"Debit or Credit?"

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Shop at any major retailer in the country, and unless you're using cold, hard cash, you'll be asked the question, "Debit or credit?" If, like me, you typically answer based on the whim of the moment, you'll be interested to know that there really are times when choosing one over the other can make a difference.

Most folks already know the major difference between debit and credit cards, of course. Debit cards immediately withdraw money from an account in which you have previously deposited funds. When you swipe your debit card, the store is checking to make sure you have adequate funds in your account. Pay with credit, and the merchant simply verifies that you have an adequate credit line. The bank pays at the moment of purchase, and you're responsible for paying the bank back.

Then there are cards that are a hybrid between debit and credit. They require a PIN for debit transactions and a signature for credit, and the credit portion kicks in if you overdraw your account, to prevent you from getting denied a purchase. Sound good? Banks like to describe this credit feature with terms like "emergency cushion," but what it can mean is that what was once your checking account is now another credit card obligation, with all of the possible pitfalls attached.

Out of these choices, "debit" is the answer stores prefer to hear. The reason? Purely economic. Merchants must pay a percentage of a credit card purchase -- sometimes 2% or more. That's a boon for the credit card company but not so great for the merchant. Typically, fees for debit transactions are lower than for credit card transactions.

But what about what's best for you? That's not such a simple answer. Each method of payment has advantages and disadvantages. Check out the following pros-and-cons list to determine which option is the right one for you.

Credit cards

Pros:

• Credit cards are a surefire way to build up credit.
• Your card may offer perks in the form of cash back, airline miles, or other rewards.
• Credit cards may afford greater consumer protection, since purchases are covered under the Fair Credit Billing Act, which allows you the option to withhold payment when you are dissatisfied with a purchase.

Cons:

• You may rack up interest and late fees.
• You can spend much more than your means allow.
• Late payments can hurt your credit rating.

Debit cards

Pros:

• You don't have to worry about interest or late fees.
• Choosing debit over credit can help you limit your spending.
• A PIN-based debit card can offer you greater security than a signature-required card can. Let's face it: Store clerks aren't experts in handwriting analysis.

Cons:

• Your bank may charge you a point-of-service fee every time you use your debit card. These fees, although typically a dollar per transaction or less, can really add up.
• PIN purchases do not count toward reward programs.
• Your purchases are not protected under the Fair Credit Billing Act. Similar to when you purchase an item with cash or a check, you could be stuck trying to negotiate directly with the merchant if you're unhappy with a purchase or want a refund.
• Every time you use your debit card, you give out access to your checking account.
• You may have to maintain a minimum balance.

Hybrid debit/credit cards

Pros:

• You won't have to worry about being denied a purchase if there's not enough money in your account. There's only the cap set by that pesky credit limit.
• You have fewer cards to carry.

Cons:

• Hybrid cards can make you especially vulnerable to theft, since, simply by signing your name, a thief can remove money directly from your account.
• You may be surprised by the monthly bill and interest charges that kick in when you've dipped into the credit line on your account.
• Your credit rating can be hurt.
• You miss out on the lessons of deferred gratification. The credit card portion of your card kicks in before you experience any problems from overdrawing your account.

So when you're reaching for your wallet, here's what you should remember. Debit cards are great for small, everyday purchases. For large purchases, services such as automobile repair and home improvement, and items ordered online or for future delivery, a credit card is the way to go. As for those hybrid cards? Although banks tout these as the best of both worlds, you may be better off being a purist. Keeping your credit card separate from your debit card allows you to maximize the benefits of each.