"DEBIT OR CREDIT?"

By Elizabeth Brokamp
The Motley Fool

Shop at any major retailer in the country, and, unless you're
using cold, hard cash, you'll be asked the question, "Debit or
credit?" If, like me, you typically answer based on the whim of
the moment, you'll be interested to know that there really are
times when choosing one over the other can make a difference.

Most folks already know the major difference between debit and
credit cards, of course. Debit cards immediately withdraw money
from an account in which you have previously deposited funds.
When you indicate you want to pay with a debit card, the store
is checking to make sure you have proper funds in your account.
Pay with credit and the merchant simply verifies that you have
an adequate credit line, the bank pays at the moment of
purchase, and you're responsible for paying them back.

Still yet, there are cards that are a hybrid between debit and
credit, requiring a PIN for debit transactions and a signature
for credit. The credit portion kicks in if you overdraw your
account, to prevent you from getting denied a purchase. Sound
good? Banks like to describe this using terms like "emergency
cushion," but what it can mean is that what was once your
checking account is now a credit card obligation with all the
possible pitfalls attached.

Out of these choices, "debit" is the answer stores prefer to
hear. The reason? Purely economic. Merchants must pay a
percentage of a credit card purchases (typically 2.49%), which
can translate into a tidy sum (and a boon for the credit card
company), whereas they pay only a flat fee for their customer's
debit transactions.

But what about what's best for you? That's not such a simple
answer. Each method of payment has advantages and disadvantages.
Check the pros and cons list below to determine which option is
the right one for you.

CREDIT CARDS

Pros:
- Credit cards are a surefire way to build up credit.
- Your card may offer perks in the form of cash back, airline
miles, or other rewards.
- Credit cards may afford greater consumer protection since
purchases are covered under the Fair Credit Billing Act. This
allows you the option to withhold payment when you are
dissatisfied with a purchase.

Cons:
- You may rack up interest and late fees.
- You can spend much more than your means.
- Your credit rating can be hurt by late payments.

DEBIT CARDS

Pros:
- You don't have to worry about interest or late fees.
- Choosing debit over credit can help you limit your spending.
- A PIN-based debit card can offer you greater security than a
signature-required card. Let's face it: Store clerks aren't
experts in handwriting analysis.

Cons:
- Your bank may charge you a point-of-service (POS) fee every
time you use your debit card. These fees, while typically a
dollar per transaction or less, can really add up.
- PIN purchases do not count toward reward programs like airline
miles or education credits.
- Your purchases are not protected under the Fair Credit Billing
Act. Similar to when you purchase an item with cash or a check,
you could be stuck trying to negotiate directly with the
merchant if you're unhappy with a purchase or want a refund.
- Every time you use your debit card, you give out access to
your checking account.
- You may have to maintain a minimum balance.

HYBRID DEBIT/CREDIT CARDS

Pros:
- You won't have to worry about being denied a purchase because
there's not enough money in your account. There's only the cap
set by that pesky credit limit.
- You have fewer cards to carry.

Cons:
- Hybrid cards can make you especially vulnerable to theft
since, simply by signing your name, a thief can remove money
directly from your account. While both MasterCard and Visa have
extended their zero-liability protection to debit card users,
this move was voluntary and is therefore subject to change.
Debit purchases are still not covered by the Fair Credit Billing
Act.
- You may be surprised by the monthly bill and interest charges
that kick in when you've dipped into the credit line on your
account.
- Your credit rating can be hurt.
- You miss out on lessons of deferred gratification. The credit
card portion of your card kicks in before you experience any
problems from overdrawing your account.

So when you're reaching for your wallet, what should you
remember? Debit cards are great for small, everyday purchases.
For large purchases, services like automobile repair and home
improvement, and items ordered online or for future delivery, a
credit card is the way to go. As for those hybrid cards? While
banks tout these as "the best of both worlds," you may be better
off being a purist. Keeping your credit card separate from your
debit card allows you to maximize the benefits of each.

Interesting...

I am an odball-- always have been probably always will be.

I pay cash or write a check.

I don't have a debit card.

I use credit cards for car rentals, hotel stays and for emergencies.

This article left a lot to be desired.

I use my debit/check card whenever I can. I carry very little cash.