In the debate over whether debit or credit cards reign supreme, there may never be a tidy conclusion. Some financial experts champion credit cards as the best payment method, citing their superior rewards and benefits and heightened fraud protection. Others say debit cards are the way to go, especially for certain types of spenders. “Some folks just don’t do well with credit cards,” says Alan Moore, a certified financial planner with offices in Milwaukee, Wis., and Bozeman, Mont. “They lose track of their expenses and seem to always be in debt.”
Ultimately, the answer depends a lot on your financial personality. If you have firm control over your spending and pay off your card balances every month, you may want to pump a credit card for optimum benefits -- the grace period you get before you have to pay the bill, plus the rewards tied to some cards. For people who are digging out of debt or prefer firmer spending limits, a debit card supplies a dose of discipline. And if you fall somewhere in the middle, you can tailor a payment strategy that uses the advantages of each. You may even find that a prepaid debit card has a place in the pantheon of plastic.
The case for credit
A credit card can be a powerful financial tool. For one thing, assuming you don’t carry a balance, you get at least a 21-day interest-free grace period between the statement date and the bill’s due date. The potential to earn rewards on purchases is usually a lot better than with a debit card. On-time payments build your credit record. And credit cards carry more protections than debit and prepaid cards. Plus, the card issuer must investigate disputes with merchants. That makes a credit card the best choice for big-ticket purchases.
Bob Miller of Chicago uses a debit card for much of his spending. But when he buys a pricey item, he uses a credit card and tries to buy at the beginning of the card’s billing cycle. That gives him maximum time -- about seven weeks, he says -- between the purchase date and the statement due date to pay off the balance with no interest. Some cards offer introductory periods with 0% interest.
Some rewards credit cards pay up to 5% or 6% back in certain categories, such as groceries or gas, plus 1% or more on other purchases (see Best of the Rewards Cards). Miller uses his Chase Freedom rewards credit card for transactions that earn the maximum 5% rebate in rotating categories -- recently, purchases at restaurants, movie theaters and Lowe’s home-improvement stores.
Extra perks make credit cards attractive, too. With cards that include purchase protection, customers who buy items that are damaged or stolen within a certain period after purchase (typically 90 days) can file a claim for reimbursement, replacement or repair, up to a set amount. If you buy a flat-screen TV on your American Express card and break it on the way home from the store, for instance, you may get up to $1,000 to repair or replace it. You may also be able to extend warranties (often an extra year) on items you buy with a credit card, as well as receive reimbursement for luggage lost or damaged during a flight. (Some debit cards, such as the SunTrust MasterCard Check Card, supply similar benefits.)
Most credit cards cover damage to a rental car that is reserved and paid for with the card, meaning you can decline the collision-damage waiver at the counter. Plus, many car-rental agencies and hotels prefer that you make reservations with a credit card. If they allow debit cards, they may put a “hold” on cash in your checking account (possibly a few hundred dollars) -- money you won’t be able to access until the hold is lifted.
Watch for fees of up to 4% of the transaction when you use your MasterCard or Visa credit card. Merchants pay swipe fees to payment processors and banks each time a customer uses plastic. As part of a settlement earlier this year, merchants gained permission to begin passing on those fees to customers who make credit card purchases, except in several states where it is illegal. By and large, merchants aren’t charging customers, but some smaller businesses are levying the fees. The fee must be clearly stated in the store or on the merchant’s Web site before you check out, as well as on your receipt.