As consumers, we think much more about comparing products rather than comparing methods of payment. Cash, debit cards and credit cards are seen as interchangeable when stopping for gas or buying food. This assumption is common among most consumers because retailers have made buying with cash or card incredibly easy. For example, we can swipe our cards or insert dollar bills at self-service checkouts available through major retailers. You may need to reevaluate your own assumptions about methods of payment when considering changes to your financial situation. Learning the right times to use cash or card payments can help you budget funds and avoid financial problems.
The biggest issue that comes from using debit cards for purchases is the hold placed on an account by the retailer. A gas station might place a hold for more than your purchase in order to secure funds. Hotels and car rental companies will often take out more than your rental costs per day if you use a debit card rather than a credit card. These holds can take weeks to clear from your account, depriving you of your hard-earned money. You should reserve your debit card for groceries, department stores and online payments that won’t place excessive holds on your checking account.
Your credit card can be a tempting form of payment in just about every situation. You do not have to enter your PIN code when using a credit card and Visa and MasterCard in particular are accepted by retailers of all sizes. Credit cards have several downsides that should lead to more cautious use in the future. Primarily, they add to your debt and consumer debt is increasing fast. Each payment with a credit card not only adds to your monthly bill but kicks up monthly interest that can be significant without immediate repayment. A credit card with rewards might lead you to make purchases that you don’t need for rewards points you might never redeem. You should determine if you can pay down your debt with interest the next month before swiping your card. Another consideration is whether the convenience of the card is worth the compounded interest for big-ticket items.
Cash is often seen as ideal by merchants though fellow shoppers might hate waiting behind in line as you receive change. Your favorite corner store or grocery store has to pay per card swipe, which slowly cuts into profits. Taxi drivers in particular offer payments by credit card but would prefer cash to avoid those payments. A wallet filled with cash might seem cumbersome and is certainly a security concern in areas with higher crime rates. You might not want to end up with pockets full of change and loose bills after a few trips to local stores. The best way to use cash is for small businesses and individual proprietors that have slimmer margins eaten away by card fees. You can keep a notebook or piece of paper on hand to track each transaction for your budget while stowing away change in a bank at home.