Ditch your debit card and you'll be better off

If you pay by debit card, you're missing out on some serious financial benefits, argues Serena Cowdy.

This article was first sent to readers as a '360 degrees' email.

How do you pay for stuff nowadays? Odds are, you are using your debit card more than you used to - and arguably, more than you should.

According to APACS, the UK payments association, cheque use fell by 4% in 2008, and cash and credit card spending stayed relatively flat. However, the proportion of spending via debit cards and electronic payments continued to rise - with debit cards now accounting for two-thirds of all spending on plastic cards.

The looming demise of the cheque is hardly surprising. They take ages to write out, are a pain to process, and many retailers don't even accept them any more.

Credit cards, meanwhile, have rightly been associated with the nation's recent obsession with 'instant spending gratification'. And we all know where that got us.

However, if you're regularly paying for stuff - particularly expensive items - by debit card, you could be missing out. The right credit cards - handled properly - offer all sorts of cashback and rewards incentives.

And crucially, they also offer you financial protection if anything goes wrong with your purchase (as long as it costs over £100).

Credit card cashback

Buy everything on a cashback credit card and you really could earn yourself hundreds of pounds of free money.

At the moment, the market leader is the American Express Platinum Cashback card. This offers a whopping 5% cashback on purchases for the first three months (on spending up to £2,000).

After that, you'll earn 0.5% cashback up to £3,500 of spending, 1% cashback on spending from £3,501 to £10,000, and 1.5% cashback thereafter. 

After the first three months, there's no limit on the amount of cashback you can earn - and there are no restrictions on what you buy to earn it.

Just bear in mind that American Express still isn't accepted everywhere. If you'd prefer one that does (or you just want to check out the other options), read The best cashback credit cards.

Here you can find out all about Amex's main cashback rival, the Halifax Cashback credit card. It offers 1% cashback on all grocery and fuel spend and 0.5% cashback on everything else.

Whichever cashback card you go for, you must be confident you can pay off your bill in full every month. Otherwise, you'll be hit with a whopping APR (18.9% in the case of American Express) which will totally defeat the point of having the card.

Rewarding your loyalty

Do you regularly wield your debit card at one particular retailer? If so, a rewards credit card may be better suited to you. In a nutshell, you'll receive reward points and other financial incentives in return for your loyalty. For example:

• With the ASDA MasterCard, you'll earn one point (worth 1p) for every £4 you spend. You'll get quadruple points for the first three months - and every December - in ASDA stores. Double points are earned outside ASDA for the first three months and at ASDA after this period.

• The Easyjet MasterCard gives £40 worth of Easyjet credit when you spend £250 within the first 90 days on the card. You can use this to pay for Easyjet flights, car hire or hotels - but not taxes.

• If you take out the John Lewis and Waitrose partnership MasterCard, you'll earn one point for every £1 you spend in John Lewis, Waitrose, Greenbee and at Ocado - and one point for every £2 you spend elsewhere.

These are just three of the many good rewards cards aound at the moment. Read credit card freebies! and Get rewarded for your weekly shop to find out about your other options. The one that's right for you will depend on your personal circumstances and spending habits.

As with cashback cards, a rewards credit card is only worth it if you can clear your balance every month. Otherwise, any interest you have to pay will totally wipe out the rewards and benefits you've accrued.

Consumer protection

If you don't spend using a credit card, you'll also miss out on the important legal protection offered under Section 75 of the Consumer Credit Act (1974).

It sounds terribly complicated, but essentially this legislation allows you to claim against your credit card company if there's something wrong with your purchase.

So for example - if goods aren't as described, you order something and it never turns up, or if a holiday package has been misrepresented - Section 75 gives you the right to redress.

The rules only apply where the cash price of a single item you pay for is at least £100, but no more than £30,000.

That's why putting big purchases on a credit card (then paying it off in full) makes so much more sense than using a debit card.

To find out more about your rights under Section 75, read Why credit card spending is foolish!

When NOT to pay by credit card

Here's my quick rule of thumb: If you're tempted by one of the credit cards I've mentioned - but you're worried about the APR - then they're not for you.

The APR of a cashback or reward credit card should be completely irrelevant, because you should be clearing the balance, in full, every month. The second you're charged interest, your whole house of cards falls down and any benefits get swallowed up by the charges.

In other words, you should use these cards as alternatives to debit cards - for spending on items you can afford to pay for upfront.

If you don't think you'll be able to pay off the debt immediately, you'll be much better off with a card that offers 0% interest on new purchases instead.

Compare credit cards with lovemoney.com

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