We are fortunate to live in a world filled with options. We can choose the type of food we want to eat, where to purchase goods and services, as well as where and how to spend our time. Best of all, we have multiple options on how to pay for all of it: credit, debit or cash.

It’s a well-known fact that cash is king, but in my world credit ranks supreme. Luckily, we have payment options to choose from based on our individual financial circumstances and preferences. Before you fall into the routine of pulling out a wad of cash, entering your debit pin or swiping your credit card, understand which method offers you the most bang for your buck.

Cash

Hopefully no explanation needed – just bills and coins.

Where you make your money:

  • It’s impossible to overspend: You can’t spend more cash than you have (though you can spend more than you planned on). When you’re not living beyond your means, you’re (1) not overspending and (2) saving money on overdraft fees, interest, etc.
  • No Late Fees: You can’t forget to pay your credit card bill because you spent all your money in cash. Therefore you can’t get hit with a late fee (and that nasty interest).

The hidden fees:

  • If cash is stolen, you are sh*t out of luck. Exhibit A: a few summers ago as I was leaving an outdoor concert with my boyfriend’s family when his sister found a hundred dollar bill folded up and tucked in the grass. With no one around to claim it, it was a great snag for her but I couldn’t help but think how annoyed (alright enraged) I’d be if that slipped out of my pocket.
  • Temptation: temptation is the root of all evil and for some having physical money burns a hole in their pocket. If you’re nodding your head you should either build some will power with a budget (for help budgeting click here) or consider using a debit or credit card.
  • ATM Fees: If you’re primary method of getting cash is from the ATM you could be spending extra in fees when you visit an ATM that’s not within your network. Depending on your bank, you could be charged $2-3 from the non-network ATM PLUS (now here’s the kicker) an additional $1.50 – $3.50 from your OWN bank. That’s $3.50 – 6.50 just to access your own money. If you’re traveling internationally don’t forget to tack on the international ATM fee!

With cash, you’re ability to track your expenses are limited. Sure, you can keep your receipts to budget, but I can’t tell you how many times I’ve lost the one receipt I was looking for to enter a payment into my budget or return those shoes I knew I shouldn’t have bought on a whim (luckily a lot of stores are turning to e-receipts which helps). *Pro tip – take a picture of your receipts for returns, exchanges etc. in case you lose the physical copy.

Debit Cards

Debit cards straddle the line between cash and credit. When you pay with a debit card the money is taken directly from your checking account. You’re essentially paying with cash without the need to carry around the physical dollars and coins (no more hundred dollar bills on the ground).

The pros:

  • Easy to track your spending online (without that drawer filled with receipts)
  • Protection against theft / loss (important to note it’s different than with credit)
  • No late fees or opportunities to miss a credit card payment since the money is automatically deducted from your account
  • Limited to checking account balance: You can’t spend more than what you have in your checking account (but you could be hit with an overdraft fee if you try to – see cons)

The cons:

  • No Rewards: you’re missing out on rewards and perks you’d get with a credit card (cash back, gift cards, airline miles, etc.)
  • Not Building Credit
  • Overdraft Fees: If you make a purchase where the transaction value is higher than the balance of your account, your card will either be declined or you’ll be declined AND charged an overdraft fee (some banks will let you either configure overdraft protection by pulling money from another account in this situation, or you can choose to decline purchases higher than the account balance)

From my experience, most college students and recent grads rely heavily on their debit cards. It allows them freedom from physical cash and the need to run back and forth from the ATM. However, debit cards do not help you build credit and do not give you the rewards like credit cards do. If you’re using credit for all of your purchases (AND paying off your cards on time, paying more than the minimum, not having a high revolving balance etc.) you’re reaping the benefits of building your credit score and cashing in on rewards/perks. If you tends to overspend, and/or aren’t so great with paying bills on time, definitely stick with your debit card.

Credit Cards

I make purchases almost exclusively on my credit cards (and when I can’t I’m bummed I’m missing out on my rewards). When you use a credit card you’re borrowing money to make a purchase and paying back the balance at the end of the month. If you can’t pay back the full amount at the end of the month, you pay the balance back in incremental payments with an added interest rate over an extended period of time.

