The Debit Card vs. Credit Card Conundrum

September 16, 2010

A question I often get in workshops and over our Helpline is whether to use a debit card or a credit card.  On the surface this would seem to be a no-brainer right?  Using a debit card allows you to easily track where you’re spending your money, it pulls money directly from your checking account (so you’re not going into debt) and heck, it’s convenient.  And what does a credit card do?  Well under closer scrutiny, a credit card can provide a lot of advantages too.  If you pay the balance in full, you are basically “borrowing” money at no cost to you – which could allow you to earn that extra .10% on your dollars – you also can still get a breakdown of what you’re buying as many credit card providers have this feature, and yes, credit cards are also (sometimes too) convenient.

So now that I have muddied the waters, your question probably is, “Ok Bruce, so when do I use one over the other?”  Well, let me share with you the strategies my wife and I use.

First off, I actually have a debit card that gives me miles on several qualifying airlines, so my decision might be a bit easier than someone who doesn’t have a reward debit card.  For basically all my essential living costs; gas, groceries, dry cleaning  and toiletries, I use my debit card, primarily because these are low cost items and occur frequently.  So what does that leave for my credit card?  Larger purchases (because of extra guarantees and fraud protection), taking my wife out for romantic dinners and of course, all my various travel expenses.  A mistake I used to make many moons ago was putting my rental car and hotel reservations on my debit card.  Shouldn’t be an issue right?  Well keep in mind that when a reservation is made on a debit card, amounts in excess of the reservation will be “frozen” from use for a period of time – even after you have completed your reservation!  Think about the worst case scenario; you bounce a check because your money was frozen. Ouch!

Now of course there is one caveat with our strategy, darn well better be paying our credit card balances off each month.