Should I Use a Debit Card or Credit Card?

When it comes to making ATM deposits and withdrawals, a debit card is an indispensable tool that is clearly suited for the task at hand.

However, when it comes to making simple everyday purchases, conducting certain recurring financial transactions, and travelling, it becomes less clear whether using a debit card is better than using a credit card.

In fact, there are a number of considerations to take into account when deciding whether to use a debit card or a credit card – including the presence of rewards programs, degree of fraud protection, whether a transaction is personal or business related – and several others. Not sure whether to use your debit card or credit card? Let’s take a closer look.

If you’re going to an ATM to make a withdrawal or deposit, the answer is an easy yes. From there, the next most obvious instance when to use a debit card is in the event that you simply don’t want to take on any more debt through the use of a credit card.

It may sound obvious, but using your debit card instead of a credit card will prevent you from incurring additional debt while still allowing for the convenience of not carrying cash.

This comes into play particularly when making everyday purchases such as groceries, gasoline and trips to the coffee shop. Furthermore, if you know that you are less than perfect when it comes to paying your monthly bills on time – or if money is a little tighter than usual right now – then using your debit card will not add to your monthly bills.

When it comes to rewards programs such as those that include cash back or airline miles, credit cards leave debit cards in the dust. Therefore, if you care about taking advantage of rewards programs, it won’t make much sense to use your debit card.

Very few debit cards offer rewards programs, and even those that do – such as the Discover Cashback Debit come with only modest cashback of 1% on up to $3,000 per month in qualifying purchases. This compares unfavorably with Discover credit cards that offer 5% cashback on grocery stores, ride services such as Uber, restaurants and retailers on a rotating quarterly basis throughout the calendar year.

Discover is but one credit card issuer that competes feverishly for your business by offering various rewards programs – and this competition simply does not exist within the debit card space. However, it is important not to accumulate significant credit card balances while enjoying the benefits of rewards programs – as the interest expense generated will more than defeat the purpose of participating in the rewards program.

Credit cards also come up more favorably than debit cards when travelling. For starters, when booking a hotel room or rental car, regardless of the card you use, a hold will be placed upon it for up to five business days to cover any potential damages and incidental costs.

For example, a hotel will protect itself against minibar and room service charges that could go unpaid, and a rental car company will protect itself in the event you don’t return the car filled with gas. The point here is that the size of the hold will vary by the company placing it on your card, and if you furnish them your debit card, that hold will freeze some of your cash.

A hold placed on your credit card will block that portion of your available credit, but not impact access to any of your existing assets. Furthermore, debit cards generally do not offer any form of travel insurance, whereas credit cards often do.

There are plenty of potential problems that come with travel – such as lost baggage and missed flights – and a credit card complete with travel insurance can help mitigate the cost and stress involved with these situations. Not to mention that many credit cards also include primary rental car insurance coverage that can save you the cost of paying for insurance at the rental car agency.

The laws governing unauthorized charges made to credit cards and debit cards are actually quite different. Credit cards are covered by the Fair Credit Billing Act, which essentially limits liability for any fraudulent or unauthorized purchases to a maximum of fifty dollars.

Debit cards, however, are governed by the Electronic Fund Transfer Act, which requires that any fraudulent charges be reported quickly – within two days – for liability to be capped at fifty dollars. After that, liability shifts upward toward $500.

This means that if a thief gets hold of your debit card and drains cash from your bank account – but you don’t realize it until three days later – you could be liable for up to $500. If for some reason, a victim doesn’t notify the bank within sixty days of a debit card crime, that individual may be liable for the full amount stolen!

Clearly, when it come to fraud protection, credit cards win out over debit cards. This is another reason not to use debit cards as much when travelling – as the added fraud protection that comes with credit cards can make things that much more safer.

Another situation that can favor credit card usage over debit card usage involves spending on business expenses. Whether you run a small business or the company you work for reimburses you for out-of-pocket business expenses, a separate business credit card can make a lot of sense.

This way, you are not draining any of your cash reserves when business expenses arise – not to mention that you can enjoy the benefits of rewards programs while not actually spending any of your own personal cash to do so!

Just make certain that your business or company reimbursement is performed in a timely manner so as to prevent any accumulation of interest charges on the credit card balance. Paying off a credit card balance quickly is important to do in any and all instances in which you choose to use a credit card over a debit card.

Therefore, following any travel as well, make certain to quickly pay off any accumulated credit card balance in order to prevent interest expense. And, again, as a reminder – if you know yourself not to be disciplined enough to quickly pay off accumulated credit card debt – then you have as valid a reason as any to use a debit card over a credit card.

Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.

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