Where you win:

  • Convenience: credit cards are accepted almost everywhere (depending on the type of card you have)
  • You’re protected if the card is lost and/or stolen
  • Easily track purchases with either paper statements or an online account (bonus points for adding on a tracking tool like the apps here)
  • Rewards and Perks Galore: Depending on the card, you can receive statement credits, cash back, discounts at select retailers, travel points, access to early sales, etc. based on how much you spend. Most cards also have intro offers that accelerate the amount of rewards you’ll earn depending on how much $$$ you spend over the first few months.

You are rewarded for spending money – how is this possible?! If you don’t pay your credit card off in full each month you’ll be charged an interest rate (and a high one at that) on the balance you leave on your card (i.e. your revolving balance). A portion of the money credit card companies make on your interest and other fees (late payments, etc.) offsets the rewards they pay out. This is why you tend to see higher interest rates and fees on cards with better rewards – nothing’s for free right?

Where you lose:

  • If you tend to be an impulsive shopper (not simply the candy bar at the checkout impulsive) you can back yourself into a corner with credit card debt. If you continue to spend more than you can afford to pay off each month, you’ll be putting a good chunk of change towards interest on things you most likely didn’t need in the first place and the high balance / high credit utilization ratio (the balance on your card vs. the card’s credit limit) can harm your credit score.

Side bar – if you DO purchase more than you can afford to pay off and have a revolving balance make sure you pay AT LEAST the minimum payment each month ON TIME. Take it from me these are very costly mistakes. While studying abroad in college I thought I had paid off the balance of a credit card in full before I left. The statements were sent to my house in the states and before I even realized it I was a few months late on payments. Not only was I unable to use the card but it wreaked havoc on my credit score (slowly recovering from that- event though it’s been 3+ years).

  • If you sometimes pay bills late: Even if you can’t pay off the full balance of your credit card at months end, ALWAYS PAY THE MINIMUM (I think my card has a minimum payment of $25). Some cards forgive the first late payment, but most charge a hefty fee for missing payments AND these missed payments will affect your credit score – double whammy.

I love using credit cards because I get 2% cashback on all my purchases. It’s like having a 2% off coupon at every store. Sure it doesn’t sound like much but coupled with other rewards it can really add up. If you’re hesitant about overspending with a credit card, click here for my budgeting template to help you stay on track. However, if you know you’re more likely than not to overspend and wrack up debt – stick to debit cards and cash, no rewards are worth the high interest rates and knocks to your credit score.

All in all what you take out of your wallet is completely up to you. Most people don’t rely exclusively on one method but use a healthy mix of 2 or 3. I for one always try to keep $10-20 cash in my wallet in cash of an emergency (which more often than not is a coffee or ice cream at a place with a $5-10 credit card minimum). What works best for you?

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Cover image source: http://www.bettingsitesuk.co/pics/payment-option-types.jpg

4 thoughts on “Credit, Debit and Cash – oh my!”

  1. Hi Kelly,

    I take care with Credit Cards, I always make sure I pay all on time and I don’t have any debt. Otherwise, it can become a nightmare!

    However, I use credit cards to get points for trips and more. They are really good in that sense, also to build your credit to buy your first house.

    Really good post!

    Francisco

    1. Using credit cards and getting the benefits of the rewards is great, especially since you can build your credit too!

      Thanks for the comment!

  2. I’m often torn between cash and credit cards. I like credit cards because of the cash rewards and the free float, but I know cash causes me to spend less. So I compromise a bit – a credit card for large purchases and cash for small ones. So most of my spending earns rewards, while I minimize the small potatoes stuff.

    1. That’s a great way to compromise! Get the rewards on the larger purchases and minimize everyday (and potentially impulsive) purchases with cash! Larger purchases often take more planning, thought etc. so it definitely makes sense to put those on a card and cut back on unnecessary spending with cash – best of both worlds!

      Thanks for the tip!

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