Best payment cards for holiday shopping

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(MoneyWatch) When you are shopping this holiday season, it might be worth watching what payment card you pull out of your wallet. Using the right credit card can not only earn you "points" for future purchases or travel, but also extend the product warranties on the gifts you buy, said Odysseas Papadimitriou, chief executive of CardHub, a credit card shopping site.

What are the best payment cards to use and why?

Not debit

Although consumers sometimes like to pay with debit cards to avoid overspending, the cards present a variety of risks. Those risks are made all the more dangerous by the fact that pickpockets and con artists go into overdrive as holiday shoppers pack the malls, said Brett Montgomery, fraud operations manager at security software company Identity Theft 911. Specifically, PIN-based transactions are easily "skimmed," making your checking account vulnerable to theft, he said.

Moreover, credit card fraud claims are less likely to get declined than claims involving a debit card. If you are ordering something on line with a credit card -- any credit card -- the Fair Credit Billing Act also allows you to reverse the transaction if an item you ordered wasn't delivered as promised. There is no comparable law governing debit cards.

Finally, it's simple to reverse an errant charge -- before you pay the bill-- with a credit card. Not so with debit. Because money comes out of your checking account immediately when you use a debit card, when you've been improperly charged or double-billed you're out the cash until (and unless) you can convince your bank to reimburse you.

Credit considerations

But if you're like most consumers, you've got a fistful of credit card options. The right card to use hinges on three things -- whether using a particular card will get you a discount on a purchase; whether it will gain you "points" to use for future purchases or travel; and whether it will land you a free extended warranty or insurance coverage for the item you're buying.

To that end, here are four credit card rules to live by:

1. Use store cards (if it gets you a discount) for clothing purchases you can pay off. Promotions that promise big discounts on the first purchase of merchandise when a consumer applies for a store credit card can be tempting to those buying a big basket full of holiday gifts. However, credit cards offered by retailers usually come with high annual interest rates, so you should forgo the discount if you'll need to carry a balance on the card for more than a few months.

Also, if you are buying electronics or some other big-ticket item that is prone to break, you may want to forgo the retailer's credit card for a card that provides an extended warranty (see below).

2. Use American Express for computers, cameras and electronics. Most branded credit cards provide extended warranties for the items you buy when using that card, Papadimitriou said. However, precisely what these warranties cover can vary significantly from card to card. American Express provides the most inclusive extended warranty coverage, according to a CardHub study, which may make this card your best choice when buying big-ticket items with lots of moving parts.

Though American Express' warranty also has some exclusions, it generally doubles the manufacturer's warranty on the products you buy. (MasterCard has the least attractive coverage, according to this study.) But be sure to keep your receipt and credit card bill in a safe place. This warranty can only be used with the appropriate proof of when you bought the item and that you used the relevant credit card to buy it.

3. Use Visa or Discover for rental cars. If your holiday plans include travel and you will be renting a car, you should also know that your credit card is likely to automatically provide car rental insurance, too. All credit card car rental coverage is rendered void if you buy the collision damage waiver at the counter, however. And none of the credit cards provide coverage for exotic or luxury cars.

But if you just want to avoid buying the costly collision damage waivers on the Ford Focus you're getting to drive to grandma's over the holidays, you should pay the rental car tab with a Visa or Discover card, Papidimitriou said. CardHub's study on the best rental car coverage rates Visa as the best, getting 87 points on the site's 100-point scale. Discover ranked as the second-best choice, with 82 points. The CardHub scale rates the availability of coverage, the exclusions and other limitations.

Notably, MasterCard scored poorly partly because of a confusing restriction that could render coverage void. Specifically, it excludes coverage for accidents "occurring on roads that aren't regularly maintained." 

4. Pay with a rewards card. When there are no new-card discounts to be had, go ahead and pay with the card that gives you the best rewards. If your purchases are substantial, however, be sure to go on the card issuer's website to see what warranty and insurance coverages are provided. These are a free service from your credit card company that can be exceptionally valuable, if you need to use it.