Credit Card vs Debit Card vs Cash: When to Use What

Posted on: 26th May 2015 in Finance

When paying for goods and services, either online or in brick and mortar stores, there are usually multiple payment options. Cash, debit card and credit card are among them in most cases. While many people have a general preference for one of these and use that more often than the others, each payment method has strengths and weaknesses. In particular situations, one can be more suitable than others. Cash Cash is the traditional form of payment which has been used for thousands of years. Although it’s clearly on a decline, there are still places and situations where you will either have to use cash due to lack of other options or might prefer cash for various reasons.

• Cards are not accepted and cash is often the only way to pay in small shops, at stalls in outdoor markets or at events and generally in the world of small commerce. Vendors have to pay card processing fees for each transaction and many small businesses choose to not offer this payment option to save costs and be able to offer lower prices.
• When shopping in stores or restaurants where low cost is a major part of the advertising and value proposition, you may sometimes be required to pay an extra fee to compensate the vendor for the card processing fees they incur, in order for them to be able to preserve their low prices for those who pay with cash.
• When shopping in small unfamiliar stores or eating at unfamiliar restaurants, especially in foreign countries, many people prefer cash from cards, as they are worried about possible theft and abuse of their card details, which is still a real possibility in spite of the continuous improvements in security technology.
• Cash is also a common way to give tips.
• Finally, cash can have psychological benefits when trying to spend less and save money, due to the physical nature of parting with your money, which is subconsciously more significant than merely swiping a card. Therefore, using cash rather than cards is often recommended for those trying to get out of debt or those with an overspending problem.

Debit Card When you pay with a debit card, you are using money you have on your bank account. The price of the goods is deducted (hence “debit”) from your account’s balance. A debit card is quite similar to cash. The only difference is that everything is virtual and electronic. Compared to cash, paying with a debit card has several advantages:

• For most people, using a debit card is much more convenient than using cash. There is less to carry and you don’t need to count coins when making payments.
• You can buy things online, which is an increasingly important benefit. Obviously there is no way to use cash on the internet.
• Keeping records is much easier than with cash. All your debit card spending will appear on your bank account statement at the end of the month. With online banking, you can often download your transactions into an Excel spreadsheet or other software.
• When your card gets lost or stolen, you don’t lose your money (if you do everything right and contact your bank immediately). There is no way to recover lost cash.

Generally, if there is no money on your bank account, your debit card payment won’t get approved. However, some banks will allow the transaction to go through and then you may be charged an unauthorized overdraft fee. It is very important to check your bank account balance and transactions regularly to avoid bad surprises. Credit Card Unlike cash and debit card, a credit card is a loan. You are using money you don’t have and the price you pay is added (credited) to the amount you owe. Excessive or incorrect use of credit cards can lead to serious financial troubles, which is why credit cards sometimes have a bad reputation and some people completely avoid them. But they have some significant advantages over cash and debit cards and when used correctly, they can be a powerful part of your financial arsenal.

• There is often stronger fraud protection for credit card payments. A credit card is good when buying from unfamiliar providers, especially online.
• Many vendors offer interesting discounts or rewards when you pay with a credit card, for example in the travel industry or when shopping online.
• For some people, a credit card can actually be an effective way to control and manage spending. The key is always paying your balance in full every month (you can set up a direct debit to have it done automatically).

Use All Cash, debit cards and credit cards all have their place in the financial world. When you are aware of their strengths and weaknesses in different situations, you will be able to save money and manage your finances more effectively.