Decision Points: Debit or Credit?

Published June 27, 2012

| NewsCore

In our increasingly cashless society, many of us don't think twice when we pull out plastic to pay at the checkout. But we do have a choice within the plastic world: credit or debit?

"A credit card offers a line of credit to a consumer, while a debit card is tied to a checking account and deducts money from your account when you make a purchase," says credit expert Janna Herron of

Essentially, paying with a credit card means borrowing money that you must pay back later. Paying with a debit card means paying with money you already have.

Pros of debit cards

According to Herron, a debit card is your best bet if you need to stick to a budget. "If you don't opt for overdraft protection, you won't spend more than you have and you don't need to worry about rolling over balances and accruing interest," she says.

Kevin Gallegos of Freedom Financial Network points out that paying with cash or a debit card can sometimes merit a discount. For instance, if you've saved up money for a new appliance or car, you might be able to get a better deal if paying with cash or by debit card.

Cons of debit cards

"Using your debit card, no matter how responsible you are, won't do a thing for your credit," Herron states. It does not show up on your credit report and can't be used to calculate your credit score.

Moreover, Herron says, "Your protections against loss and theft of your debit card aren't nearly as good as a credit card's." If you don't report your debit card missing for more than two days, your liability is $500. After 60 days, it's unlimited liability, under federal law.

According to Howard Dvorkin, founder of Consolidated Credit Counseling, "Many banks require consumers to keep a minimum balance in their checking account; otherwise they start charging penalty fees." Such fees become difficult for consumers struggling to keep their checking account afloat.

For those who don't elect for overdraft protection, don't overdraw or you will face hefty overdraft fees as well.

Pros of credit cards

When using a credit card, you have the opportunity to build good credit history. Herron says, "Good credit will help you qualify for other loans, such as a car loan or mortgage, down the road."

Many credit cards also offer rewards programs where you earn points to redeem later for airline miles, hotel stays or even cash.

Under federal law, the maximum liability for card loss or theft is $50 for consumers, but most offer zero liability.

"Many credit cards provide shopping protections, like return and purchase protection or extended warranties, along with other perks, such as car rental insurance and roadside assistance," says Herron.

Additionally, you can stop payment for unsatisfactory goods under the Fair Credit Billing Act. It's worth using a credit card when paying travel expenses, purchasing online or making significant purchases, like electronics.

Cons of credit cards

If you're not disciplined in paying your credit card balance off entirely each month, whatever is left earns interest. The longer you revolve a balance, the larger the debt becomes. If you stop making payments, you'll be charged fees, your interest rate will jump and you'll dent your credit. Continue this cycle, warns Herron, and you fall down the rabbit hole of delinquency and unpaid debt.

From annual fees just to keep the card in your wallet to penalty fees if you make a late payment or go over your limit, both Herron and Dvorkin warn consumers that credit cards come with a host of expenses. Rewards programs can also coincide with spending thresholds, expiration dates and other conditions, potentially making them less lucrative than you first thought.