February 27th, 2014

Plastic vs. Plastic: When is it Better to Use a Debit Card or a Credit Card?

84008592When it comes to spending money, much of the world has gone plastic. Many people make a habit of carrying little-to-no cash around these days, as most businesses accept debit and credit card payments, even small ones. While it’s easy to get caught up in the multiple debit and credit card options out there, it’s important to remember that not all plastic is created equal.

Making the decision whether to use debit or credit for everyday purchases can have a huge impact on your life. While it’s a good idea to have both types of cards on hand, budget savvy consumers often use their debit card to make most purchases, instead of opting for credit. On the other hand, credit scores largely depend on credit card use. Let’s see when debit cards are more useful and then look at the same for credit cards.

Best times to use your debit card

In 2013, the average US household credit card debt was $15,270. This should be a red flag that credit cards are not always the best choice and can damage your credit score as much as build it.

1. Trying to pay off debt
The easiest way to stop a cycle of debt is to pay with just your debit card, at least for a while. Stick to what you can pay for and don’t add to any recurring credit card balance—or the interest on that balance.

2. When paying your tax bill
If you’re planning to pay your tax bill with plastic, opt for debit, not credit. You’ll be charged a flat fee of a few dollars for using your debit card. However, the processing fee rises significantly when using a credit card, usually costing you a percentage of the entire total bill.

3. If you have a tendency to overspend
If you’re guilty of carrying a burdensome balance on your credit cards without a manageable plan to reduce it, use the safer plastic. You pick up on more healthy spending habits this way. Plus, if you pretend that your debit card is a credit card and spend more than is in your account, you may be in for an unpleasant surprise of hefty overdraft fees.

When to use your credit card

Healthy purchase habits develop with debit card use, but when used well, credit cards can offer more: from saving you on travel costs to protecting you in instances of theft.

1. Using rewards
One of the main downsides to a debit card is that not all have bonuses or rewards programs. With a credit card, you can tap into those rewards and save on travel or merchandise expenses.

2. For lost card liability
A credit card can protect you in the event of theft much better than a debit card can. If you report the stolen credit card within a few days, the most you’ll have to pay is $50 for any unauthorized use of your card. Unfortunately, not reporting a stolen debit card within two business days of learning of the theft can leave you liable for up to $500—and even more if you wait longer than 60 days to report it. Granted, this would only occur if you don’t report the card stolen, but it still shows the credit card’s advantage in the situation.

3. Build credit
The bottom line for using a credit card is to build credit, become creditworthy, and be eligible for good quality mortgages, auto loans, or other credit lines that will make paying off the key purchases in your life much more manageable than they would otherwise.

Final word

The decision to use a debit card or a credit card comes down to financial responsibility and circumstances. One will help you build healthy spending habits; the other will help build credit. Balancing out their respective uses is part of improving your financial well being in 2014.

Spencer Tierney, NerdWallet

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