Should you use debit or credit?

Feb 21, 2012

When you're not paying with cash, do you prefer a credit card or a debit card?

Organizations such as the Better Business Bureau and Consumer Reports prefer the security of credit cards. 

On this week's Money Matters, financial commentator Greg Heberlein and KPLU's Dave Meyer agree that credit cards offer the most security and benefits, but find debit cards still have a useful role to play.

Debit cards are great for people learning how to manage their money. They offer the convenience of credit cards, without the ability to spend more money than you have in your account. They force you to live within your means.

But beware of overdraft fees!

Charging more than your account balance is like bouncing a check, and your bank can charge stiff penalties.

For those who are good at managing their money, though, credit cards are superior, especially when it comes to security.

If someone steals your credit card number, you're only liable for up to $50 lost to fraudulent purchases, and many card issuers give you zero liability coverage.

It's different with debit cards. If you don't report the fraud within two days, you could be liable for up to $500. But again, many banks will offer lower liability coverage. It pays to shop around.

When it comes to resolving disputes with a merchant, you're better protected with a credit card. With a debit card, the money is already gone from your bank account. But with a credit card, you can withhold payment while your dispute is being resolved.

Some credit cards offer great benefits such as extended warranties, car rental insurance, cash rebates, gift cards, airline miles, etc. If you stick to cards with no annual fee and always pay your bill in full every month, these cards literally pay you to use them.

If you carry both credit and debit cards, consider using debit for charges under $100 to help you manage money better, but use credit for more expensive items to get reward points.

No matter what, avoid paying credit card balances over periods longer than a month. Once in a while an expensive emergency may require a multi-month payout, but paying off the card as quickly as possible will be like filling a piggy bank with large-denomination currency.