'Tis the Season of Buying – Which is Better Credit or Debit ?

People ask me all the time if it matters whether they use their debit card or credit card for purchases/expenses. The answer is “all things being equal, no.” But, all things are never equal.

The difference between debit and credit card use (assuming you are paying your credit card off completely each month) is about cash flow. You may get paid every two weeks or twice per month. Most of the time your expenses do not match when your paychecks come in.

Credit cards allow you to have one payment each month for “all the stuff you buy” like groceries, gas and fun stuff, too. You know when you have to pay it and you can let cash “pile up” through the month in anticipation of that payment. No cash flow problem!

However, psychologically and realistically, people do not always respect limits and can be saddled with debt for years if they abuse their credit card. If you are not disciplined and do not know how much you can spend each month, stay away from credit cards and use your debit card. If you are good with limits and know how much you can spend each month, but maybe want to have more control over your cash flows, use a credit card.

Here are my general guidelines for when to use Credit or Debit cards assuming you pay your credit card bill completely each month:

Use your credit card if:

  1. You do not go overboard on your spending generally and are not tempted to spend more than you earn each month.
  2. You pay your entire balance off each month without fail.
  3. You like having one payment each month on a predictable day to take care of all your purchases.
  4. You like having an itemized statement of everything you bought.
  5. You are building your credit history (see #2 as well).

Use your debit card if:

  1. There is ANY chance you may over buy or go on a spending spree
  2. There is ANY chance you CANNOT pay for everything you buy at the end of the month
  3. You have enough in your checking account to pay for things on the days you buy them
  4. You do not like the concept of credit and prefer to pay in “cash”
  5. Your credit history is built and you do not need to prove anything to anyone.

The bottom line is, if your cash flows are lumpy WITHIN the month because your paychecks do not always match big expenses but your earn enough to cover them, use a credit card.

If there is some question about your cash flow from month to month, i.e. you may not have enough income to support your lifestyle, use a debit card and do not mess with temptation.