Credit cards have gotten a bad rap recently – in today’s economic climate, horror stories of high interest rates and sketchy lending practices have convinced many consumers to stop charging and just pay cash. Like most stories in the news, there is some truth in these claims – after all, when you use a credit card, you are responsible for paying the money back, plus any finance charges associated with your purchases. All those fees can add up to a pretty hefty credit card bill if you’re not careful.

So, why use credit cards? Isn’t it smarter and safer to use your debit card?

Well, yes and no.

When it comes to making a choice between using your debit card and your credit card, the answer isn’t always black-and-white. In the “credit vs. debit” debate, it seems that the answer lies somewhere in the middle – used responsibly, both cards have distinct advantages and disadvantages, depending on the type of purchase you’re making and how you track your spending.

Not sure which is right for you? Here are some of the main differences between the two:

Security

Credit Cards: In many cases, credit cards offer a higher level of protection if your card is lost or stolen. Credit cards are protected by federal laws, so if your card is stolen, you won’t end up paying for purchases you didn’t make; most credit card companies cap customer liability at around $50 (of course, it’s a good idea to check with your credit card company and find out exactly what their policy is). And, because your credit card isn’t tied to your bank account, you’re not out any money while charges are under investigation.

Debit Cards: Debit cards don’t come with as many federal protections as credit cards when it comes to purchases you didn’t make. With debit transactions, the burden is on you to prove that your card was stolen and that you didn’t spend, say, $600 on stereo equipment. Plus, your debit card is tied to your bank account: If it falls into the wrong hands, your bank account may be drained in a matter of days, leaving you high and dry while your case is being investigated. Protection for debit cards can vary a lot – it’s a good idea to call your bank and find out exactly how much security you have.

Costs

Credit Cards: Here’s where credit cards can get you in trouble if you’re not careful. Sure, it’s easy to buy now and pay later, but if you pay too much later, you could end up paying some hefty interest on your purchases. After all, credit purchases are basically loans – when you swipe your card, you’re promising to pay that money back. If you always pay your balance in full, and on time, you won’t pay any interest or finance fees. But, if you let too much debt pile up, you’re looking at hundreds – even thousands – of dollars in interest. So, that $50 pair of shoes you just had to have may end up costing you $100.

Debit Cards: Debit cards are linked directly to your bank account. So, if you don’t have the money, you can’t spend it. That means that if you put $100 on your debit card at the grocery store, that’s all you pay. Period. However, it’s critical that you keep track of your bank account balance before you start spending: Even if you don’t have the money in your checking account, your bank may approve the transaction anyway, leaving you with some hefty overdraft fees in the process.

Rewards

Credit Cards: Most credit card companies offer extra incentives to their customers, like airline miles or cash back on certain types of purchases. Additionally, your credit card company may offer things like extended warranties on big-ticket items, or insurance on things like car rentals or airline tickets.

Debit Cards: As more and more consumers reach for their debit cards, banks have stepped up – now, many debit cards come with bonuses to help you get the most from your debit purchases. For example, Bank of America offers “Keep the Change,” which rounds all debit transactions to the nearest dollar and deposits the difference into your savings account. And, Chase features “Leisure Rewards” – debit card users earn reward points for debit purchases and can redeem them for gift cards and merchandise.

Credit Score

Credit Cards: When you use your credit card, your activity is monitored by credit reporting agencies. So, your spending habits, payment history, and even the amount of credit cards you have all affect your credit rating. The good news is, if you use your credit card responsibly, your credit score will show it – it will be easier to get approved for a home mortgage loan or a car note. But keep in mind that if you don’t pay on time or spend too much money, your credit score will show that, too – you may find it hard to buy your dream home down the road.

Debit Cards: Unlike credit purchases, debit transactions don’t affect your credit score. So, while your credit rating won’t suffer if you accidentally overdraft, it also won’t benefit from responsible spending. If you’re only using your debit card, you aren’t building credit.

The Verdict

In the debate between credit cards and debit cards, there’s no clear winner. Credit cards aren’t inherently evil (when used responsibly), and, depending on your financial goals, debit cards don’t always help you in the long run.

So, credit or debit? The choice is yours. The important thing to remember is that, when used with care, both cards have their advantages.

Copyright © 2009 Reality Media Inc.