When to use a credit card, debit card, and cash? Which option should you pick in which situations? In my opinion, there is a place and time for each type of payment method. As a consumer, you just need to know when you should use which payment method and what it means for your financial situation.
Let’s talk the difference between cash, debit cards and credit cards.
We all have a pretty good understanding of cash, right? It’s money we have withdrawn from our bank account (or never deposited). It’s easy to use and not very forgiving — once you’re out, you’re out. Cash is a good option when you struggle with overspending. It’s recommended that most households use cash for budget categories that are easily overdrawn — groceries, dining out, and miscellaneous funds.
When you use cash it’s hard to go over budget. You can’t swipe a card and hope that it clears or that your bank will cover it. If your total is $22.50 and you only have $20.00 in cash then you will have to make the choice of either not buying it or going with a less expensive option.
Debit cards are pretty similar to cash. You swipe your card at the cash register, you enter a pin (or sign) and funds are immediately deducted from your bank account to pay for your purchase. If you overdraft your account you could face either a declined transaction or an overdraft fee from your bank.
Debit cards are perfect for anyone who has a desire to stay on budget and to automate their finances. You can easily connect your monthly bills to your bank account via a debit card to make sure your bills are setup on autopay.
Credit cards get a bad rap. But there are a lot of benefits of using credit cards — rewards points, cash back, miles and so on. It’s just having a better understanding of how to use credit cards that most people need. Here’s the general rule when it comes to using a credit card: if you can turn around the next day and pay off your credit card (and plan to do so) then it’s okay to use it. However, if you are using credit cards to get by until payday then you should cut them up and stop using them immediately.
Credit cards are not tools to utilize when you don’t have the money in the bank to immediately pay them off. When you swipe knowing you don’t have the money to cover your new expense, then you can put yourself and your budget into financial strain.
If you do have the cash in the bank and turn around to payoff the credit card before interest accumulates then find a credit card that hosts benefits you can utilize. For instance, finding a card that rewards members with cash reward points then you can budget those points to use for larger purchases — such as Christmas shopping, vacations, and any other larger transactions.
When is a credit card the safer option?
You should opt for a credit card when you’re online shopping. Credit card companies offer more fraud protection and larger coverage than most bank debit cards.
They are also the easiest and safest option when traveling or on vacation. Again, you can more easily dispute any fraudulent purchases.
How often should you use a credit card if you’re trying to raise your credit score?
Remember a credit card typically weighs more heavily on your credit score because it gives a good insight on how you manage debt. The bottom line? They’re good for your credit score, if you use them wisely.
You should use your card enough to avoid it closing due to inactivity. Closing your account or having it closed for you can actually hurt your credit. Closing an account will raise your credit utilization ratio since you will have less credit available.
If you’re trying to raise your score then keep in mind a few things: make sure you’re paying more than the minimum payment each month, make sure to pay on time, and don’t max out your card.