When holiday shopping, credit card benefits like rewards, buyer protection, and short-term financing make their use attractive. Debit cards, on the other hand, enforce budget discipline and eliminate the temptation of revolving debt.
The first step is to make a budget. While U.S. consumer spending this holiday season could top $1 trillion, you should have a conservative, concrete figure from which you subtract every purchase until you reach zero dollars. That amount will depend on how much you set aside, such as in the Tropical Financial Savings Club Account, for presents.
Use a credit card during the holidays to:
Earn rewards on every purchase. Many credit cards offer rewards programs that give you points, miles, or cash back for every purchase. During the holidays, when spending tends to spike, these rewards can accumulate quickly. For example, a card offering 2% cash back on all purchases could yield a notable return on big-ticket gift items or travel expenses. Some credit cards even offer bonus categories for holiday-related purchases. That makes them more valuable during this time of year.
Benefit from purchase and fraud protections. Credit cards generally provide stronger fraud protection than debit cards. Under U.S. law, your maximum liability for unauthorized credit card charges is only $50, and most major issuers waive that amount. TIP: Use credit cards with purchase protection, extended warranties, and price matching. These benefits pay off when an item is damaged, lost, or its price drops after you buy it.
Manage cash flows. Installment payments, where you choose when and how much, can smooth your cash flow, taking immediate pressure off your checking account. TIP: Pay off the balance in full to avoid interest costs. With average credit card interest rates over 20%, the cost of rolling over balances can quickly exceed the value of any rewards earned.
Build or strengthen your credit history. Consistent and responsible use of a credit card can help improve your credit score. TIP: Keep the balance low and always pay on time. A better credit profile makes future borrowing more affordable.
Use a debit card to:
Avoid impulse buying. Your most significant risk during holiday gift shopping may not be fraud; it could be overspending. Because funds from debit card purchases are instantly withdrawn, overspending immediately puts you in financial trouble. TIP: Avoid drawing funds from the overdraft protection on your checking account, as that often comes with fees and interest charges. Regular monitoring of your checking and savings account balances can keep you from getting the post-holiday financial blues.
Avoid interest charges and debt accumulation. Credit card purchases can lead to interest charges and late payment fees. TIP: Play it safe by paying with a debit card for those items you can afford now.
Simplify your budgeting. Debit card accounts provide real-time updates on your spending. TIP: Use mobile banking apps that categorize or visualize spending to see how close you are to hitting your gift-giving budget limit.
Protect against fraud. Financial institutions have made notable progress in that area. Many financial institutions now offer zero-liability policies and instant fraud alerts. TIP: If your debit card is compromised, immediately contact the issuer. Have its phone number handy and know how to freeze your card through its app or website page.
Balance the two approaches to spending:
That’s a lot to remember when you’re in a store or shopping online and come across a must-have item for a loved one. So, let’s summarize:
- Use a credit card for major purchases or online orders to maximize benefits from rewards, fraud protection, and warranties.
- Use a debit card for small in-store gifts, local shopping, and when you want to limit spending to what’s in your checking and holiday savings accounts.
- Set up automatic payments for or schedule reminders to pay credit card balances in full before interest accrues.
- Track your spending in a shared budget app so you can simultaneously monitor both accounts.
