How to choose between debit and credit

How to choose between debit and credit

Many Americans are cautious about throwing down plastic, and when they do, they may prefer debit cards over credit cards. Limiting credit card use is a great way to avoid debt. Yet some credit cards have incredible deals, from 5% cash back to 30,000 free frequent flier miles. Are they worth it? If you’re debating between debit and credit, here’s how to tell what’s right for you:

If you have trouble controlling your spending:

Consider cutting up your credit cards and using a debit card instead. Like a credit card, a debit card offers the convenience of not having to carry cash—though cash may be a useful too for parents. Unlike a credit card, a debit card simply enables you to use money you already have. So you won’t run the risk of interest accumulating and your balance spiraling out of control.  

If you carry a balance on your credit card and you’re trying to become debt-free:

See above. Or better yet: use cash. A famous study from MIT found that people were willing to spend twice as much for the same items when they paid with credit than when they paid with cash.

If you can pay your credit card in full every month and you have a good rewards program:

Stick with your credit card. (But make sure you aren’t justifying over-spending just because you get points!) If you’re shopping around for a new card, NerdWallet is a good place to find reviews.

If you’ve already got two credit cards and one debit card:

You don’t need any more cards! I don’t care if a better deal comes along, or how many frequent flier miles you’re going to get. (OK, maybe once for one card I will make an exception to this.) But it’s so easy to get caught up in the deals that you forget you have to deal with those cards. You don’t want to spend all your free time chasing bills, right? Keep in mind that the road to credit card debt is paved with offers of 30,000 free miles. Your job: Stay off that road!

Remember you don’t have to be loyal to any card:

Go with the company that charges you the lowest fees and the lowest interest rates. In the past, many loyal customers who always paid on time saw their credit card rates hiked seemingly out of nowhere or annual fees slapped onto their bills. If this happened to you (check your statements—maybe you didn’t even notice), try negotiating with your credit card company or find a new card (see above).  

No matter what, know the rules of your card.

Whether you choose debit or credit, make sure you know the rules of your card. That means read every piece of correspondence that comes your way. For example, if you don’t opt in overdraft protection, that means if you buy beyond your funds, your card will be declined rather than the bank charging you an overdraft fee. That’s a good thing in my book, but you don’t want to be caught unaware. (If you’d rather pay the fee, check with your bank to opt in). Additionally, some debit cards charge annual fees in order to join their rewards program. So no matter what, know the score.

And if you’re going to use debit anyway, why not get rid of all plastic (except in an emergency), and just use cash?

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