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Cash vs. credit vs debit: Here’s when to use each payment method

If you want to earn rewards or boost your score, credit cards are the way to go. But what about cash or debit? There's a time and place for every payment method

Summary

If you’re a credit card loyalist, you might be charging every possible purchase. But are there any occasions where you should consider using cash, or even a debit card instead? This guide will tell you everything you need to choose the right payment method.

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You stop in your local coffee shop to buy a latte and a cookie. Should you pay with cash or your credit card? Or maybe your debit card is the right choice? What if you’re buying a big-ticket item such as a flat-screen TV or filling your car’s tank at the gas pump? What’s the right way to pay for these purchases?

You might not think it makes much difference if you insert plastic or pull dollar bills out of your wallet. But credit and financial experts say how you pay can impact your financial health.

Here’s a look at the pros and cons of paying with cash, debit or credit, and when each method makes the most sense.

See related: 8 things you must know about credit card debt

When to pay with a credit card

When you’re trying to build a credit history or boost your score

Jeff Rose, certified financial planner and CEO of Nashville’s Good Financial Cents, said it’s best to use credit cards if you are trying to build credit. Any transactions you make with a debit card or cash are not reported to the credit bureaus  – therefore, not helping boost your credit score.

But, as Rose says, if you purchase items with your credit card and then make your credit card payment on time each month, that good behavior is reported to the credit bureaus. A record of on-time payments will steadily improve your credit score.

The key is to never charge more than what you can afford to pay off in full each month. If you carry a balance on your card from month to month, you will get hit by high interest rates, which can cause your debt to grow quickly. The money you pay out in interest will outweigh the benefits to your credit score.

“Using a debit card or cash to pay for your goods doesn’t impact your credit score at all,” Rose said. “Credit cards are a great way to build your credit.”

See related: 6 reasons to stop using cash and start using credit cards

When you’re worried about security

If someone steals your debit card or that card’s account number, that thief can immediately withdraw funds from your savings account, perhaps draining it before you’re even aware of the theft. If someone steals your wallet full of cash, that money is probably long gone.

Credit cards are safer. Thieves can steal your credit card information and use it to rack up unauthorized charges in your name. But you can cancel your card to stop future purchases. And if you report the unauthorized charges to your credit card provider quickly enough, you usually won’t be responsible for paying the fraudulent charges.

Just make sure to report the fraud within 60 days. That’s the time limit specified by the Fair Credit Billing Act. If you report the fraud during this period, your credit card provider will begin an investigation of the unauthorized charges. If you report after this period, your card provider will still begin an investigation, but it could take more time and you might have to pay for as much as $50 of the fraudulent charges on your statement.

Shawn Lane, consumer credit expert at McKinney, Texas-based credit-repair company FRS Credit, says debit cards come with a higher risk than credit cards. If a hacker steals your debit card information, they can immediately drain your bank account. You might eventually get the money back after reporting the crime, Lane said. But this could take time. If you are living paycheck to paycheck, this can cause a domino effect where you miss payments and take a hit on your credit score, he said.

Instead of making purchases with a debit card, Lane recommends that you make them with your credit cards, but use your credit cards as if they were debit cards.

This means you go online, maybe every day, maybe two or three times a week, and pay off any purchases you’ve made with your credit cards. This way, you won’t carry a balance from month to month, and you won’t have to worry about interest, Lane said.

See related: Your rights under the Fair Credit Billing Act

When you want to earn rewards

Michael Foguth, founder of Brighton, Michigan-based Foguth Financial Group, says there is little reason to use anything for any purchase except a credit card.

“For me, it’s 100% credit card for all of life’s purchases,” Foguth said. “I want to be rewarded for all of my purchases.”

Using credit cards can help you build up cash back bonuses and rewards points. You can’t earn these rewards with cash or most debit cards.

This doesn’t mean Foguth avoids cash entirely. He says he carries at least some cash at all times. That’s in case he encounters a merchant that doesn’t take credit cards or if a retailer’s credit card machine is out of order.

But a debit card? Foguth sees little reason to ever use one.

“The only time I can think to use a debit card is if you need cash and you are at an ATM,” he said. “If it’s a choice between debit and credit, I use credit. The rewards are too valuable to pass up.”

When to pay by cash or debit card

When you want to score a bargain

Krista Goodrich, a Daytona Beach, Florida-based author of “The Boss Lady Investor: You Don’t Need a Di*k to Understand Money,” said that cash can be helpful if you have enough of it. That’s because you can usually buy big-ticket items such as cars, boats, hot tubs or other luxury items at a discount if you offer to pay for them in cash.

Sellers like the liquidity of cash and are sometimes willing to sell their big items for less because cash is convenient. Goodrich said she has twice purchased vehicles for from $7,000 to $10,000 less than asking price because she offered to pay for them in cash.

And Goodrich says the ability to buy a home with cash gives you a big advantage. This is especially true if you are competing with other possible buyers. Sellers prefer the rare cash offer because they don’t have to worry that a buyer’s financing will fall through. You might even be able to pay a lesser price for the house because sellers are so eager for cash offers.

When you want to avoid overspending

While Goodrich agrees that credit cards make sense for people hoping to build their credit scores or earn rewards, she also warns that cards can be trouble for consumers who have a habit of overspending or not paying their bills on time.

Paying a credit card 30 days or more late can cause your credit score to plummet, often by 100 points or more. And if you carry a balance from month to month, the high interest rates that come with a credit card can cause your debt to grow quickly.

If you struggle with budgeting, paying your bills on time or overspending, it might make more sense to pay for purchases with a debit card or cash. This will prevent you from carrying an expensive credit card balance each month. Limiting yourself to purchases with cash or debit might also force to skip some purchases you can’t really afford.

“If you’re the type of person who sees something and immediately wants to buy it, credit cards can be devastating,” Goodrich said. “We all know people who can’t manage their spending. If you have multiple cards and you can’t control your spending, you’ll have way too many opportunities to hurt yourself financially.”

See related: In credit card debt for the first time? Here’s how to pay it off

When you want to make a small purchase

Despite his preference for credit cards, Lane uses debit cards on occasion. He’ll use these for small transactions, such as a morning coffee, because he doesn’t like to carry cash. But he’s also set up a separate bank account for his debit card purchases. That account only has a small amount of money in it at any one time, usually $200 or so.

That way, if someone does steal his debit card information, he’s only at risk to lose a small amount of money.

Lane said about the only time he uses cash these days is when he needs to tip someone.

“Tipping is the one instance when I find myself at a loss by not having cash on me,” he said.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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