Editorial Policy

Debit or credit? Best options for holiday shopping

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By Eva Norlyk Smith, Ph.D.
November 3, 2010

Over the past years, debit cards have become increasingly popular, in part because consumers have gotten more cautious about their finances. In 2008, the dollar volume charged on debit cards surpassed that of credit cards for the first time, and about half of consumers now prefer debit over credit cards, particularly for everyday expenditures like groceries.

However, when it comes to making major purchases, as well as shopping for those special holiday gifts, credit cards may have some advantages over debit cards, and not just because they enable you to defer payments. So, with Thanksgiving and Black Friday just around the corner, should you play it safe and leave your credit cards in the drawer, or go to town and charge happily ever after? Here are some pros and cons to consider:

Pros of Using Credit Cards

1. Increased purchase protection, return protection, and extended warranties. Should junior spill a soft drink on the keyboard of that brand new laptop computer you got him for Christmas, you may be protected if you charged the laptop to a credit card. The purchase protection on many credit cards means that card issuers will pick up the tab for items stolen or damaged within a limited time after purchase (often the first 90 days), even if the damage occurred from a stupid mistake, such as “accidentally discharged water” (naturally, intentional damage is not covered).

Many credit card issuers also offer return protection. Should a retailer refuse to accept a return, card programs reimburse cardholders for items purchased, as long as the return is attempted within 90 days of purchase and the price of the item falls within the benefit limit, typically $250 for Visa credit cards and $300 for Amex cards (with a maximum of $1,000 annually in covered returns.)

Lastly, many credit cards offer extended warranty protection on items charged to the card, typically extending the warranty to double the time period of the manufacturer&#039s standard warranty, up to one full year. There are caps on coverage, so check the terms of your credit cards before charging.

These perks are most commonly available on premium credit cards, such as American Express cards, Visa Signature cards, many Visa business credit cards, and certain MasterCard credit cards. The terms of the service vary, so check with your card issuer.

2. Greater protection if your card is stolen. Both debit and credit cards come with real-time fraud monitoring and offer a zero liability policy for unauthorized purchases should the card get stolen. However, the protections for debit cards are more limited, and if the cardholder fails to notify the bank within two days after discovering fraudulent charges, he or she could be on the hook for as much as $500.

3. Credit card rewards offer extra perks. For rewards card junkies, who know how to optimize rewards earnings, charging Holiday purchases to a rewards credit card can mean savings of 1 to as high as 5 percent, or higher, on purchases. Of course, to reap the benefits of those rewards, you have to pay the balance in full each month, or the credit card interest charges could quickly outweigh rewards earnings.

4. Credit cards may help build credit scores. Charging purchases to a credit card and regularly paying them off can help build one&#039s credit score, because it demonstrates the ability to handle credit responsibly. Payment history makes up 35 percent of credit scores, and using different types of credit also boost scores, so having a credit card and paying the bill on time each month can enhances scores considerably.

Cons of Using Credit Cards:

1. With credit cards, you&#039re more likely to spend more. Studies show that people spend more when they pay with credit cards than with other payment methods, including cash and debit cards. So unless you&#039re confident that you&#039ll be disciplined enough to stick to that Holiday shopping list and not get lured in by the irresistible offers retailers are sure to be rolling out for the Holiday Season, leaving your credit cards at home may be the best option.

2. It&#039s easy to get caught in the credit card interest trap. Credit cards offering a 0 APR balance transfer or 0 APR on purchases may seem like just the thing you need to get you through the Holiday season. However, credit card interest rates are up, and once that promotional rate expires, you could end up paying interest as high as 22.99 percent on those Holiday purchases.

3. Credit cards may hurt your credit score. Just like credit cards can improve credit scores, they can hurt them. In addition to failing to pay bills on time, one of the worst mistakes many consumers make is carrying high balances on their credit cards. This negatively affects the credit-utilization ratio, another key component of credit scores, which account for 30 percent of FICO scores. The general rule of thumb is to use less than 30 percent of the available credit across all your credit cards, preferably keeping balances at 10-20 percent of the credit limit.

In sum, if used to your advantage, credit cards may come in handy for the Holiday season, but be cautious to stay clear of the pitfalls. And of course, using credit versus debit cards for Holiday shopping doesn&#039t have to be an either-or. Consider using credit cards for larger purchases, and leaving them at home for everyday shopping trips to minimize impulse purchases.