Guiding your life’s biggest financial moments

Personal Finance

Should I use credit or debit?

As the holiday shopping season approaches, you’ll need to decide not only what to buy, but how to pay for it as well. The decision will be even bigger this year, when many shoppers shop for vacation online. In the credit card and debit card debate, supporters on both sides have good reason to take one method and reject the other.

The case of credit. The biggest benefit offered by a credit card is security. Under the Fair Credit Billing Act, if someone fraudulently uses your card number for crazy spending, federal law limits your liability to $ 50. And many credit card companies are extending their protection beyond that baseline. American Express, Discover, Mastercard and Visa take full responsibility for unauthorized purchases.

FCBA protections are especially important if you shop online. If you use your credit card to make a purchase and you have a billing issue with a merchant, including a dispute over unsatisfactory merchandise, the credit card issuer should investigate and resolve your complaint, and you can suspend payment until that date.

In addition, credit cards can offer other protections, such as extended warranties and purchase protection, says Ted Rossman, analyst for

Credit cards also have more generous rewards programs. Depending on the card, you can earn up to 5% cash back (or, typically, five points per dollar) for your groceries, gasoline, dining and travel expenses. Some cards earn up to 3% cash back on every purchase you make (see The Best Rewards Cards For You).

The case of debit. While credit cards allow you to spread payments over time, the costs can be high if you don’t pay off your balance in full each month: Interest on credit card balances averages $ 16. %. And missing payments, going over your credit limit, or using too high a ratio of your available credit could hurt your credit score.

You avoid these pitfalls with debit cards. Since the funds are taken directly from your checking account when you use a debit card, the temptation to spend money you don’t have is removed. “In practice, debit cards are seen as a debt-free form of payment similar to cash, whereas a credit card could be used as a loan,” says Rossman.

Debit cards do not offer the same legal protections as credit cards. They have stricter timelines for reporting fraud, which could put you at substantial risk if you wait too long to report unauthorized use. If your debit card is stolen, you must report it within two days to get the same $ 50 limited liability. Notifying your bank between three and 60 days after the fraud occurred could cost you up to $ 500, and beyond 60 days your losses could be unlimited.

In practice, however, your bank will likely reimburse any unauthorized charges as long as you promptly notify them of the loss or theft of a debit card. But it can take weeks to get your money back. And some debit card issuers offer additional protections. For example, Visa debit cards do not hold you responsible for fraudulent transactions if the transaction is processed by Visa, although you may not know which transactions are processed by Visa and which are not.

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