Debit v. Credit: What You Need to Know


"Credit or debit?" asks the cashier.

There should be a reason behind your answer, depending on your money situation.

You may use your debit card because it keeps you on a tighter budget.  But when it comes to fraud, your credit card may offer better protection.

In short, not all plastic is created equal. So which is best to use? It depends.

For People into Budgeting
If saving more money is a top priority, then stick with debit. Or, better yet, cash. Credit experts from and the National Foundation for Credit Counseling say using cash or cash-like methods of payment can save individuals 20% a year.

That said, use a debit card for transactions sparingly. It’s better to go to your bank’s fee-free ATM to withdraw as much money as you need for the week. Stay safe by reserving your debit card for smaller day-to-day purchases. The rationale is that for your immediate consumable purchases, use immediate funds.
Best Bet: Debit

For Folks Who Favor Flexibility
Credit cards let us to buy now and pay later. We can either pay in full, or carry a balance over time.  That’s more flexible than using a debit card, which automatically deducts money from our accounts.  The catch is that credit cards carry interest rates, so if you carry a balance, you will have to pay more than your initial purchase. Depending on your interest rate, it may be much more.  But, credit may come in handy when buying big-ticket items you can only afford by paying in installments.  (Just remember: If you overuse your credit card and can barely pay the monthly minimum, its flexibility can quickly turn into a financial nightmare.)  
Best Bet: Credit

For Reward Earners
Credit cards rewards programs include cash back, travel deals, discounts on iPods (Stock Quote: AAPL) , etc. If you are a responsible card user (that is, you pay on time and in full every month) a rewards credit card can be a great perk. Reward cards, like MasterCard’s Upromise college savings program (Stock Quote: MA) can even help you save while you spend.  A few debit cards have also gotten into the rewards game, though it’s less prevalent.
Best Bet: Credit

For Bill Disputes
Disputing incorrect charges on a credit card is theoretically less of a headache. If a merchant makes an unauthorized charge, federal law says the credit card company must investigate. In the meantime, you owe nothing.  Also, if you’re unhappy with a product or service you were charged for, again, the law protects you from having to pay. With debit card billing disputes the money’s already been taken out of your account, so it’s much harder to recover those lost funds.
Best Bet: Credit

For Fraud Protection
The law extends more protection to credit card users.  Regardless, if your wallet gets stolen or lost, notify your credit and debit card companies and bank as soon as possible. The Fair Credit Billing Act says that your credit card liability is capped at $50, while your debit card liability is up to $500, if you inform your bank of your missing debit card within two days of noticing it. If you wait more than 60 days to report a lost or stolen debit card, you may face unlimited liability. Visa (Stock Quote: V) and MasterCard also offer zero-liability protection on unauthorized debit card transactions, though some restrictions apply. For example, if a thief used your PIN to draw money from your debit MasterCard account, MasterCard doesn’t offer zero-liability protection. If it was a signature-based unauthorized transaction, it does offer protection.
Best Bet: Credit

For Those in Need of a Credit Score Boost
Your credit record doesn’t reflect debit card transactions.  But using your credit card responsibly, paying your bills on time and keeping your debt at or below 30% of your credit limit can help boost your credit score.  If you're worried about sticking to a budget, Gail Cunningham of the National Foundation of Credit Counselors suggests keeping your existing credit card accounts active by charging a small amount to them each month for fixed expenses, like cable or car insurance. By linking those cards to a checking account which automatically pays off the balance in full each month, you’re practicing good credit card behavior and eliminating the risk of impulse purchases and overspending.
Best Bet: Credit

For the Fee-Phobic
Debit cards are notorious for leading to fees. First, there are those wretched ATM charges.  But beyond that there are overdraft fees. Banks typically allow you to make a debit transaction even if you don’t have enough money in your account. Why? It’s a huge money maker for them.  For each overdraft on your debit card, expect a fee of around $35. Between bounced check fees and overdraft fees, banks make some $10 billion annually. Credit card companies cash in on fees too. Beware of $35 and up late payment fees, which can be easy to accrue when your credit card company moves your payment due date without much notice. There are also equally pricy over-limit fees. It’s particularly easy for cardholders to exceed their credit limit when they’re being assessed 20 and 30% interest. So even if you haven’t actually charged more money than you’ve been allotted, if you’re carrying a balance, and interest begins to compound, you might exceed that limit in no time. Then you’re being charged interest on your fees, too, and it really gets out of control.
Best Bet: Draw



—For the best rates on CDs, mortgages, savings, credit cards and more, enter your ZIP code at

Show Comments

Back to Top