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When to Use Credit And Debit Cards

The decision of whether to use a debit card or a credit card can affect consumers’ credit ratings and make it easier or more difficult to manage one’s personal finances. This decision often depends on the situation and understanding how each of these cards works.

Credit cards allow customers to borrow money from the credit card company up to a certain limit with the intent to pay back the amount used at the end of the month. If that balance is not paid in full, customers will be charged interest fees. Debit cards are a direct link to the money a person has in the bank. Debit cards withdraw cash straight from a checking account, so no interest will ever need to be paid on purchases made with debit cards.

Since 2004, use of debit cards has exceeded credit cards for purchases made in the United States, reports the Federal Reserve. In 2012, debit cards were used to make 47 billion payments, compared to 26.2 billion payments made with credit cards. But debit cards might not always be the best choice in certain situations.

Here are a few ways to weigh the options of what payment method might be best:

∫ If you’re concerned about fraud: CreditCredit cards typically offer better fraud protection than debit cards. If unauthorized purchases are reported, the consumer’s maximum liability is $50, though many credit cards offer zero liability. Debit cards offer some protection, but it may take a little longer to get your money back, and loss responsibility amounts may be higher.

∫ If you don’t want to overspend: DebitStaying on budget and not overspending can be challenging when using credit cards. When cash leaves your hand, it is easy to keep track of what you have left. This isn’t as easy when using credit to make purchases. Some shoppers feel they are more likely to overspend when using credit than having money deducted from their bank accounts via debit cards. Bank of America says record-keeping is made simpler with debit cards and they are a great way to avoid spending more money than you have available.

∫ If you like incentives: CreditCredit cards are still the best way to earn rewards on purchases made, and credit card companies recognize the rewards market is more competitive than ever before. From airline miles to cash back bonuses to points toward vacations, credit card companies now offer a host of benefits that debit cards do not offer. But industry analysts at CreditCards.com say the industry is so competitive that many banks are trying to attract new customers and keep current ones happy, so debit card users may be able to earn some perks if they are not doing so already.

∫ If you’re shopping at small businesses: DebitBusiness Insider says it costs small-business owners more to process credit transactions than transactions in which customers use a debit card or cash. By using debit cards when patronizing local businesses, consumers can help small business owners keep more money in their pockets.

∫ Debit and credit cards are secure and convenient ways to shop. One card may be better in certain instances than the other.

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