Updated November 27, 2013

Debit Card vs Credit Card: What's Best for Your Wallet?

“Debit or credit?” It’s question you probably hear about once a week at the checkout line. It’s also a question you should ask yourself before you go shopping. It is important to decide what type of card you want as your everyday, go-to payment option.

We’ve already uncovered the charge card versus credit card mystery, but the debit card versus credit card question remains hanging in the air. What exactly differentiates the two types of cards, and which option is best for your wallet? Here is the information you need to know.

Debit Card

The main identifier of a debit card is that it is linked directly to your checking account; each time you make a transaction with your debit card, the purchase is withdrawn from the funds in your checking account. This means that the financial impact of your purchases is immediate. When deciding between the two types of cards, keep in mind that a debit card:

  • Makes accruing debt easier because it immediately withdraws funds.

  • Requires close monitoring of your account to ensure you don’t go in the red with your checking account balance -- otherwise you may have to pay hefty overdraft fees.

  • Provides convenience because the cards are typically accepted by most merchants who accept credit cards – just look for the credit card logo on your debit card (Visa or MasterCard). However, some industries, including hotels and rental car companies, have a history of not accepting debit cards or placing large holds. Check ahead when making reservations so you know what your payment options are for your travels.

  • Opens you up to greater risk if the card is stolen. Since it involves “real” money (compared to a credit card,) you will be out that stolen money while the fraud investigation is underway. However, the law does limit a consumer’s liability to only $50 if the fraud is reported to the bank within two days of when the fraudulent charges were noticed. If the report of fraud is delayed, liability increases to $500 and then up to your entire account balance if the fraud is not reported within 60 days.

Credit Card

Credit cards, unlike debit cards, are not immediately paid. Instead, you have the option of paying all or just a portion of the balance each month. Interest is charged on the portion of the balance that is not paid by the end of the grace period. Here are other factors to keep in mind regarding credit cards:

  • One major benefit of a credit card is that it helps you build your credit score, which is necessary to get the best rates for auto, mortgage, and other loans.

  • Credit cards, like debit cards, provide fraud protection if the card is stolen; however, with credit cards, consumers will not be on the hook for more than $50.

  • There is lower risk involved when a credit card is stolen, as the thief does not have instant access to your funds.

  • Many credit cards provide additional benefits, such as no fraud liability, purchase protection, warranty protection, travel insurance, and even accidental death and dismemberment insurance.

The Bottom Line

As you can see, each type of card has positives and negatives. Perhaps the best solution for most people is to own at least one of each. By having a trusted debit card and credit card option, you’ll be able to responsibly build credit while staying within your monthly budget.

Once you have selected your cards, devise a plan regarding how much you’ll be using each type of card. For example, is the credit card just for large purchases and reservations, or are the card benefits great enough to use it for a majority of your monthly transactions? You can make this decision by weighing fees, rates, rewards, and other card benefits.

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Follow @CreditDonkey or write to Meghan Clark at meghan@creditdonkey.com

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