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.

Q: How do you know if your money is being blocked – and how much is being blocked?

A: Your best defense is to ask the vendor if they block, how much they block and for how long, Hobson said. That will help you determine the best payment option – and whether you even want to continue to use that vendor, she noted.

Q: Do debit cards help build credit history?

A: No. Even though your debit card may have a Visa or MasterCard logo on it, it doesn't affect your credit history or credit score, Hobson said. If you are looking to build credit history, use a credit card and pay your balance in full and on time, she added.

Q: When should I use a debit card?

A: Debit cards make sense if you struggle to pay bills on time, Hobson said. And thanks to the new card act that prevents banks from enrolling people in overdraft protection for their debit cards without their knowledge, you can't spend over your limit or incur fees unless you authorize it, she added.

Using a debit card will prevent you from racking up interest and late-payment fees, and you can't hurt your credit score.

Hobson advised people to use cash for smaller purchases. People spend 12 to 18 percent more when they use cards versus cash, because when they use cards they don't actually see the money changing hands.

If you do use credit cards, pay your balance in full.

Web-extra Tips

Here are some extra tips from Mellody Hobson:

If you have reserved a hotel on your card, try to use that same card to make the final payment. If you use a different card – or another payment method – to make that final payment upon checkout, the blocked amount may stay on your account longer.

Never opt-in for overdraft protection for your debit card.

Report a lost or stolen debit or credit card right away. Make sure to save your debit and credit card receipts and compare them to your monthly statement to ensure there are no erroneous or fraudulent charges.

If there's a PIN number associated with your debit card, don't ever share that number with anyone.

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