| April 20, 2012

Credit vs. debit cards: Which is the better option

When individuals are trying to get a handle on their finances and curb their debt, they may run into the common question of whether to shun credit cards altogether in favor of debit cards. The answer is it depends on certain factors. Credit and debit cards each have pros and cons, so the decision of which payment method to use largely depends on consumers' current financial situation, goals and spending habits.

For example, adults who are already facing significant credit card debt should stop adding to it and focus on the money they have at their disposal. During the repayment period, adding small balances to their already large bill can be costly, once interest rates are factored in. Consumers can chip away at their balances more quickly by organizing their budget to pay down their debt, and focus on using cash, checks and other bank account funds to meet their day-to-day costs.

In other instances, adults with no credit card debt that are trying to build a strong credit profile may benefit from paying with their line of credit. In order to build a healthy score, however, individuals should only charge small balances that they can pay off in full each billing cycle. One additional thing to keep in mind is that large balances, namely those that surpass 30 percent of a user's credit limit, can hurt a consumer's credit standing by raising their credit utilization rate. This is the case even if the amount is paid off in full each month.

There are also times when using a credit card may be preferable to using a debit card, if managed responsibly. For example, credit cards can provide added protection from fraud and keep criminals from draining bank accounts, according to CBS News. Because purchases made with a debit card are immediately deducted from a consumer's bank account, it can be more difficult to retrieve the funds once they're gone. The waiting period can also make it more difficult to cover the day-to-day costs, bills and written checks.

For this reason, credit may also be the better option for making reservations and rental purchases. Many retailers will not charge the amount immediately, but instead put a hold on the account to freeze the funds. This can be problematic for debit card users who need the money in their account to make other purchases.

Before making the decision to use debit or credit cards, it's important to consider all the financial factors, spending habits and the type of purchase being made. In addition, consumers should make sure they can fully cover the costs of all credit card purchases to avoid racking up debt.

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