Should Consumers Mostly Use Credit or Debit Cards?

As Americans make a growing number of purchases with plastic, the question of what kind of card they use more often—credit or debit—has a clear answer. The number of purchases made with debit cards in the U.S. each year exceeded the number of purchases made with credit cards for the first time back in 2004, according to the Federal Reserve. And in 2012, debit cards were used to make 47 billion payments, compared with 26.2 billion payments made with credit cards (though the total value of credit-card purchases is higher).

But are the people who pay with debit cards onto something, or would they be better off using credit cards for those purchases instead?

Proponents of credit cards argue that credit cards offer better rewards programs and other perks than debit cards, as well as better fraud protection. Also, they’re a great way to boost your credit score by building a credit history.

Advocates of debit cards say those cards offer rewards, perks and fraud protection as well, and they’re a great way to keep from ruining your credit by piling up debt you can’t handle.

Arguing in favor of credit cards for most purchases is Beverly Harzog, a consumer-credit expert and author. Making the case for debt cards is Allison Martin, a writer, financial mentor and business consultant to 

Debit: They Keep Spending in Check

By Allison Martin

Debit cards are convenient for checking-account holders, but are they the best option for everyday spending? They certainly are.

For years, many people have argued that credit cards are a better choice because of their added fraud protection and lucrative rewards. But debit cards also come with a host of benefits.

The biggest benefit: budget discipline. With a credit card, you can spend now and pay later. But what happens when the bill arrives and there’s not enough cash on hand to cover the outstanding balance? You pay what you can and vow to take care of the rest the following month. For some, this pattern continues for months, creating a mountain of debt.

By contrast, debit cards help keep spending in check. If you want to make a big-ticket purchase, will you whip out your debit card without giving it much thought? Probably not, because of the immediate impact on your bank account.

Perks Without Risk

Of course, debit cards don’t guarantee that you won’t overspend accidentally, and that means there’s a risk of overdraft fees. But there are ways to avoid that. If you have your bank’s mobile app, you can always check your balance before you make a purchase. And you can get overdraft protection, though you should make sure your bank doesn’t charge a hefty fee for using this service.

Speaking of fees, it’s possible to steer clear of them with debit cards if your bank offers free checking. With credit cards, even those that don’t charge annual fees can end up costing you no small amount in interest if you carry a balance and in fees for any late payments.

As for rewards, debit cards may not be as generous as credit cards, but you can still rake in cash back, airline miles or points redeemable for merchandise, without the drawbacks of a credit card. Additional benefits, such as travel insurance, purchase protection, warranties, event discounts and rental-car insurance, are available to select Visa and MasterCard debit-card holders. Most important, with any debit card, you won’t accumulate more debt than you can comfortably afford to pay off during your quest to earn perks.

The Greater Danger

If your debit card is compromised, the money does come out of your account right away, and there’s a risk your credit could take a tumble if you’re unable to make payments on time because of that. But that doesn’t mean you won’t get the funds back. You’re liable up to $50 if your financial institution is notified within 48 hours and $500 within two months. However, if your card carries the MasterCard or Visa logo, you may still be covered for the full amount stolen. Yes, the cash-flow disruption still can cause problems. But for most people the greater danger is the lack of budgetary discipline credit cards enable, which can have a more lasting impact on their finances.

It’s also true that credit cards can help build a valuable credit history. But if you take on too much debt and can’t make timely payments, your credit score will drop.

The bottom line: Debit cards can’t quite match the benefits of credit cards, but they come close, and they spare you the risk of being saddled with debt that could haunt you for years to come.