The credit or debit conundrum


I remember when I was a relative newcomer to the world of making, spending, saving, and wasting money. I had a brand new, shiny checking account, a box of brand new, shiny checks with ocean scenes on them, and a brand new, shiny debit/ATM card. That card was magic. No need for cash. No need to stand around writing out checks. Just a swipe and my transaction was complete. Except…

“Is that credit or debit?”

That always stumped me. It was a debit card, so the answer was supposed to be “debit” right? But I remembered very distinctly that the nice lady at the bank had told me that the card could be used as a credit card, too. But it couldn’t be both. Not really. That would be anarchy.

“Debit, please.” Then I would punch in my secret, clever, never-the-year-I-was-born PIN and be on my way. But was debit really the right answer?

Most consumers these days have their choice of payment methods: credit, debit, cash, check, etc. If you’re reaching for the plastic, though, and find yourself wondering, “Which card should I use?” here are some helpful tips.

What’s the difference?

If you have a bank card that can be used as both a debit card and a credit card, you might assume that it doesn’t really matter which one you use. “It’s all the same money anyway.” And although ultimately it is the same money, how and when that money is accessed is quite different depending on which option you choose.

On a debit transaction your money is moved almost immediately from your account to the merchant’s account. It’s about as close to exchanging digital cash as you can get and there are generally no fees added on the merchant’s end for processing the transaction.

On a credit transaction things go a little slower. The affiliated credit card company handles the exchange, rather than your financial institution, and when the money actually leaves your account depends on when the merchant processes your purchase. The merchant pays a fee to the credit card company for the transaction, which may be passed on to you, the consumer.

When should I pick credit?

Credit cards have one major advantage over debit cards – security. Credit cards (when used responsibly) are safer than debit cards, because credit purchases generally have greater anti-fraud protections. Credit cards make it much easier to recover your money when purchasing a defective item or after having your card stolen and used to make fraudulent purchases.

But the pros don’t stop there! You should favor credit when you are:

Reserving a hotel room. Any time you’re putting a hold on your card it’s safer to use credit over debit, especially if you’re short on funds in your account. A hold for a hotel room on your debit card could potentially leave you without access to your money until you’ve checked out.

Buying online. It’s just safer. It’s easier to dispute charges and undo the damage from a stolen credit card number.

Getting rewards. If your credit card gets your airline miles or other valuable perks, then stick with the credit card.

Rebuilding your credit. Debit purchases don’t help your credit score. You have to use credit wisely in order to build good credit.

Able to pay back those purchases quickly. Credit can be a dangerous game to play. If you don’t trust your ability to spend within your limits and pay back those purchases on time then credit shouldn’t be your first choice.

When should I pick debit?

Debit cards are essentially a direct line to your bank account. Those transactions are faster and cheaper for merchants. Debit also has the advantage of only allowing you to spend what you currently have – you may overdraft your account (depending on the account type) but theoretically you shouldn’t end up owing money or accruing interest fees on debit purchases.

With that in mind, you should choose debit when you are:

Buying from small, trusted merchants. If you want to save a preferred merchant from credit transaction fees, and you trust them, go debit. Also, if the merchant chooses to pass those creditor transaction fees on to you, debit may be cheaper.

Struggling with finances. Using credit cards to fill in the financial gaps is a dangerous scenario. If you’re struggling to balance your budget, try limiting yourself to only the money that you have. Adding new credit card debt (along with fees and interest) is only going to make it harder to manage your money.

In the end…

The trick is to simply know yourself. Credit cards are more secure and offer a range of advantages over debit cards, but credit card usage can get out of hand if you don’t know how to handle credit responsibly. If you’re comfortable with credit, that should be your primary option. If you’re not comfortable with credit, stick with debit cards and cash while you learn how to use credit safely.

Good luck!

Clarification - The question has been asked: "So what happens when I use my debit card as a credit card?" Your debit card is NOT a credit card. Choosing "credit" after swiping your debit card simply changes how the transaction is processed (choosing "debit" and entering your PIN pulls the funds immediately; entering "credit" and signing your name authorizes payment through the card card network, which may take a couple days to complete). Using a debit card and choosing "credit" does not impact your credit report in any way. Your best bet for building your credit history and giving yourself the maximum amount of consumer protection is to use a credit card.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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