Should I use a debit or credit card?
A step-by-step guide to using plastic
You hear it from every cashier, but as with most things, there's no one right answer. For some of us, in certain situations, credit might be better. For other people, in other situations, it might be debit.
So how are you supposed to know which option is right for you — and when? We'll help you figure it out.
Use a credit card if . . .
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1. You're trying to build credit
The better your FICO credit score, the better your odds of getting a favorable interest rate on a future mortgage, car loan or other line of credit. And a big part of achieving a stellar credit score comes down to building a proper credit history.
"In order to qualify for a FICO score, you need to have some credit history that will allow the algorithm to assess the likelihood that you'll repay various credit obligations over time," says Frederic Huynh of FICO, the company that developed the popular credit scoring system. "Using a credit card as a means of repayment is one way to build up that history."
Worried that you'll overspend? According to Huynh, just using your credit card to buy something small each month, like a pack of gum — and then paying off that charge without delay — is enough to build a strong credit history.
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2. You want to accrue rewards
Although some debit cards do offer rewards, the perks offered through credit cards tend to be more enticing. "In general, debit cards aren't so lucrative for banks, whereas the credit card market is hot right now, so there are bonuses and benefits," explains Brian Kelly, who runs credit blog The Points Guy.
A debit card rewards program, for instance, might offer you small, spending-based contributions to your checking account for a short period of time — but credit card rewards may give you up to three percent cash back on certain types of purchases without a time limit.
3. You're an avid traveler
While there are plenty of credit cards that reward travel through airline miles or points toward free hotel stays, debit cards centered around travel are few and far between. If you travel a ton and rank airline miles right up there with cash, it might pay to opt for a credit card that can grant you miles by the bucketful.
Some programs offer a mile for every dollar spent, while other cards offer 1.5 or even two miles per dollar. And that's not to mention sign-up bonuses, which can grant you tens of thousands of miles early on if you put a certain amount on the card in the first few months. Plus, many credit cards offer other travel perks, such as car rental insurance (as long as you paid for the rental with your card), emergency assistance and even a 24-hour phone concierge service.
4. You want purchase protection
Some credit cards offer purchase protection if an item that you buy with that card gets stolen or damaged —and that protection often covers you up to 90 days from the purchase date and for up to $500 in damages. Other cards will extend your manufacturer or retailer's warranty. And a few cards offer price protection: They'll reimburse the difference if you find the same item on sale elsewhere for less within a certain timeframe after you buy it. Some credit cards even offer return protection — the credit card company will reimburse you (within predetermined time and price limits) if you try to return something and the retailer won't take the item back.
5. You'd like to minimize your liability against fraud
If your card gets lost or stolen, you might have less liability for a credit card than a debit card. If a thief personally presents your credit card to buy something, you can't legally be held accountable for more than $50, and many card issuers waive that as a courtesy. And if a thief uses your card online or over the phone, you have no liability.
Meanwhile, if someone fraudulently uses your debit card, you must report the loss or theft within two days of realizing it. If you do, you won't be liable for more than $50, but if you miss that deadline, you're on the hook for $500. And if you receive a statement with fraudulent withdrawals or charges, but you fail to notify the bank within 60 days, you're liable for an unlimited amount.
Use a debit card if . . .
1. You tend to overspend
Although credit cards are a crucial way to build your credit history, you don't want to build up a bad credit history. "Some consumers may lack the self-control to rein in spending, and can get themselves into trouble, racking up balances that are very difficult to pay off, or worse, start going delinquent," Huynh says. "In this case, using credit cards can be a very bad thing for these people because it tarnishes their credit, has the ability to negatively impact their credit score, and can consequently limit access to credit going forward or increase the cost of that credit."
Bottom line: If you're going to use a credit card to spend more than you can afford, you might want to stick with debit instead.
2. You're more of a cash person
If you normally prefer to use money, debit could be a more secure alternative to carrying around a wad of bills. If your debit card gets stolen, you should be able to recover the damages without being held responsible for any charges — as long as you report the theft right away. Your debit card provider can also freeze the card, so the transactions stop.
And if you need to get cash on the go, your debit card may offer access to ATM machines without a fee (or your bank may reimburse you for them). But if you take a cash advance on a credit card, you're charged interest at a much higher rate than the rate on an actual purchase.
3. You want to earn rewards on your tax bill
One exception to the credit-cards-offer-better-rewards rule? Paying taxes. Payment processors typically charge a flat fee of a few dollars when you pay your tax bill using a debit card, but if you pay by credit card, they charge a percentage of the total.
So if you have one of the few debit cards that offers significant rewards, putting a large tax bill on a debit card can earn you significant rewards — and you'll pay a smaller fee than you would using a credit card. "If you have, say, a $30,000 bill, then you're only paying $3.49 to earn 30,000 airline miles," explains Kelly of The Points Guy. Just keep in mind that airline rewards debit cards often carry annual fees, but if you spend enough, you may consider that fee worthwhile.
Can I use both?
Of course, you might find yourself in a few of the above situations. That's why plenty of people maintain both debit and credit accounts, so they have flexibility. Maybe you'll use a credit card for big buys that could use purchase protection, but you'll whip out your debit card for a small purchase at the convenience store.
Whatever your personal calculus, that next time that a store clerk asks, "Debit or credit?" you'll not only have an answer — but a good reason for your decision.
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