Credit or Debit: Pick Your Plastic

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.

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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.

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When debit wins

For many, the ability to control cash flow with a debit card trumps any extra benefits a credit card provides. When the money you have in the bank is gone, you stop spending. That’s why Heather Mumaw of Arlington, Va., makes nearly all of her purchases using a debit card. She puts one or two charges a month on her credit card -- usually larger purchases, such as plane tickets, as well as reimbursed work expenses -- to maintain a positive credit history. Many people use a debit card for spending on essentials that they don’t want to finance, such as groceries, utilities and gas.

Although traditional debit card rewards programs have faded, you could benefit from new incentives. Bank of America customers enrolled in BankAmeriDeals can get cash back on certain purchases when they use their debit cards -- for example, a $2 credit for a purchase at Panera Bread. With Chase’s Disney Visa debit card, you can get discounts on some Disney purchases and access to a “Character Meet ’N’ Greet” at Walt Disney World and Disneyland resorts.

If you have a rewards checking account, you may have a good reason to use a debit card several times per month: earning a bigger yield. Miller has Community Financial Services Bank’s Kasasa Cash checking account, which pays 3.05% on balances of up to $20,000. To get that rate, he must make 12 monthly transactions with his debit card, enroll in online banking, receive e-statements, and have one monthly direct deposit or electronic transfer. (Look for top-yielding rewards checking accounts at www.depositaccounts.com.)

One downside: You could end up paying overdraft fees -- which run an average of $31 -- if you’re enrolled in an overdraft-protection plan and spend beyond your checking-account balance. You can opt out of overdraft protection, meaning your card will be declined at the register if you try to spend more than you have in the bank. A small percentage of checking accounts also charge 35 cents to $1.50 each time you enter a PIN to make a debit card purchase.

Prepaid: A new contender

As prepaid debit cards become more popular, it’s worth asking whether one deserves a slot in your wallet. In a survey by the National Foun­dation for Credit Counseling and the Network Branded Prepaid Card Association, 81% of those who use a prepaid card regularly said they felt more in control of their money with a prepaid card than with a debit card tied to a checking account.

When it comes to fees, a free checking account that reimburses out-of-network ATM charges beats a prepaid card (with most prepaid cards, you pay the bank’s ATM fee). But if managing money has been a problem for you, you might save on overdraft fees with a prepaid card. Most of them don’t let you spend more than is loaded on the card. And if your checking account hits you with other types of fees, a prepaid card might be less pricey. Javelin Strategy & Research found that bank prepaid cards cost consumers an average of $6.89 a month in fees, while basic checking accounts charged an average of $8.84 a month.

One prepaid card worth checking out is the low-fee Bluebird card from American Express and Walmart. It allows you to add up to four subaccounts -- handy for parents who want to load money onto their kids’ cards. The primary cardholder can control daily spending limits and ATM access on the subaccounts and receive e-mail alerts about activity. The Bluebird card also recently added check-writing and introduced Federal Deposit Insurance Corp. coverage against bank failure -- a feature lacking on some prepaid cards. Both the Bluebird and the American Express Prepaid cards offer purchase protection, roadside assistance and travel-emergency services.