Should I use a credit card or debit card?

Q: Is it better financially to use a credit card or a debit card for everyday purchases? I've heard advice on both sides.

A: There are valid points to be made on both sides of that argument, because the right answer depends on your financial habits. Here are some of the issues involved:

  1. Interest-free use of money. When you make purchases on your debit card, the money comes out of your checking account right away, so you lose any potential interest earnings on that money. With checking account interest very scarce these days, that's a negligible problem, but it still is preferable to use the credit card company's money interest-free from the time you make the charge till the time the interest charges hit.
  2. Potential interest charges. The caveat to the above is that if you use a credit card for everyday purchases, you have to make sure you can and will pay the bill in full every month. Otherwise, you will be paying much more in credit card interest than you could possibly have saved in checking account interest.
  3. Potential overdraft charges and other fees. If you use a debit card frequently, you have to update your checking account balance regularly to avoid expensive overdraft charges. Also, some banks will charge a monthly maintenance fee on your checking account if your balance drops below a certain threshold.
  4. Convenience. Using a debit card means making a series of updates to your checking account, while with a credit card you can consolidate a month's purchases into one payment. On the other hand, with a debit card your charges are paid directly out of your checking account, while with a credit card you have to be sure to make that monthly payment.
  5. Risk to your checking account. Both debit cards and credit cards provide consumers with protection against unauthorized use, provided you report the loss, theft or suspicious transactions in a timely fashion. If your habits are such that there might be a delay in spotting and reporting such problems, then a credit card with a low credit limit might be less risky because it does not provide direct access to your checking account.

Ultimately, making either approach work comes down to having good financial habits. If you use a credit card for everyday purchases, you must be diligent about paying the bill in full every month or you will incur interest charges -- and at a high rate of interest by today's standards. If you use a debit card for everyday purchases, you must keep your checking account records completely up-to-date to avoid overdraft charges.

So, you should decide which of these good habits you can most readily maintain, and choose your approach accordingly.

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