Should You Use Credit or Debit for Your Holiday Shopping This Year?
November 22, 2017
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Sticking to your holiday shopping budget can be tricky no matter how you pay. After all, you may have a dozen people on your holiday shopping list, and potentially more. Finding the perfect gift for everyone is hard enough, let alone finding gifts that are within your price range.
Still, you could end up ahead - or behind - based on the form of payment you choose to use. In this post, we’ll dive into the benefits of both credit and debit, along with potential risks to consider.
The Benefits of Using Credit Cards
The benefits of using credit for your holiday shopping aren’t that hard to find. Obviously, credit cards – specifically, rewards credit cards – let you earn a percentage of cash back or travel rewards on each purchase, whereas debit cards give you a big fat pile of nothing for each dollar you spend.
Further, many credit cards (including cash-back credit cards and rewards cards) offer important consumer protections that can help make your purchases safer. You might qualify for extended warranties, guaranteed returns, and price protection, for example. When you’re using your card for holiday purchases, these benefits can come in handy and help you avoid taking a financial loss.
Other benefits of using credit include the fact that you can earn a signup bonus if you time your credit card signup with the holiday shopping season. Often times, these initial bonuses add up to hundreds of dollars. Last but not least, some credit cards offer 0 percent APR or zero interest on purchases for up to 15 months. These offers make it possible to charge your holiday purchases then pay them off slowly over time – and all without interest payments.
While you should never charge Christmas gifts without a plan to pay them off, 0 percent credit card offers can help free up cash in your end-of-year budget and make it easier to afford the rest of your holiday bills.
Risks of Debit vs. Credit
Still, there’s more to deciding between credit and debit than just analyzing rewards and credit card offers. For example, it’s important to understand the consumer protections built in for both credit cards and debit cards. The Fair Credit Billing Act (FCBA) does state you can be liable for up to $50 in unauthorized purchases made with your credit card, but you’re never on the hook if you report your card is stolen before it’s used. Further, most top credit cards offer zero percent liability to beef up that coverage and bring your liability to zero.
When someone gets ahold of your credit card or credit card number and makes a fraudulent purchase, you can report the situation and get a new card in the mail fairly fast.
Debit cards, on the other hand, are an entirely different animal. Many might even say they’re riskier to use since they are tied to your actual bank account.
According to the Federal Trade Commission (FTC), your liability is elevated when you use a debit card and it’s lost or stolen. Here’s what you could be on the hook for if you report your card stolen under these circumstances:
- If you report your debit card stolen before unauthorized charges are made: $0
- If you report your debit card stolen within 2 business days after you learn about the loss or theft: $50
- If you report your debit card stolen more than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you: $500
- If you report your debit card stolen more than 60 calendar days after your statement is sent to you: The FTC reports that you could be liable for “all the money taken from your ATM/debit card account, and possibly more; for example, money in accounts linked to your debit account.
The idea of someone stealing your debit card and wiping out your bank account is scary for sure, but that could only happen in the rarest of circumstances. You would have to go months without noticing fraudulent charges on your account to take on that kind of liability, for example. Still, it’s important to consider this liability and how it might put your finances at risk - especially if you don’t watch your accounts closely.
Where Debit Cards Pull Ahead
While the liability side of debit sounds terrifying, using credit isn’t risk-free, either. Obviously, credit cards come with the added risk of getting into debt and forking over lots of cash in the form of interest payments. The average interest rate for credit cards is around 15 percent, yet rates on rewards cards tend to be higher. If you buy your holiday purchases with a credit card to earn rewards and wind up spiraling into debt, the gifts you buy could wind up being costly.
This is definitely one area where debit cards come out ahead. Instead of using credit to buy holiday gifts, purchases made with a debit card use money debited directly from your checking account. Not only can this help you stay on budget and avoid overspending, but it can help you avoid taking on holiday debt.
And if you’re worried about overspending this holiday season, then it might be best to avoid credit cards in spite of the rewards they offer.
At the end of the day, there’s no “right” or “wrong” answer when it comes to choosing between debit and credit. However, there is usually a better option for each individual consumer, provided they know what they want and need this year.
If you’re looking for rewards and beefed up consumer protections like guaranteed returns and extended warranties, then credit cards are the way to go. On the flip side, it’s important to charge only what you can afford – and have a plan to pay it back. If you don’t, you could fall victim to debt and all the stress that comes with it. Also make sure you’re using a credit card that offers the protections you want. Not all rewards cards offer the same benefits, and it’s up to you to vet new cards before you sign up.
Debit, on the other hand, tends to be a good option for individuals who don’t care too much about rewards but desperately want to stick to their holiday budgets. Debit is great for families who are credit-averse and don’t let special promotions influence the way they shop.
At the same time, it’s important for families to understand their liability if their debit card (or debit card numbers) wind up lost or stolen. If they wait too long and don’t report it - or don’t notice fraudulent transactions - they could be out thousands of dollars or more.