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Holiday shopping: Will you choose debit or credit?

The debate over credit cards versus debit cards has been raging for years. In one camp, you have the Dave Ramsey crowd, which shuns credit cards for the financial pain they can inflict on those who are tempted to run up debt. In the other, you have groups such as the Privacy Clearinghouse that warns consumers to dump their debit cards because they lack certain consumer protections. For the moment, debit seems to be winning. But many credit card issuers are pulling out the stops to boost holiday charge volume. Which should you choose?

Three Reasons Use Your Credit Card

Better Protection: While all the major card issuers promote zero liability for fraudulent purchases on their cards -- credit or debit -- there are a couple of crucial differences in the protections offered. The first is that only credit cards carry the additional protection of the Fair Credit Billing Act, which gives you the right to dispute credit card charges when an item is not delivered as agreed. Buy something with a debit card and, if there is a problem (besides outright fraud), you'll have to try to straighten it out with the merchant. Use a credit card and you may be able to dispute the purchase and withhold payment while the card company goes to bat for you. The second is the fact that, in the case of debit card fraud, the money will already be out of your account. It can take days -- or even longer in some cases -- to get it back. In the meantime, you may find yourself juggling bills or even bouncing checks you've already written. With a credit card, though, it is the card issuer's money that is tied up while the fraudulent purchases are investigated. And one more warning: Debit card transactions are regulated by a federal law called the Electronic Funds Transfer Act (EFTA). Under EFTA, if you wait too long to report the loss or theft of your card, you could potentially lose all the money in the account tied to the debit card. It's rare, but I have heard from a couple of people over the years to whom that has happened. So be sure to at least review your statements each month carefully.

Holds: If you'll be traveling this holiday season, you may encounter a hold on your card when you check into a hotel, rent a car or fill up the gas tank. On a credit card with lots of available credit, those holds aren't even noticeable. But when a hold ties up funds in your checking account -- as it will if you use a debit card -- it turn into more than a minor annoyances.

Richer Rewards: My colleague Beverly Harzog of Credit.com, who recently revealed her picks for the Best Credit Cards In America, says, "Rewards cards are a great way to save money during the holidays, especially if you use a card with rotating categories that give you up to 5% cash back." Or use a card that offers airline-mile rewards during the holidays and you can rack up miles quickly. "If you’re using your cards anyway," she says, "why not earn airline miles for that?" By contrast, issuers have been slashing debit card rewards programs as a result of changes in debit card interchange regulations. Debit card rewards were always skimpier than those on credit cards, though a few standouts, like Perkstreet's 1-5% cash back bonus, remain.

Three Reasons To Use Your Debit Card

Interest-Free Purchases: If you are carrying balances on your credit cards, then any new purchases you make start accruing interest immediately. In that case, a debit card -- or cash -- makes sense. 

No Holiday Hangover: Or at least not the kind caused by a big credit card bill you can't pay off! As long as you haven't opted into often costly "standard overdraft protection" for debit card purchases, you won't have to worry about spending money you don't have. (And if you have opted in to one of these programs that allows your issuers to charge you something like $35 a pop if you accidentally use your card when there's not enough money in your account to cover the purchase, you can always change your mind and opt out.)

Better Budgeting: If you've sworn off credit and want to pay cash for everything, a debit card can help keep you honest. Unlike that $60 you took from the ATM yesterday that seemed to disappear, you'll have a record of all your purchases, making it easier to see where your money is going. In addition, while merchants are allowed to impose a $10 minimum for credit card purchases, that’s currently a no-no for debit cards. Theoretically at least, you can still use your debit card for that latte.

So, which will you choose this holiday season? Debit or credit?  

About the author

Gerri Detweiler has been helping consumers find reliable answers to their credit questions for over two decades. She is the author or co-author of five books, including Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis. She is also the host of Talk Credit Radio.

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