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Credit Matters

Among the debates that tend to vex shoppers, there’s one standby: Credit or debit?

The decision isn’t a trivial one. When you shop, how you pay for your purchase can determine how much protection you’ll have should the merchandise prove defective, how quickly you’ll get your money back and whether you’ll be digging yourself out of debt years later.

Yet there’s no one right answer for everyone. If you have the discipline to pay off your purchases on time, consider using your credit card, because you generally get more protection against faulty merchandise and fraud.

On the other hand, if you tend to buy now and pay months later, you should stick to debit cards, cash or checks, because the money will come straight out of your bank account, sparing you interest charges.

There’s also the risk that fraudsters will steal your debit card. Typically, if debit card fraud occurs, you’ll have less protection than with credit cards. That’s why some consumer advocates suggest you use debit cards sparingly — if at all.

“For a long time, people were saying, ‘Use debit instead of credit’ if you’re debt-prone,” says Ed Mierzwinski of the U.S. Public Interest Research Group. “But that thinking is shifting.”

Before you pull out a debit or credit card, here’s what you need to know:

Purchase protection and fraud

If what you buy proves defective, credit cards allow you to dispute the charges. Some debit cards do, too, but benefits vary by issuer, and sometimes depend on whether you signed for the purchase or instead entered a PIN.

With a signature debit card transaction, “There are very defined rules about how defective merchandise would get handled, and you have rights you don’t have with a PIN,” says Edward Kadletz, Wells Fargo’s head of debit cards.

Meanwhile, if fraudsters strike, you often have stronger protection with credit cards than with debit cards. With credit cards, under federal law, you’re liable for no more than $50 if fraud occurs. With debit cards, your maximum exposure is $50 if you report it within 48 hours. Report it after two days, and you could be liable for up to $500. Take longer than 60 days, and you could be responsible for the entire amount of fraud.

Security experts say that if you use a debit card, you should sign for the purchase rather than enter a PIN. Why? Because while banks may offer zero liability for fraud that occurs with signature-debit transactions, they’re often unclear about whether they’ll provide equal coverage on PIN-debit card purchases, says Avivah Litan, a senior analyst at Gartner, a research firm.

Rewards

To encourage the use of credit and debit cards, banks offer points that can be redeemed for an array of rewards.

Credit cards usually offer more lavish rewards than debit cards. And among debit cards, PIN and signature transactions aren’t created equal. Signing for a purchase often earns you more points than entering your PIN does.

Why the uneven rewards structure? Banks usually make more money from processing a credit card transaction than a debit card transaction. And banks earn more when you sign for your debit card purchase than when you enter a PIN.

Convenience and cost

Using credit or debit cards also provides you with a record of where you’re spending money, which can help with budgeting.

Credit cards, of course, carry steep interest rates — especially for people with poor credit scores — and loads of fees. But if you have the discipline to pay off the card at the end of the month, you’re essentially receiving an interest-free loan from the bank each month.

Debit cards also impose steep fees. And as more shoppers use debit cards for small-dollar transactions, banks are making it easier for consumers to trigger these fees. A few years ago, most banks denied a debit card purchase if you had insufficient funds. Not anymore. Today, most banks will approve even the smallest debit card purchase — then hit you with a fee of $35 or more.