Credit or Debit? That Is the Question

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So which is better to use -- your credit card or your debit card?

"It really depends," says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA. "I typically tell people to avoid using credit cards because of the damage they can do to your financial well-being. Even so, there are some situations where I'd pick a credit card over a debit card or even cash, for that matter."

When to Use Credit

In the following situations, he favors using a credit card over a debit card. Pay with credit when you want to:

  • Shop online. One of the biggest cardholder benefits is purchase protection. If an item never arrives or is damaged, or you have a dispute with the merchant, you can ask your credit card company to withhold payment. With a debit card, the money is gone from your account until the matter is settled. "While you may ultimately get your money back from a debit card purchase that's gone bad, it often takes awhile," Halliwell says.
  • Buy something big. Some credit cards offer warranty protection beyond the manufacturer's or store's coverage. For example, a home theater system may come with a one-year manufacturer's warranty. Buy it with a credit card, such as MasterCard®, Visa® or American Express®, and you generally get additional protection automatically. Review the specifics with your credit card company before making the purchase.
  • Establish a credit history. Debit card activity doesn't translate to your credit report. "Credit is one of the ultimate Catch-22s," Halliwell says. "Lenders are often hesitant to extend credit to someone with a limited history. But to build that history, someone has to agree to extend you credit." A secured credit card, which is a credit card backed by a deposit made by you, can be helpful in building a credit history.
  • Rent a car. Some credit cards offer collision damage insurance, eliminating the need to pay for the add-on coverage that rental agencies sell. Be sure to check your card's exact coverage and exclusions before you charge. Also, if you use a debit card for a rental car, the rental agency could put a large deposit hold on your account, which means you won't have access to that cash during that time.
  • Stay at a hotel or travel in general. Some gas stations and hotels will put a hold on funds as a security deposit. If you use a debit card, you'll lose access to those funds until the hold is released.
  • Score points. Credit card rewards programs can provide substantial benefits in the form of airline tickets, free hotel rooms or cash back. Look for no-fee programs, and be sure to pay off the balances each month. Otherwise, the "free" rewards will cost you. "I've seen this one get a lot of people in trouble," says Halliwell. "They initially begin using a card for the rewards. But then something unexpected happens, and they eventually find themselves carrying a balance and paying high interest charges."


When to Use Debit

In some situations, using a debit card trumps a credit card. Pay with debit when you want to:

  • Get cash fast. You can get cash from your bank's ATM without the fees and interest many credit cards charge for cash advances. But fast cash also can have its downsides, Halliwell warns. "One of the biggest problems with people being able to access their cash on virtually every corner is that it makes it easy to spend without a plan. I often tell people to take out their entire week's planned spending all at once and when the money is done, so is their spending."
  • Avoid interest charges. You'll pay no interest on purchases and only buy what you can afford. Set up overdraft protection to avoid fees or penalties if you spend beyond the funds available in your account.
  • Buy something inexpensive. Debit cards are great for purchases of less than $50. It's faster than writing checks, and most merchants accept debit. Make sure you keep track of your debits to avoid overspending.
  • Exercise control. "Psychologically, debit card users are probably less likely to overspend than credit card users because they can see the immediate results of their spending as their bank balance goes down," says Halliwell. The bill for items paid for with a credit card might not be seen for three or four weeks.


Whether the situation calls for your debit card or your credit card, Halliwell says it's important to remember that each is merely a way to access your hard-earned cash. One does it now, and the other does it later. "But both are using your money, so be thoughtful when you pull any piece of plastic from your wallet," he adds.

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USAA, a diversified financial services organization, is the leading provider of competitively priced financial planning, insurance, investments, and banking products to members of the U.S. military and their eligible families. Rated among the highest among financial services companies for customer advocacy in a Forrester Research survey, USAA provides convenient and accessible financial products to its more than 9 million members. For more information about USAA, or to learn more about membership, visit usaa.com
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