Debit or Credit? The Choice Can Make a Difference

Use of debit cards is soaring, but is it always the best choice?

Oct. 26, 2010— -- Debit or credit? That question is just as common at the supermarket checkout line as plastic or paper. While there are plenty of arguments for both sides, consumers are choosing to use their debit cards rather than credit cards in growing numbers.

Debit card use is highest at the supermarket, with 53 percent reporting that they use debit most frequently, up 18 points from two years ago, according to research MasterCard published in January.

And there is more evidence of consumers' growing use of debit cards. Forty-eight percent of consumers say debit is their primary payment method. For the last quarter of 2008, Visa reported that the total dollar volume of purchases made using its debit cards surpassed credit card purchases for the first time. For the third quarter ending in June, Visa reported that the total dollar volume of its debit programs was more than its credit programs.

With the holiday shopping season just around the corner, analysts are expecting to see an increasing reliance on debit cards by consumers who want to rein in personal debt. With an unstable economy, consumers are more wary of using credit, instead opting to spend money they have.

"That's an important advantage of debit," said Josh Frank, senior researcher with the Center for Responsible Lending. "A lot of people don't use their credit card because they don't want to get over their head into debt, which is a good concern. With debit, you're spending money that you have, if you haven't opted into an overdraft program."

A number of debit cards have overdraft features that allow users, for a fee, to spend more than they have in their account. The features of debit cards are often a matter of bank policy, and consumers should be aware that policies required by law for credit cards may not apply to debit cards, including dispute protections. However, industry analysts say the most important protections are present for both credit and debit cards, such as protection against stolen cards.

"The general rule is: Consumers are not liable for unauthorized transactions," said Peter Garuccio, spokesman for the American Bankers Association. "But you have to contact your bank right away."

When Credit Is Better Than Debit

Visa offers the same dispute rights with debit cards as for their credit cards: real-time fraud monitoring and a zero liability policy for unauthorized purchases made using a Visa debit card, even online.

However, it is recommended that consumers check individual debit card policies to be certain they understand any additional fees.

Consumers are often unaware of the advantage of using credit, instead of debit, said Frank, of the Center for Responsible Lending. These include the replacement or reimbursement for purchases that have been damaged or stolen, travel and car insurance, and warranties.

The ABA's Garuccio said some banks may even intervene on a consumer's behalf if a merchant is unfairly withholding a refund for a purchase. "Since you paid with your credit card, you can get your bank involved and cancel or reverse the transaction," he said. "In a debit card transaction, once a merchant receives payment, the transaction is complete."

Credit card rewards programs, including airline mileage and cash back, are also strong incentives to use credit for holiday purchases this season. "If you anticipate making a lot of purchases, manage your money well, and know that you would pay off your balance in full every month, it's almost a better idea to use your credit card as much as possible to get rewards points," said Garuccio.

Still, some analysts say the shift to debit cards will only accelerate."The growth in debit cards is part of a long-term trend of replacing cash and checks," said Frank. "Credit card use isn't disappearing but debit cards are definitely rising faster."

In 2005, the number of transactions completed with debit cards outnumbered those on credit cards. David Robertson, publisher of The Nilson Report, said he expects the amount of actual dollar spending to outnumber credit cards in three years. The reason is a new population of spenders will enter the fray.

"A younger generation of Americans is going to be making more transactions on their debit cards and will be less credit worthy than their older compatriots," said Robertson.