One of the questions that keeps coming up in personal finance now that we have so many options in terms of how to pay for things is this: When should I use what?
The answer is usually very personal, and depends upon your individual needs, as well as your personal finance style. But there are ways that you can determine what might work best in different situations. But the key, as always, is to make sure you can afford whatever it is that you are buying.
Cash is the payment option of choice for many, especially in the current climate of credit market fears. It is nearly always accepted. Plus, for some people, using cash helps them curb their spending. They get a certain amount of cash each month to spend on “fun” things, or needed things, or whatever, and physically watching it go encourages them to spend it more carefully. The main downside to carrying cash is that if your purse or wallet is stolen, you lose the cash. There isn’t a way to replace. And you need to keep receipts so that if disputes arise, you can prove that you paid.
Credit cards work great for large purchases. I also like to use credit cards when I go on vacation. You don’t have to worry about carrying around the cash (and having it ripped off) and it is easy and free to cancel when lost or stolen. Liability protection and help with disputes with merchants also come with credit cards, which can be helpful and provide peace of mind. However, it is important to pay it off every month. You should realize that the interest charges can be horrendous, and once you get stuck in a cycle of credit card debt, it can be hard to get out.
Debit cards can give you a great combo of cash and credit. I like to use my debit card for smaller purchases, and at times when I need to get $10 or $20 cash back to have on hand. They work with the convenience of credit, but take the money right from your checking account. And there is no interest for using them. But you have to keep track of your account. You need to make sure that you have plenty of money in your account to cover the debit card. And watch out for holds. This could mean that you have less money available and it could make your life difficult. The liability protection isn’t as complete as with a credit card, either, so it is important to be careful, especially when using your debit card online.