Debit card or credit card? Here are the pros and cons

Last year, debit card use surpassed credit card use for the first time in history: Americans made 28.4 billion debit purchases compared with 21 billion credit card purchases, according to payment systems newsletter The Nilson Report.

It happened, industry watchers say, because of tighter credit, recession-weary and strapped consumers, wider acceptance of debit cards for small purchases, and a burgeoning youth market that prefers paying with debit cards.

The typical American household carries four credit or debit cards. Which should be in your wallet, and for what should each card be used?

Brian Riley, research director for the TowerGroup, says consumers should pick the card that's the best fit for their specific needs: convenience, low interest, fraud protection, rewards or even as a help in taming your inner spendthrift.

First step, though: Consider cash for the purchase. Cash is the simplest transaction and comes with no strings, fees or delayed costs.

But if you need to use a card, know what costs you might face. Read the fine print in the notices you receive in the mail, and pay attention to statements and accounts.

Debit card pros and cons

Some considerations when using a debit card:

•Make sure the funds are there. A $6 sandwich can wind up costing $46 if you don't realize your checking account is flat-lining. Most merchants no longer reject a card if you have an inadequate balance; instead, you incur a hefty overdraft fee.

For example, Bank of America charges $35 for each overdraft above $5. Spokeswoman Anne Pace says fees will be capped after a consumer makes 10 overdrafts in a single day; overdrafts totaling less than $5 carry a smaller fee of $10. Wachovia charges $22 for the first overdraft in a 12-month period, then $35 for each subsequent one, says spokeswoman Richele Messick.

Messick suggests debit customers can avoid fees if they keep track of expenditures and link checking accounts to savings accounts, credit cards or lines of credit.

•A security breach could mean trouble. "I do think there are a lot of advantages to using debit cards as far as restraining spending, but there are a lot of risks of having debit card information stolen," says Ronald Mann, a Columbia University law professor who wrote Charging Ahead: The Growth and Regulation of Payment Card Markets.

"If there's a problem with a credit card, I simply put that card aside and use a different card until things get worked out. With debit, it's a much more serious event," Mann says.

Federal regulations limit liability for most consumers who are defrauded, but your debit account could be inaccessible for up to 10 business days after you report the fraud, says Gail Hillebrand, senior attorney for the non-profit Consumers Union's West Coast office.

If your credit card is lost or stolen, you typically won't be on the hook for more than $50. If an unauthorized user gets your card number but not your card, your liability in most cases is zilch. Both Visa and MasterCard promise "zero liability" and quick resolution for any fraud committed over their transaction networks, including debit transactions. Some merchants use other networks.

•Usage fees. Some banks and merchants charge fees of 50 cents or a $1 for debit card use at certain stores.

•Account blocks. Some merchants place blocks on debit accounts for purchases that aren't completed immediately: hotels, vehicle rentals and gasoline purchases, for example. That could keep you from using the debit card for other purchases.

•Prepaid debit and gift cards. Look out for fees — activation fees, non-use fees, ATM withdrawal fees, retail fees and reload fees. Also, many of these cards aren't covered by federal regulations.

What about credit cards?

The major difference between credit and debit cards — when the money actually leaves your bank — accounts for the positives and negatives. Some considerations:

•They offer free short-term borrowing. If you pay the balance in full on time, you get an interest-free loan.

•Delayed payment raises the price paid. The $6 burger that ballooned to $46 with the debit card overdraft? It could do the same — or worse — over time on a credit card if you don't pay the balance at month's end. High interest rates and late-payment penalties can add up.

•Charges can be denied. If you use your card to purchase something that didn't turn out the way you had hoped, you can dispute the charge. Some credit cards even carry insurance on purchased items.

"It's the best method for ordering online or ordering something that you can't evaluate until you bring it home and plug it in," says Consumers Union's Hillebrand.

•They tempt you to buy more than you can afford. "You have the best consumer protections on the payment method that creates the most risk to your household budget," Hillebrand says. "The biggest danger with credit is going into debt — and that's a danger that's highly overlooked."

•Be careful with rewards. Some credit card companies offer rewards programs to keep customers charging — although some issuers recently instituted fees for delinquent card holders who wish to remain eligible for rewards. Hillebrand advises consumers to rethink rewards.

"The basic problem with rewards programs is that they are designed to get us to use our credit cards more than we really should," she says. "If you're at any risk of not being able to pay it off at the end of the month, the rewards are not worth it. And, in this economy, we're all at risk."