Pay using cash, debit or credit? Here’s how to make the right spending decision

Cash or credit? Despite the recent decline in cash transactions due to Covid-19 fears, both cold, hard cash and credit each have a place in our purchasing habits. 

If you’re concerned about catching Covid-19 from handling cash, you can opt for debit or mobile payments linked to your checking account. Or rely on good hand hygiene or letting your cash sit for a few days to prevent any transmission of germs. These methods ensure you’re able to use cash (or cash alternatives) in place of credit, when needed.

Many financial experts suggest choosing credit whenever possible, in order to earn cash back, or other valuable rewards. Yet others caution against the perils of credit, encouraging the use of cash to guard against financial excess.

There’s an element of truth to both arguments, and whether you should pay with cash or credit usually depends on your own cash management skills — with some important exceptions.

If you’re generally good with credit

If you’ve got generally good credit and pay off all or most of your card bills each month, it makes sense to maximize cash back or rewards by paying with plastic. Otherwise, this is free money you’re missing.

Exceptions would include circumstances in which there are high fees or where temptation might lead to excessive spending and cash could serve as a means of tempering your spending, such as:

Foreign purchases. When your card doesn’t offer zero foreign transaction fees, purchases abroad are best made using cash. Using local currency is generally the cheaper bet. (If your debit card doesn’t charge foreign fees, then that’s actually the cheapest — and safest — bet).

Entertainment. If you’re engaging in entertainment or other activities where large sums of cash can easily be spent — such as gambling or drinks out on the town — choose debit (or cash) whenever possible. Set a limit and then withdraw and spend only that amount of cash. Choose electronic versions of cash transactions whenever possible if Covid-19 is a concern. In areas where bars, casinos, and other entertainment venues are still open, employ excellent hand hygiene when using cash, washing your hands after touching money.

Taxis. Cabs should usually be paid for in cash (or with cash equivalents, such as debit or mobile payment apps), unless you need a receipt for expense reimbursement at work. Some taxi companies charge extra fees for credit card users.

Rent. Avoid paying your rent on credit, as many service providers will impose surcharges for processing credit cards. Checks, money orders or direct bank withdrawals are preferable.

The envelope method. When you’re mastering budgeting and saving, it can be useful to employ the cash envelope method, in which you place a certain amount in an envelope monthly toward certain expenses or savings goals. If you’re avoiding cash due to Covid-19, try creating separate savings accounts toward major goals, which you can set up using an existing bank, an online bank, or an investing app.

If your credit isn’t great

People with poor credit management habits should rely on debit and cash until they can master the use of credit. That’s because paying with cash makes your spending easier to track, and increases your aversion to spending, according to a 2008 paper published in PsychNet.

In another study, paying with cash not only led to more judicious choices but also increased emotional attachment to the purchased product. However, there are times when people with less than stellar credit should pay with plastic:

Record-keeping. When you need a thorough record of your purchase, and receipts aren’t otherwise available. Expenses for work-related charges are a good example, as are major purchases you intend on deducting from your taxes.

Shady suppliers. When you’re purchasing something from questionable vendors, and your credit card offers superior fraud protection or money-back guarantees and warranties, choose plastic over cash.

Online incentives. Choose credit when you’re making an online purchase offering significant incentives for credit card users that aren’t offered through your debit card. Be careful, however, that interest and other fees don’t erode the value of these incentives, and ask yourself whether you really need to make this purchase in the first place.

Travel. Use plastic when you’re purchasing airline or cruise tickets, and your credit card offers trip cancellation, lost baggage or illness protections that your debit card doesn’t.

How you choose to pay impacts your bottom line in more ways than you might originally think. Whether you choose cash/debit or credit is a personal choice, but one that can carry significant financial consequences.

Take a minute to consider your choices, make smart decisions with your spending and reap the benefits.

from CNBC