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The holiday shopping debate: Credit or debit?

The U.S. Consumer Financial Protection Bureau is set to propose new rules to protect consumers using prepaid debit cards, according to a report in the Wall Street Journal.

The shopping and spending rush is on. Your credit card can be your best friend or your worst enemy during the holidays, when it seems like you’re walking around with your wallet wide open.

So when you’re reaching for a piece of plastic, should you pull out your credit or your debit card? Take a step back first before even making that choice.

“Before people reach for their wallet, the first thing they want to do is have a plan for what they’re going to spend,” says Darren Coleman, senior vice president, private client group, and associate branch manager and portfolio manager at Raymond James in Toronto.

“Figure out who it is they’re giving to and what’s the amount you want to give, and have the discipline to stick with that plan. The card is just the means to pay for it, and we have to be sure we can pay for it.”

According to the Canadian Bankers Association, 70 per cent of Canadians pay their credit card balance in full each month.

A separate survey by the Strategic Counsel on behalf of Interac Association, meanwhile, found that more than one-third of credit card users report that at least once in the past six months, they have not completely paid off their credit card balance, while one in four say they reached their credit limit at least once in the last six months.

The pros and cons of each type of payment

“Many planners would stay stick with your debit card because it ensures you only spend what you have in your account,” Coleman says. “That may or may not be true; people have overdraft, so there’s still a credit facility attached.”

If used correctly, credit cards can be an effective tool, says Robert Stammers, director of investor education at the CFA Institute. “Credit cards are like chainsaws: they can be really useful for people who know how to use them but they can be a disaster for those without the right skills. People have to understand what they’re using their credit cards for.”

There’s the ability to break a large purchase down into smaller, more manageable payments, but the interest associated with that borrowing has to be factored into a bigger plan, he says.

“There’s cost involved in any debt and it has to be paid,” Stammers says. “You can figure out that cost in advance and work that into your strategy.”

Part of the appeal of credit cards is that they typically come with rewards points, which can be used for travel, groceries, merchandise, or cash back.

“I know people who are so disciplined about their money management they can literally spend their entire month’s operating budget on their credit card and pay it off at the end of the month. They’re racking up these points that they’re using for cash or airline tickets or whatever they can get and it’s extremely useful to them,” Stammers says.

“But that’s because have fiscal discipline and money management skills to do it correctly and they know they’re not going to get caught by having a large balance to maintain and pay over a long period of time.”

A downside to holiday shopping with credit cards is the inevitable downer that comes when the bills start rolling in. While some people enjoy shopping in December, especially during sales, you’re not saving any money if you’re paying interest.

“Overall you have to think about the purchase in the here and now,” says Caroline Caroline Hubberstey, head of external affairs for Interac Association.

“’Can I afford it or is it something I’m going to be paying off for seven years? Do I really want to pay off that jacket for the next four years?’ Make conscious choices. Your debit card is a stress-free way to get through the holidays and you’re not dreading the bills coming in January and February.”

More financial institutions are starting to offer rewards points for purchases made with debit cards, Hubberstey notes, and another advantage of using debit is that it’s better for small businesses and local merchants as their costs are lower.

If you’re going to use credit, Coleman suggests shopping with just one card and not the several may have in their wallet. “Take just one with you instead of five, which limits your ability to overspend,” he says.

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