If you’re like most Americans you carry both a credit and debit card. If you’re typical you probably carry multiple credit cards. One survey recently found that the average American carries between five and 10 credit cards. We also have an average of 11 “credit obligations,” including credit cards, department store charge cards, gas cards and, of course, a debit card. This makes it unsurprising that the average American household owes $15,611 just in credit card debts.
The pros to credit cards
When you stop to think about it, credit cards are a lot like drinking wine. Using them sensibly and in moderation can be good for you just as drinking red wine in moderation can be a good thing. But using them to excess can cause serious problems.
On the upside using a credit card limits your liability to $50 in the event your credit card number or your entire identity is stolen. If you are ripped off the odds are that even the $50 liability will be waived. You should always use a credit card when buying online even if it’s a site you seriously trust. The old adage that it’s better to be safe than sorry definitely holds true when buying online.
Do you have recurring monthly payments such as a membership to a health club? It’s much better to put that recurring payment on a credit card. This is so that if you were to ever get into a dispute with the club you’d find it much easier to have the charge removed from a credit card then a debit card.
If you were renting a car or something from a home improvement store you’d be smart to use your credit card rather than that debit card. This is because the car rental company or the store might put a hold on your funds. By using a credit card you would still be able to access all the money in your checking account instead of seeing some of it frozen until the hold is released.
Its also possible to see a hold put on checks you deposit in your checking account as explained in this video.
When you’re booking travel it’s also better to use a credit card. This is for the same reason. If you use a debit card the money will be instantly deducted from your checking account the minute you make a reservation, or the travel company might put a hold on a certain part of your funds. If you use a credit card then you still have access to all of the money in your checking account. If you do need to or want to use your debit card to make travel reservations, be sure to ask how much if any of your funds the hotel or reservations company will hold. For that matter, most gas stations will put a hold on your funds. You could buy $30 worth of gas but the hold will be for $100. So before you use your debit card to buy gas it would be a good idea to make sure you understand what the station’s policy is regarding holds or use a credit card so that you’ll still be able to access all the money in your checking account.
Rewards points and travel miles
If earning cash back, rewards points or travel miles is important to you it would be best to put all or at least your major purchases on a credit card that has a rewards program. After all, if you’re using the card and racking up some debt you might at least earn some rewards.
When to use your debit card
As you have read there are many occasions when it makes better sense to use your credit card than a debit card. But there are, of course, times when its better to use your debit card for purchases. For one thing, using your debit card will keep you from racking up debt. This might not be a real difference if you pay off your balances at the end of every month but if not then consider using your debit card more and your credit card less. The problem with a credit card is that it just makes it so darn easy to buy things when you don’t have the money to pay for them. It’s also better to use a debit card if your credit card has a very low limit. This is because if you’re not careful you could exceed your limit, which would have a very negative effect on your credit score.
If you need to make a withdrawal from an ATM it’s always better to use a debit card – assuming you have the money in your account. The reason for this is simple. When you take cash using a credit card you’re borrowing money and probably at a much higher interest rate than when you’re just making purchases. Plus, you start paying interest on that money the minute you take it out of the ATM.
Give a small business a break
If you do business with a small, local merchant you could give it a break by using your debit card instead of a credit card. Most merchants hate credit cards because of the fees they are required to pay to accept then. Of course, debit cards also come with fees but they are much smaller. So if you have a favorite local merchant you could give it a break by always using your debit card. You might also use your debit card when negotiating big purchases as offering to use it would relieve the merchant from the need to process a credit card, which could save it money. In other words this could be a bargaining chip.
When paying taxes
Your local and state governments as well as the federal government are allowed to charge what’s called a credit card convenience fee. It is typically about 2% of what you are paying. But when you use a debit card, there is just a flat fee of about three dollars. So if you’re making a tax payment of $150 or more, it will cost less to use your debit card.
If you’re offered a cash discount
Did you know that sometimes there are discounts available if you pay cash or use your debit card? As an example of this, gas stations sometimes show two prices – one for credit cards and a lower one for cash or debit cards. However, remember what we said earlier on in this article, which is that most gas stations will place a hold on your debit card for $100 that can keep your cash tied up for several days.
Use your debit card to pay utility bills
Finally, it’s best to use your debit card when paying your electrical, gas or water bill. The reason for this is the same as when paying taxes. Many public utilities are allowed to charge an additional fee when you use a credit card. You may also be charged a fee if you use a debit card but it will be much less. Plus, when you use a credit card to pay for your utilities you’re basically borrowing money to pay for them, which in most cases just isn’t a good idea.