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Credit vs. Debit Cards: Weighing the Options

The different types of cards have their own plusses and minuses. We compare.

If you're debating whether debit cards or credit cards are best for you, this article can help you decide.

Debit cards have changed in the last few years, and some of the changes -- such as overdraft protection and usage fees -- are making them a bad option for consumers. But that doesn't mean credit cards are necessarily better: Americans are currently accumulating crippling amounts of credit card debt.

To complicate things even further, credit and debit cards are increasingly difficult to tell apart. Some debit cards -- known as "check cards" -- don't even require a PIN (personal identification number) at the time of purchase; you can simply sign for your purchase as you would with a credit card. (Check cards, many of which are emblazoned with that name, usually carry a


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How should you choose between debit and credit? Consider the following factors:

Overdraft Fees

Conventional wisdom used to dictate that if you had problems reining in your spending and tended to accumulate debt, you should go with a debit card, since you could only spend money that you actually had in your account.

The problem is, many institutions now offer overdraft protection for debit cards. This "courtesy" allows a consumer to spend more money than he or she has in a given account, essentially converting the debit card into a credit card with a fee -- typically $30 or more -- charged per overdrawn transaction.

Credit cards, on the other hand, are a problem for consumers who pay high interest rates on large balances.

Still, paying a $30 overdraft fee on a small transaction converts to a penalty rate that dwarfs even the worst credit cards.

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(If you have money in multiple accounts, some banks may offer overdraft protection with no fee, so check to see if that's a possibility for you.)


Credit (unless you have a serious debt-accumulation problem)

Fraud Protection

Credit cards have a large window in which to report fraud -- over a month in some cases -- given the lag time between your purchase and when you receive your statement in the mail. In general, you are liable for up to $50 in the case of a fraud, but many card companies waive even that amount.

With traditional debit cards, on the other hand, you have just 24 hours to report a loss before any money taken fraudulently is gone for good. If you report it in time, you are similarly liable for $50, but the bank can take up to 20 days to replace the rest of the money in your account.

Check cards, however, have recently improved their security packages. Many now offer zero liability fraud protection -- the same as credit cards.


A tie, given the new protections afforded by check cards


Some retailers, such as


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and other warehouse stores, don't accept credit cards because credit card companies charge them a fee on each credit card purchase.

Meanwhile, debit cards are accepted by Costco and other credit-fearing retailers, since they don't get charged when consumers use a debit card with their PIN. Still, banks are always looking for ways to increase fee revenues, and some are quietly tacking on user fees when consumers use their debit card and PIN. The fees can range anywhere from a dime to a dollar or more.

Debit cards also allow you to get cash back at some retailers. While you can make withdrawals at just about any ATM, you'll typically have to pay a few-dollar fee every time you go outside your bank's network.




When you make a credit card purchase, there is a delay between your purchase and your payment for that purchase. In the interim, your money can sit in your savings account earning interest. Of course, this only works to your advantage if you pay the purchase off in full.

Meanwhile, a debit card transaction comes out of your account within a few days.



The Upshot

Despite the current popularity of debit cards (a 2006

Federal Reserve Board report

found that debit card usage has surpassed credit cards in transactions at the point of sale) you are likely better off using a credit card, provided you keep your balance as low as possible.

You can compare credit card rates, offers and more at


Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.