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Debit or Credit - Which is better?

E-mail|Link Posted by Cheryl Costa July 15, 2009 10:01 AM

There are now over 1 billion bank issued credit and debit cards in circulation in the US. So, which is better -- a debit card or a credit card?

If you are often tempted to spend money you don't have, debit cards are probably the better choice. When you use a debit card, the money you spend is automatically deducted from your account. Most banks offer over-draft protection but, by and large, when there is no money left in the account, you probably aren't going to continue to use the card.

For people with more spending discipline, I think credit cards are the better choice for several reasons. First, they help you build your credit history. A strong credit score will get you the best rates on mortgages and car loans and may even help you get the next job that you apply for.

Also, when you use a credit card, you can take advantage of "float." You might charge something today and not have to "pay" for it until a month or a month and a half later. (Of course, this is also a feature that can get some people into trouble.)

There are also some great protection features built into credit cards. If someone steals your credit card, you are not responsible for the charges as long as you report the charges in a timely manner. Similar safeguards are available for debit card holders but since the money is removed from your account right away, you might have to wait days or weeks to get the money put back into your account and this could cause a cash flow nightmare.

My personal favorite reason for using a credit card is the rewards that you can get from many card providers. I am thrilled that 2 percent of everything I charge on my Fidelity 529 Rewards card is credited to my kid's 529 accounts. I have accumulated thousands of dollars in contributions simply by making everyday purchases. Another great card is the Schwab Invest First Visa card. This card has a 2 percent unlimited cash back feature. Each month, 2 percent of everything you charge is deposited into a Schwab One brokerage account.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master�s in business administration from Boston University.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.