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Choose credit if you can

By Greg McBride, CFA · Bankrate.com
Wednesday, December 7, 2011
Posted: 11 am ET

In my weekly appearance with Gary Goldberg's "Money Matters" radio program, we discussed the advantages of credit cards over debit cards for disciplined consumers. Here's a partial transcript of my comments.

Credit card rewards programs are more than twice as generous as debit rewards. And they're growing, whereas we've seen a 30 percent decline in debit rewards offers over the last 12 months. The interchange fees issuers get whenever a consumer swipes a card are higher for credit cards, and that's why rewards programs are more generous.

There's certainly the possibility consumers will pay with a credit card, not be able to pay off the whole balance at the end of the month and then have to pay very high interest rates. That would obviously benefit the issuer. But even for those disciplined cardholders who pay the balance in full every month, they're generating swipe fee income for the issuer every time they use the card. And that's almost risk-free, because as long as the cardholder is routinely paying off the balance at the end of every month, there's virtually no risk of default. So the card issuers really like those consumers, even though they're not carrying a balance.

We're seeing higher credit card rewards for certain categories of purchases, or once you reach a certain level of annual spending. Those are cards where it makes sense to assess what your monthly spending pattern is like, because the best card for you will not necessarily be the best card for your neighbor. We're seeing some cards where the reward you get for all purchases is above the long-time standard of 1 percent (such as cards that offer 2 percent on every purchase). That's something that adds up very, very quickly.

When there's some type of dispute, credit cards offer the ability to withhold payment on that disputed item. Whereas with a debit card, you've already paid for it. If you have a dispute with a debit card, you don't have the issuer on your side, and you have to deal directly with the merchant. Good luck getting a refund -- it's like trying to get the horse back in the barn.

Unlike debit cards, credit cards offer a purchase protection program. This is especially relevant for big-ticket purchases such as appliances and TVs. If the merchandise is damaged, or even in some cases if it's stolen, the credit card company's protection plan ensures you get a suitable replacement.

Car rental insurance is another plus credit cards offer you don't tend to see with debit cards. And so is the float: the ability to use other people's money for up to 30 days free of charge. The day your statement cycle starts is the best day to go grocery shopping and make your big purchases for the month.

The fork in the road here is how disciplined you can be. If you can pay your statement balance in full at the end of every month, credit cards are the way to go. That being said, there are plenty of consumers who are either fighting a battle with debt or can't get credit cards, so they're using a debit card to get the convenience of plastic even if they don't have the availability of using credit.

Debit cards will be alive and well. They will continue to be a growth industry and outpace credit cards at least in terms of transactions, but credit cards offer significant advantages. This is especially true for those 35 percent to 40 percent of consumers who are disciplined about paying the balance in full every month.

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