Winning Ways: Debit or Credit?

Credit cards have become an American institution. Not to be outdone, debit cards have replaced "ATM-only" bankcards, and can now be used almost anywhere, from McDonald's to Macy's. Here are some tips to know which ones to use when.

Each day, countless cashiers ask you "Debit or credit?" But which is the right choice? When is one form of payment better than the other?

Clearly, abusing your credit cards will cost you more in the end. But, assuming that you actually pay them off each month, there are certain circumstances in which one payment method is superior to the other.

Free cash back

The first situation finds you short on cash and outside your local banking area. You have a bulging bank account, and don't want to rack up expensive foreign ATM charges.

Winner: debit card. Many stores offer free cash back if you use your debit card to pay for a purchase. Buy yourself a snack and replenish your cash supply at the same time. Generally, credit cards don't offer this option. If they did, they'd probably charge a high cash advance rate to do so.

Rental cars and hotels

Is there anything more frustrating than trying to reason with a teenager? You betcha! Just try using your debit card to obtain a rental car. Even if you manage to secure a reservation over the phone or on the Internet, be prepared for rejection once you actually go to pick up the vehicle. Most rental agents would sooner hand over their own mothers than let you take one of their precious cars off the lot with only a measly bank account to secure it.

Winner: credit card: If you use a debit card, hotels will generally place a "hold" on your account in the amount that you could potentially spend during your stay. It can be surprisingly high, since merchants are trying to cover any unpaid incidental charges, including long distance phone calls, room damages, and room service fees. To make matters worse, the hotel will enter your final bill as a second charge, even though the hold amount is still in affect. Account holds can take up to 48 hours to disappear (even longer on weekends or bank holidays). Since your bank immediately deducts the held amount from your available balance, it could put a drastic dent into your vacation budget if you're using your debit card exclusively.

Shopping

Credit card companies have powerful consumer dispute policies. If you're unhappy with a purchase, you can dispute the charge and ask your credit card company to help negotiate a resolution with the vendor.

Winner: credit card: Debit cards also provide some protection, but banks target most of it toward unauthorized transactions, not customer dissatisfaction.

Both debit and credit cards have various benefits and risks. By learning the advantages of each, you'll be better prepared to answer that cashier the next time. Now if you could only decide between paper and plastic.