When to Use Debit or Credit

You've been asked this question over and over again: debit or credit? Like many American consumers you probably answered "debit." And why not, it's designed to be more convenient for purchases. In fact, Americans made 28.4 billion debit purchases versus 21 billion credit card transactions in 2008. Debit card users also spent as much as $1.1 trillion dollars in purchases, according to The Nilson Report.

However, there are instances when paying with a debit card is not the answer. Debit cards come with rules and stipulations that may not be in your best interest if you buy a big-ticket item that is damaged, or if you want to boost your credit score.

Don't know whether to use your credit or debit card? Use this guide to help you decide.

Pay with credit, when you want to:

Shop online. One of the biggest cardholder benefits is purchase protection. If, for example, an item never arrives, is damaged or you have a dispute with the merchant, you can ask your credit card company to withhold payment. With a debit card, the money is gone from your account until the matter is settled. 

Buy something big. Some credit cards offer warranty protection beyond the manufacturer or store's coverage. For example, a home theater system may come with a one-year manufacturer's warranty. Buy it with a credit card, such as MasterCard? or American Express? and you get another year's protection automatically. Review the specifics with your credit card company before making the purchase. 

Establish a credit history. Debit card activity doesn't translate to your credit report. 

Rent a car. Some credit cards offer damage insurance, eliminating the need to pay for the add-on coverage rental agencies charge. Be sure to check your card's exact coverage and exclusions before you charge. 

Stay at a hotel or travel in general. Using a credit card is usually easier, especially for hotel and airline reservations. 

Pay with debit, when you want to:

Get cash fast. You can get cash from your bank's ATM without the fees and interest many credit cards charge for cash advances. 

Avoid interest charges. You'll pay no interest on purchases and only buy what you truly can afford. Set up overdraft protection to avoid fees or penalties for spending more than your available funds. 

Buy something inexpensive. Debit cards are great for purchases under $50. It's faster than writing checks and most merchants accept them. Make sure you keep track of your debits to avoid overspending. 

Pay with debit or credit, when you want to:

Earn perks and points. Many credit cards offer frequent-flier mileage and points for hotels, restaurants and purchases from participating vendors. More and more debit cards now have cash-back bonuses similar to those offered by credit card companies. Review reward programs carefully - some may offer smaller bonuses for debit card transactions than credit card purchases.