Will That Be Credit or Debit?

By Selena Maranjian

Most store purchases today involve using some form of plastic payment, and that means big bucks for the likes of Citigroup (NYSE: C), MasterCard (NYSE: MA), American Express (NYSE: AXP), and other issuers of credit, debit, and charge cards. More and more vendors -- including big names McDonald's (NYSE: MCD), Home Depot (NYSE: HD), CVS (NYSE: CVS), and Walgreen (NYSE: WAG) -- are now even permitting quick, no-signature credit card transactions.

I go through life with my credit card on hand, but I charge only what I can afford to pay for, and I pay my bills on time. All around me, though, I see people with debit cards. I have one, too, from my bank, but I never use it. I thought about this the other day, and I couldn't remember exactly why I was sticking with credit. So I thought I'd take the opportunity to review the differences between the two.

Many credit cards offer the chance to earn cash back or other "rewards." Relatively few debit cards do the same.

Credit cards help you establish a credit history and therefore a credit score, so that you can start to more easily borrow money. Not so with debit cards.

With credit cards, if your card is stolen and used fraudulently, you're typically liable for only $50 in unauthorized charges, though some cards offer zero liability. With debit cards, that fraudulent use will have sucked money out of your bank account, and it may take a little while to get it back. You may end up paying more than $50, especially if you don't report the theft within a day or two.

Tips
Here are some strategies to consider:

If an item that you order arrives damaged, credit cards offer more protections -- such as the ability to contest the transaction -- than other forms of payment do.

If you're mired in credit card debt and have trouble paying your bills on time, or if you just have trouble not charging more than you can afford, then consider favoring your debit card. Credit cards can easily get you in a lot of trouble.

Choose your cards, especially your credit cards, carefully. They can be great conveniences, but they can also needlessly eat up a lot of your money, such as when they charge you interest rates. Some big banks charge more than 25% in annual rates. My colleague Tim Beyers recently wrote about the "worst credit card ever" -- the kind from which you want to steer well clear.

Fools opine
On our discussion boards, I found a long discussion on the merits of credit vs. debit that featured more than 110 posts. You can read the whole thing if you like. Here are some highlights:

Azoreanhp said: "Recently I switched from using my credit card to my debit card because I do not want to continue to pay increasing finance charges on credit [card] balances that seem to take forever to go down. Now when I make a purchase with a debit card, it hurts me in my pocketbook just as it should and I do think twice before using it."