What’s the Best Option: Cash, Debit, or Credit?

You’re at the checkout line as the cashier rings up your purchases, when inevitably the question comes up: Will that be cash or credit today? While your answer often can depend literally on what’s in your wallet at the moment, making a conscientious decision about when to use cash or debit versus credit should be an intentional part of your financial strategy. There’s a time and place for everything, and the adage holds true when it comes time to choose between cash, debit, and credit. Here are some reasons why.

The Advantages of Cash and Debit
Perhaps the most obvious advantage — and the biggest — is that using cash limits what you can spend. If you don’t have it, you can’t spend it. If you have trouble resisting spontaneous purchases, committing to shopping with cash can help put a cap on those frivolous finds.

Cash and debit cards also can score you discounts and deals at some businesses. Gas stations often offer cash discounts as a way to entice customers inside, where they potentially will buy other products. Some retailers prefer taking cash over paying high credit card processing fees, and are willing to reward their cash customers in return. It never hurts to ask a business if they offer cash discounts.

The Downsides of Cash and Debit
Carrying large amounts of cash is inconvenient and not secure. If you’re paying with cash, plan to take only enough for your immediate needs. For example, if you are grocery shopping after work, add grocery money to your wallet in the morning and perhaps an extra few dollars of emergency money. Leave the rest at home. If your wallet is stolen, there’s little chance it will be returned full of cash.

Looking to buy a house, car or other big expense soon? A strong credit score will be critical to securing a loan. Using cash does not help you build up the credit history and score lenders will rely on when reviewing your loan application.

And cash is no help if you transact business online or over the phone. For that, you’ll need a debit or credit card. Paying for hotel, airline, and rental car reservations is much more difficult using cash as well; in fact, some rental car companies decline customers who can’t provide a credit card number, even if the rental is being paid in full in cash. Keep in mind for many large purchases such as these, the business might put a hold on the full amount of the purchase and it can take several days for that hold to be released. That is not ideal for most people.

The Advantages of Credit Cards
Credit cards offer a convenient and generally safer option than cash. No need to carry large sums of money, just a single card in your wallet. And if it is stolen, your liability is limited to no more than $50 by law, although most credit card issuers offer a zero dollar fraud liability. You will have to get a new card issued, but unlike stolen cash, you wouldn’t be out a penny.

Credit cards also protect you when authorized purchases are not delivered, or are not as they were described. Simply file a dispute with the card company.

With your credit card, you can conduct transactions online and over the phone, make car, hotel, and airline reservations, and set up recurring payments with vendors you regularly do business with.

Many credit cards offer rewards or cash back bonuses. You can earn points toward travel, merchandise, or cash back. If managed properly, using a credit card can help you build up a credit history that will be important when you are ready to make big purchases like a house or car.

The Downsides of Credit Cards
Credit cards require self-discipline. That means you must avoid overspending and pay your balance on time. Poor credit card management can negatively impact your credit score — and your financial health.