The Best Way to Pay: The Pros and Cons of Cash, Credit and E-money
July 14, 2015 | Your Finances
In days gone by, the biggest decision you had to make when checking out at a store was paper or plastic. Now there are so many alternatives for paying, it’s hard to know what’s best for you. Cost, convenience, discounts, bonuses and security concerns are all important considerations.
What’s best for you? Take a look at these advantages and disadvantages of the most popular payment methods, and see what makes sense for your budget and situation.
Pros: The ultimate old-school way to pay is still a viable alternative if you are trying to live within a strict budget. If you don’t have the cash, you simply can’t overspend. Using cash also helps protect you from getting your identity stolen through a security breach at your favorite store.
Cons: Always using cash may interfere with your ability to establish a good credit rating. Also, if you withdraw cash at ATMs regularly, you might run the risk of paying withdrawal fees. In a 2014 Bankrate survey, the average ATM surcharge for out-of-network transactions was $4.35.
Pros: American consumers make nearly twice as many purchases with debit cards than credit cards, according to the Federal Reserve—which is good news for our debt-beleaguered country. Using a debit card limits you to the money that’s currently in your bank account rather than letting you accumulate high-interest-rate credit card debt. Debit cards also allow for faster transactions than paying with cash or check and offer the added security of requiring a PIN to complete a transaction.
Cons: Using a debit card requires good bank account management. If you don’t realize your balance is $0 or below, you run the risk of paying overdraft fees as high as $40 per transaction. Check with your bank about overdraft protection, but note the dangers of linking a debit card to a second account with automatic transfer privileges. In the event of theft, linking your savings account to your debit account could result in both accounts being drained, says the Better Business Bureau website.
A second drawback is your liability on purchases if your card is ever stolen: $500 or more if you don’t report the theft within the first 48 hours. Always check your statement for unauthorized use. If your debit card information is hacked (but you still have your card), you have 60 days to report unlawful transactions. After 60 days, you may be responsible for all fraudulent purchases.
Pros: If you don’t carry a balance from month to month, a credit card offers tremendous convenience. You don’t have to carry around large sums of money or maintain a high balance in your checking account. Cash, travel and other rewards can be a wonderful bonus as long as you don’t offset your rewards with fees.
Cons: The greatest drawback of credit cards—besides the temptation to overspend—is the cost of all that convenience. If your credit history isn’t stellar, interest rates can begin as high as 22.99 percent and go even higher if you have missed payments. In addition, you can be subject to late fees or over-the-limit fees.
Using a credit card can put you at risk for hackers and scammers who steal your account information, including your name, card number, expiration date and security code. Pay attention to security breach announcements in the news and from your issuer, and always check your statement for unauthorized charges. Ask your bank or credit union about signing up for notifications about issues with your account. Please note, however, that some scammers use text messages to gather personal information. Because of that, trusted institutions never ask for your account number or Social Security number via a text message, email or phone call.
Pros: Online shoppers have been using PayPal since 1998 for the convenience and security of paying for items with a credit card, debit card or bank account without having to enter personal information. PayPal keeps your payment information on file but uses encryption software to keep personal account details private from the vendor. Today, PayPal offers a smartphone app that allows you to pay on both mobile apps and websites and to pay in person at participating retailers.
Cons: PayPal will not protect you from your own bad habits. If your PayPal account is linked to a debit card, you still have to keep an eye on your account balance to avoid overdrafts. If it’s linked to your credit card, it will be subject to interest if you don’t pay off your balance each month.
Apple Pay and Google Wallet
Pros: The newest entries to the “almost-cash” market are mobile payment systems, which allow you to pay with an app on your phone or tablet rather than your actual credit card. Arguably the biggest pioneer in the field to date is Starbucks, which allows you to add gift cards or transfer money to their mobile app, from which you can pay for your purchases with a quick scan of your personal QR code. According to Pymnts.com, Starbucks recently announced that they reached eight million mobile app transactions per week in the second quarter of this year.
Apple Pay and Google Wallet are both trying to gain traction with their mobile wallet platforms, touting their speed, convenience and security. Whether you’re making a purchase in person or online, the vendor or cashier will never see your name, account number or security code. While the two platforms’ features vary, they both offer a level of security in the event your device is stolen. Apple Pay requires a Touch ID device, which uses your fingerprint to enable a purchase. If your phone is lost or stolen, you can use the Find My Phone app to suspend payments from your device. Google Wallet requires a PIN to conduct a transaction.
Cons: Apple Pay and Google Wallet are accepted at only select national vendors, and certain retailers may never adopt their platforms. Both systems are limited to particular mobile devices and work only with cards issued by particular banks. Expect to see additional entries into the mobile wallet market over the next few years.
Clearly, each payment method has its advantages and disadvantages, depending on the size and frequency of your payments. You don’t want to be surprised by a large credit card bill at the end of the month, nor do you want to keep track of dozens of debit expenses every week. A mix of payment methods works well for most individuals, as long as you are careful to avoid penalties and make the most of your loyalty bonuses.