Credit or Debit? Which Card You Should Use, and When

May 6, 2010— -- In these challenging economic times, many people are using their credit cards less and relying more on their debit cards to make purchases.

"Good Morning America" personal finance contributor Mellody Hobson has long advised people to stay away from debt, but during an appearance on the show today, she discussed some special circumstances when paying with a credit card is actually the better option.

Q: When is it best to use a credit card?

A: It's best to use a credit card if you're buying a big-ticket item – such as a television or other pricey electronics. The credit card purchase gives you a number of protections that a debit card doesn't, she said. For example, if you pay with your credit card, you're free to dispute the charge if there's a problem with the product you purchased.

This is particularly important if you're buying something over the Internet. Under federal law, you can dispute the charge and the credit card company will pursue the issue with the retailer. You won't be responsible for the charge until the matter is settled, and you won't incur interest.

You won't get that same protection with a debit card, she said. When you use your debit card, not only will the money be taken out of your account right away, but in most cases, you will be responsible for getting a refund.

Q: How does 'blocking' work?

A: Blocking is most commonly practiced at gas stations, hotels and car rental agencies. Because these retailers generally don't know how much you will ultimately end up spending, they will put a hold on your credit or debit card for an amount that is higher than the amount you're quoted when you first hand over the card.

She gave the example reported by Money Magazine, which found that for a $900 three-night hotel stay, a hotel would block $1,200 for five days – all without your knowledge – just in case you end up spending that much.The amount that's blocked varies widely, and it could be a significant sum.

Blocking can become a real problem when you pay with your debit card, since it results in money being frozen in your bank account. You will not be able to use that money during the time that it's blocked.