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Debit or credit: Which card to use?

Last reviewed: July 2010
Image of a hand holding a card
Pick your plastic
What you’re buying can help you decide how to pay for it.
Photograph by © Getty Images

Debit cards now rule in the world of plastic. Americans reach for them more often than credit cards when shopping, a trend that's expected to continue. But for some types of purchases, swiping your credit card makes more sense. Here's when you should and shouldn't use each kind of plastic.

Use a credit card...

For big purchases

You don't want to buy, say, a laptop or other big-ticket item with a debit card, especially if you purchase it online. Credit cards allow you to withhold payment if something goes wrong with your purchase, and the card issuer often investigates the problem for you. With a debit card the cash is deducted from your checking account immediately, and it may be up to you to resolve any problems with the merchant.

Some credit cards, including all American Express 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. Many credit cards also offer complimentary travel insurance, car rental loss and damage insurance, and 24-hour travel, roadside, and emergency assistance.

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. Using your debit card won't maximize the amount of cash back or points you can earn. Rewards credit cards, however, tend to have the highest interest rates, so unless you pay off your balance in full each month, you shouldn't use one.

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. And if you fail to report the unauthorized charges within 60 days of the date of the statement that lists them, you could be held liable for any unauthorized withdrawals after that date. Those include the full value of credit lines and funds in savings linked to your checking account for overdraft protection.

In practice, Visa and MasterCard have "zero liability" policies that go beyond the federal law by exempting debit cardholders from liability in most cases when a bank investigation confirms a transaction is fraudulent. But there are loopholes in those policies. People who create fake ATM or debit cards by stealing your PIN and other account data can simply pull cash from your bank account. Using a technique known as skimming, they set up equipment that captures magnetic-stripe and keypad information when you enter your PIN at ATMs, gas pumps, restaurants, and retailers.

When you do use a debit card, don't type in your PIN at the pump; sign for the transaction instead. Use only ATMs inside banks, and monitor your account online for abnormal activity.

Use a debit card...

For budgeting

Debit cards are fine for small purchases, such as groceries and other everyday purchases. You may be inclined to spend less using debit, since you generally know how much money you have in your bank account. Debit cards may also curb the tendency to spend more to earn rewards, a problem for some people with credit cards.

Debit cards have become even better for budgeting now that new federal rules require banks to get your permission to allow overdrafts made with debit and ATM cards and charge fees for those transactions. But the rules, which take effect for new cards on July 1 and for existing accounts on Aug. 15, don't cover overdrafts from checks or recurring transactions, such as automatic bill payments.