Seeking the Bottom Line in the Credit vs. Debit Debate

Debit or credit? It’s a question we routinely must answer — often with barely a second thought — during a retail transaction, whether at the grocery store, the mall or anyplace that accepts plastic as a form of payment.

Lawrence Blanchard

As inconsequential as the question and the answer might seem, the choice between using a debit card or a credit card to pay for a purchase is worth pondering a little more deeply. Indeed, how you answer the “Debit or credit?” question can have a profound impact on your life, from protecting your identity to building a credit score, according to personal finance experts at the Financial Planning Association in Denver, Colo.

As much as the best answer differs from person to person and from situation to situation, depending on circumstances, the more you know ahead of time about the potential ramifications of the credit vs. debit decision, the better chance you’ll have of making the right call come payment time. Here are some pros and cons to consider:

PRO CREDIT CARD: Using a credit card limits identity theft exposure, said Jeff Maas, CFP® with Lincoln Financial Advisors in Sacramento, Calif. Debit cards usually are directly linked to a personal bank account, so if the card number is compromised, so, too, may be the bank account. That’s not the case with most credit cards, which typically are linked to their own distinct accounts.

PRO DEBIT CARD: Because a debit card draws funds directly from a personal account to cover purchases, it won’t increase the cardholder’s debt. And mounting debt is a major issue for many Americans.

PRO CREDIT CARD: Hotels, rental car companies and the like often place cardholder funds on “hold” for a period of time. Maas prefers using a credit card in these situations, since using a debit card may tie up money in the cardholder’s personal bank account.

PRO DEBIT CARD: Using cash on hand instead of credit to make purchases is a good way for a person to spend within their means, said Maas. “You can’t spend what you don’t have.” From a psychological standpoint, it removes the temptation to buy something you can’t afford. What’s more, there’s no big credit card tab hanging over your head.

PRO CREDIT CARD: Using a credit card responsibly — that is, using it only to the extent you’re able to pay the card’s full balance each month — will benefit your credit score. And a higher credit score plays a major role in a person’s ability to secure a loan, a mortgage, etc.

PRO CREDIT CARD: Many credit card providers offer cardholders perks such as fraud and insurance protection, return-of-purchase options and rewards programs that debit cards don’t provide.

PRO CREDIT CARD: Credit cards provide cardholders with a “float” — the flexibility of extra time (the billing period) to pay off their balance, along with the ability to finance a larger purchase. That’s not the case with debit cards, which immediately draw account funds to cover a purchase.

BOTTOM LINE: It’s reasonable for people to have both a credit card and a debit card, using them as the situation dictates. People who handle credit cards responsibly should use them to build their credit rating, to take advantage of the flexibility and perks they offer, and to protect their identity, keeping in mind the danger of accruing too much credit card debt. People who are particularly budget-conscious or who have issues with debt and spending responsibly should lean more heavily on debit cards.

Article Credit:
This column is provided by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

Photo Credit: Lawrence Blanchard