When Should I Use Credit and When Should I Use Debit When Shopping?
When I'm out shopping, I'm always presented with the option to use debit or credit when I check out. I've heard there are benefits to using credit, but aren't there fees involved that can drive up the price or put a strain on the owner of the shop I'm in? When should I use which? Is there even a difference?
Dear Card Swiper,
There's definitely a difference. When you use credit versus debit at the checkout counter, the transaction is handled very differently behind the scenes, regardless of whether the money comes out of the same bank account. If you're curious whether you should use a debit card versus a credit card, there are some serious differences there too that you should know about before you pull out the plastic. Let's look at each one at a time.
What Happens When You Pick Debit or Credit at the Counter
When you have the option to use debit or credit, you're probably using a debit card, or a card issued by a bank, backed by your checking account, but also with a Visa or Mastercard logo on it. Depending on what you pick, different things happen when the payment is processed:
- When you select debit: You enter your PIN and the funds are deducted from your bank account immediately. If they're unavailable, the bank has the option-depending on your agreement with them-to pay the charge and hit you with an insufficient funds fee, or to decline the charge. To the merchant, this transaction is the same as cash.
- When you select credit: The transaction requires a signature, and is processed by the credit card company. The funds may or may not be immediately deducted from your bank account, depending on how the retailer handles their transactions. Some stores ""batch"" their credit transactions and send them in at the end of the day. Depending on the bank, using credit instead of debit can offer you some anti-fraud protection that credit cards offer (more on that a little later). This isn't universal though, so you should check with your bank to be sure. Finally, to the merchant, processing a transaction as credit usually involves a credit card transaction fee to the major issuers, like Visa and Mastercard. This could result in higher prices or fees passed along to you
, or minimum purchase requirements in order to use your credit card.
If you are shopping in a small business or a locally owned shop, you may want to use your card as debit (or just pay with cash) instead of credit so they don't have to get hit with that credit processing fee. At the same time however, signing for your purchase as credit can give you some of the anti-fraud protection and delay the charge hitting your account-depending on the bank. Ann Arbor State Bank, for example, considers debit transactions ""online"" and deducts them immediately, while credit transactions are ""offline"" and offer protection by Visa before they're processed.
There are pros and cons to each, and now that you know the difference at the cash register, let's talk about when you should use credit cards (or tap credit) and when you should go for debit instead.
When You Should Debit Cards or Credit Cards for Your Purchases
Debit and credit are handled differently when it's time to make the purchase, but before you even get to the register or click ""check out"" when you're shopping online, there are more differences you should be aware of. To be up-front, in almost all cases there are benefits to using credit cards that debit or cash simply don't provide, but you have to decide whether or not those benefits are worth using a credit card (and accepting the financial issues that come with it; eg. debt, interest, etc). Here's how to tell when you're better off using which:
When Credit Is the Best Option
- If you're shopping online. Credit cards are by far your safest option when shopping online
, both because the credit card issuers watch for fraudulent charges. If you detect fraud yourself you can dispute a charge and get it reversed quickly, thanks to credit card issuers' ""zero liability"" policies. You're never liable for unauthorized charges, unlike debit transactions, which are the same as cash (and are protected in some cases, but that varies from bank to bank).
- If you're making large purchases or electronics purchases. Most credit cards offer their own warranty protection
for your purchases just for using a credit card for the transaction. Some of those warranties go beyond what's offered by the manufacturer, and offer you extra coverage, which is really useful for electronics, appliances, or other large purchases. Of course, before you buy, read up on the manufacturer's warranty and the return policy of the store.
- If you're traveling or are on vacation. If you're away from home, the added anti-fraud protection offered by credit cards can be essential if someone steals your card number or you accidentally use a shady ATM in some tourist trap, designed to harvest card data. With a credit card, you can put a stop to it without being liable for the charges (if the credit card company doesn't detect it first). Similarly, using your card for travel may open up perks to you
, like discounts on rental cars, frequent flyer miles, or cash back on purchases. Finally, many hotels, airlines, and other travel companies only use credit cards for reservations and bookings. If you use debit, they may put a massive hold on your account, which can be inconvenient if you need to spend your money.
Our friends at Credit Sesame have some more cases where credit beats out debit, like when you're using a rewards card or a card that offers you perks for purchases, and if you're trying to repair your credit after bankruptcy or foreclosure.
However, in both of those cases (and all others, frankly), you should be sure that the financial risks associated with credit cards are worth the benefits you'll get. A few hundred points won't make much difference if you're carrying interest on a pair of movie tickets. Make sure you pay off those credit cards at the end of the month every month, or at least pay off the transactions you charge up in order to get your rewards.
When Debit Is the Best Option
- If the other party needs to be paid immediately. Since debit transactions are handled almost instantaneously, they're also the fastest method of payment. If you're swiping your card and speed is an issue, debit is the best option.
- When you've automated your finances
and are on a budget. The beauty of automating your finances is that you can carry a debit card that's specifically for your personal or luxury purchases. You can use it as much as you like, as long as you're within your budget, and if you go out of your budget, that's it-the card won't work anymore. Bright side: you won't incur overdraft fees, and you won't pay interest on the drinks you had at the bar on Friday night, which overall will keep you better financial health.
- If you're watching your finances, or recovering from poor money management habits. Credit cards aren't for everyone. They're a tool-a powerful tool-but like any tool, they're good for some people and bad for others. If you have a hard time managing your money or living within your means, you may be better off leaving the credit card at home entirely and finding a bank that offers a zero liability policy on your debit account, so you're protected from fraudulent transactions. That way you can budget, spend only what you have, and still be protected in case someone steals your card number and PIN.
- If you want the best exchange rate on foreign currency. Credit cards can be better for flat transactions abroad, but if you need actual currency in a country that's not your own, your best bet is to use your debit card and hit the ATM
. When you do, you generally get the ""wholesale"" exchange rate, which is reserved for interbank purchases, and superior to the exchange rate you'd get on your account statement if you just swiped your plastic.
We have to point out again that since debit is essentially the same as cash, you have to check with your bank to make sure you have anti-fraud protection, and any transactions you don't authorize or want to dispute will be refunded to you. Many banks only offer zero liability policies if you swipe your debit card like credit-if you don't, it's same as cash, and if you're double-billed for example, you have to contact the retailer to get it straightened out (which can suck if you were traveling or the retailer was a bar or restaurant), or file a lengthy dispute-during which you're out the money you're arguing over.
Depending on the circumstances, credit can be a much more powerful and flexible option than debit. You're protected from identity theft, your purchases can be protected from defects and failures, and disputes are handled quickly without you having to pay up just to get your money back. However, credit cards are still credit, and you're in debt for the purchases you make. You pay interest on them, and not being able to handle your credit wisely can lead to serious financial problems. Sometimes it can be better to not spend at all unless you have the money to spend-in which case debit (and cash) are better options.
In either case, choose the option that's best for you in the situation's we've described. Think carefully about how you manage your money, and how well you handle credit. The answer for you may not be the answer for someone else-but at least you'll know the answer.
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