card situations because if I use it 12 times a month, my bank pay me 4% interest on my checking account.(Only up to 10K)

@Robert M You shouldn't feel badly about using the CC, debit cards also charge the vendor a fee. May as much or more--at least my bank does. So it doesn't matter CC or DC, fees either way.

[Charles]

I also have a Schwab 2% back Visa card, and it's just amazing to see ~$70 showing up in my checking account every month for my everyday purchases. Using cash or a debit card for a purchase is basically like paying more, so why do it?

[KaseyD]

I use credit cards for everything: The Amex Blue right now because I've reached the 5% rebate level on gas, groceries, drugstores. Amex Costco 3% rebate for restaurants. Schwab Visa 2% rebate card for most everything else, plus for all online purchases using their "SafeShopping" service. I also use Discover and Chase for their special rebate offers (ranging 5%-10% rebate), and Fidelity Amex for the 2% also. I pay the balances in FULL every month. For major purchases I make sure I use either Amex or Schwab to double the manufacturer's warranty. Amex has already replaced a hard drive and a printer that failed after the primary warranty ran out.

I refuse debit cards like the plaque. My credit union and brokerages keep offering and I refuse (although I do get the credit union's ATM-only card). Not only are debit cards not well protected by regulation, but, on principal I don't want to allow direct access to the most liquid of my assets.

I hardly use cash; but I carry at least $100 in my wallet just in case a vendor doesn't take credit cards.

[Old Limey]

@Robert M
Don't feel guilty about using a credit card in a pub or a restaurant.
We have two restaurants that we use frequently. I hand in my Costco/AMEX to get a 3% cash reward and then ask the cashier not to forget about our senior discount. That's just the way it is in the world of business. These two restaurants still greet us warmly when we arrive, plus they are restaurants where you pick up your food from the counter so there are no tips involved.

[tj]

I always use credit - I would only use a debit card to fulfill requirements for rewards checking account....because it makes more sense to spend, say $100 a month, to get 4% interest on 10k in checking than to just get 4% rewards on charging $100.

[Strick]

@ Robert. As someone who owns a retail business, don't worry about a $20 charge. The fixed per transaction charge is tiny and then there is a percentage (which you can effectively recover on your side from a good rewards card and paying off the full balance), so only when someone is charging a cup of coffee is it an annoyance for me (but that happens so rarely, not a big deal).

The debit fixed fee for us is actually a little higher. And even cash has loss issues (employee skimming). Checks are best (if good) or worst (if bounce).

[Eddie]

I transfer payments to the credit card as soon as the charges post, so that takes care of the budgeting aspect which is pretty much the only advantage that I can see to debit cards as well.

[Paul]

I'm siding with Dave Ramsey on this one. Debit all the way. Much less dangerous than getting further into debt.

[Rob]

We only use a credit card and pay off the balance every month. Debit cards are much more dangerous (not counting the debt aspect) and here is why.

As the Consumer Reports article mentioned, debit cards have less protection. The money is coming straight out of your checking account. So, if your card is lost or stolen and someone makes a fraudulent charge for a large amount, you are out that cash for a while. A credit card on the other hand gives you that grace period so you will not have to make a payment right away. By the time your payment is due, a fraudulent charge will most likely have already been removed and you will only owe what you actually charged on the card.

[Budgeting in the Fun Stuff]

I HATE debit cards because I do keep a balanced checkbook register and that is just WAY too many entries. Plus, my husband and I never want to have to call each other when we make purchases to make sure the other person hadn't already drained the account for the day or something...I don't think that would be a big problem since we do keep built-in padding, but it would be annoying even if it only happened once.

We use rewards credit cards for everything possible and pay off the balance in full every month. We've never missed a payment or carried a balance, but Discover has gotten our money back for us on a broken Ebay item. For us, credit cards have zero cost and a ton of benefits.

[BillV]

BFS
I would agree withyou but for one item. As I said above, by using a debit card I now get 4% interest on my checking.
Nice.

[Georgia]

I will use a cc only and cash or check if necessary. One advantage of the cc which no one has mentioned is that I can make a purchase on my cc card on July 5, the month cuts off the 4th of August and my payment is not due until August 28. No money directly out of my checking until I make my payment on the cc. I realize that interest is low now, but even if it is only .25%, and I earn 2-5% on my cc purchases, I am still coming out way ahead.

I have had each of my 2 cc's hijacked in the last 2 years - one in Jan. 2009 and one in Jan. 2010. Both were different companies and I did not have to cough up the $50 at either one. I called, they cancelled my card asap, and sent me a new one. Not a moments worry. The one with automatic withdrawals actually happened early enough in the month that I had 2 weeks to get everything changed over to the new card.

I have had my cards for a minimum of 6 years. In that time, I have paid no interest and have earned just over $2,000. I'll take it anytime, as FMF says.

[Budgeting in the Fun Stuff]

BillV, I agree you should take advantage of a 4% checking account, but I'd mark my calendar and once a month I'd go out and buy 12 bananas or fill up my car 12 times with 50 cents of gas (obviously I'd wait until there was no line, so like a weekday evening). But, very impressive interest rate!

[BillV]

BFS
ROtF Lol. I have heard of folks doing that. My bank frowns on that and would take steps to prevent it.

You could do sonmething similar though. For example I use mine to automatically re charge my bus transit card: 4 times a month or so. Drugstore purchases, and the such. You get to 12 very fast.

[WF]

To this list I'd add all internet purchases. If you have even the slightest reservation of the safety of your transactions because of unsureness about whether the computer you're using is completely virus free or about the party at the other end of the transaction, the safety of the credit card protections are important.