How to Decide Between Using Credit or Debit

How to Decide Between Using Credit or Debit

I'm going to be perfectly honest with you. Whenever I'm out shopping, whether it's for groceries, clothes or fast food, I run my debit/credit card as "credit" when the cashier asks me. If you were to ask me why I chose that option, I couldn't give you an answer. I think it started because when I first got a debit card, I could never remember my PIN, and the habit just stuck.

Now that I am actually responsible enough to remember a PIN and to care whether or not I'm making the correct decisions money-wise, I wanted to find out the true definition of a debit card and when I should be using it.

When should you use your debit card?

Your debit card takes money directly from your account and can be used much like writing a check. Use your debit card for everyday purchases where the money can be taken right out of your account. The most obvious use for debit cards, would be to withdrawal cash to avoid fees from ATMs that don't sport your bank name. But did you know you can also avoid foreign transaction fees when spending abroad? Some out-of-country stores will charge fees on credit cards, but not debit. So, it would be worth your time to ask before you swipe while traveling.

Debit cards are also an acceptable choice for those with trouble handling their funds. While these cards don't offer the protection credit cards do on big-ticket purchases and online orders, they do protect you from accruing interest on purchases and ruining your credit score. Banks can no longer enroll you in overdraft protection without your permission and if they do ask, consider saying no. Overdraft fees can be outrageous and if you decline protection you won't be able to spend over your available amount and incur fees, because you didn't authorize it.

Use your debit card:

  • At your every day brick and mortar stores
  • When traveling abroad
  • To receive cash back

Why would you swipe your debit card as "credit?"

A huge reason those cashiers ask you, "Debit or credit?" when you're using your debit card is because they prefer the debit option. Basically the difference here is not credit vs. debit; it's bank vs. retailer. The retailer prefers you choose the debit option and use your PIN because if you choose credit, the store will have to cover the credit fee issued by the bank.

Banks prefer the credit option (where you have to sign, rather than enter your PIN) because they get a larger percentage of the purchase. This is why many banks offer rewards and incentives to use your card as credit. Some cards, Visa specifically, also offer a stronger fraud protection if you run your debit (or check) card as credit because your purchase will go through the credit card company, which already offers certain fraud protection. When you run as debit, your purchase goes through an Electronic Funds Transfer, and the purchase will not have any liability protection.

If you do run your debit card as "credit," you are still paying with the money in your checking account, it is still immediate, you do not incur interest, you will have the additional security offered by some card issuers, but you do not have the cash back option.

When should you use your credit card?

Always use a credit card online. This allows you to dispute any charges and to save yourself from scams. Whether your item was not delivered or it was delivered broken and you are denied a refund, buying it with a credit card protects you more than a debit card would because you can dispute the charge and end up not having to pay.

With big-ticket purchases, think HDTVs and laptops, your best option is also a credit card. Many credit cards, American Express specifically, offer things like extended warranties on certain items, not to mention rewards and points. Discover is becoming well known for their 5% cash back on select categories but other cards, like this Chase Freedom Visa, also offer this type of reward. To read more about some of our favorite credit cards, click here.

Use your credit card:

  • When you shop online
  • For big-ticket items
  • To accumulate rewards or air miles

Bottom line, use your debit card for smaller every day purchases, but run it as the "credit" option when prompted at the register. You could end up earning rewards, plus you may be better protected from fraud than if you chose the debit option. Use actual credit cards online and for big ticket items to protect yourself in the event of lost, stolen or damaged purchases.

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The Best Low-Fee Credit Cards