Which way to pay: Credit, debit, check, or cash

 

Find out more about this public education campaign from Consumer Reports.

Whether you shop online or in stores this holiday season, the method of payment you choose makes a difference. Credit cards offer the most protections for consumers, but if you routinely carry a balance you’ll pay more for your purchases once fees and interest charges are factored in. 

Here’s how commonly used forms of payment stack up:

Credit cards. Use a credit card for most large purchases, if you’re not carrying a balance and can pay off the bill each month. If you don’t pay off your purchases each month, you’ll pay interest rates of about 12 to 13 percent on your balance, depending on whether your card has a variable or fixed rate.

Credit cards offer greater protection than other forms of payment. If your account number falls into the wrong hands, you're liable for only the first $50 in charges, and most large issuers waive liability altogether. If you have a legitimate beef with a seller, it's relatively easy to have the charges removed until the dispute is settled, as long as you report the matter to the card issuer within 60 days after the charge appears on your statement.

Debit cards. Use a debit card when you don't mind having the money withdrawn immediately from your checking account. Debit cards are a surefire way to avoid onerous credit-card interest charges, but you could be slapped with burdensome overdraft fees if you don’t have enough money in your account to cover your purchases. Overdraft fees average around $30 for each purchase.

Related: - Credit card rates that jump overnight - Steps to make your card work for you - The dark secrets of debit - Debit rewards: More glitter than gold - With credit cards, a deal is not a deal - CreditCardReform.org - Top 10 credit card traps (PDF)

With a debit card, your liability for unauthorized transactions is limited to $50 if you report the problem within two business days of your card being lost or stolen. After that the limit leaps to $500. Beyond 60 days of your account statement showing the unauthorized use, you could lose all the money in your bank account. However, for unauthorized transfers involving only your debit card number (not the loss of your card), you are liable only for transfers that occur after 60 days following the mailing of your bank statement containing the unauthorized use.

Debit cards also provide less protection if you decide to dispute a charge with a merchant. Once the money's gone from your account, you can ask your bank to intervene in the dispute, but it doesn't have to. Visa and Mastercard extend their “zero liability” protection to debit cards and you can ask your bank to apply those. However, there are loopholes. Visa, for instance, doesn’t extend its protections in cases where someone uses your debit card at an ATM. For that reason, and to better protect yourself in case of identity theft, you shouldn’t have your debit card linked to an account with a large amount of money in it.

Checks. Write a check if you need to make a large purchase somewhere that won't accept credit or debit and you don't want to carry cash. Canceled checks can also be useful as receipts or for tax purposes. If a check disappears, you can stop payment on it, if you act quickly enough (checks are increasingly being processed in a single day). Of course your bank is likely to slap you with a stop-payment fee, which could run as high as $30.

Cash. Use cash whenever you like. There's no fear of identity theft, and it's accepted almost everywhere. But you won't have evidence of payment unless you save a receipt. Nor will you have the leverage that a credit card provides in a dispute. And carrying large amounts of cash can leave you vulnerable to theft.—Chris Fichera

Comments

[Cash is King]

USE CASH FOR EVERYTHING... YOU CANT GO WRONG AND U HAVE A BETTER BARGAINING TOOL. NOT TO MENTION YOU SPEND 10-15% LESS WITH CASH CUZ IT HURTS WHEN YOU VISUALLY SEE IT LEAVING YOUR HAND!!! JUST FOOD FOR THOUGH

[p. Donohue]

Contesting a charge on a credit card can be very difficult. GE Money MasterCard did not care. I finally had to after six months escalate the issue, then they finally resolved it. A lot of wasted time.
I try to do transactions with major retailers. A small software site on the Internet can easily stole my identity especially when you give them your credit card and address.

[KC]

Debit is linked to your checking account and therefore can be drained if the number falls into the wrong hands. Credit card problems are handled quickly. If you have a points credit card that is an even better reason to use it. If you have trouble with credit or controlling your spending use cash, not credit. If you are buying something negotiable, use cash, especially in an economic environment like we have now. Furniture, cars, anything negotiable...use cash and talk them down.

[Jeff]

I am confused about when card companies can raise my rate with and without warning.

It seems like sometimes they simply raise it, no warning.

Other times, I get a letter offering me the chance to "opt out" of the changes. My rate freezes, but the account is closed and my credit limit is $0.

Is there a consistent law?

[Kay]

If you are using a credit card regularly, make sure you have online pay, so that you can make frequent payments. If you aren't paying the full balance every month and know that you are paying interest, it allows you to make every payment that you can, even if it's just a few extra dollars (The best credit card is the one you cut up:).

Wedding Warning: I had a shop take all my money, close down, and not deliver my wedding dress. Fortunately, since I took some smart advice and used a credit card, I got ALL of my money back, plus the interest I paid. It made a horrible situation bearable...though the best part of all was that the designer, Essense of Australia, had saved my dress at their warehouse! I was able to purchase it through another (more reputable) shop.

[Hector]

I have used an MBNA CC for about 8 years and I payoff the balance every month. During that time, the Reward Points program has fully paid for two round-trip air tickets from the east coast of the USA to Hawaii. That was worth about $2000 to me. So I will continue to use that CC.

[Jake Duffner]

One thing not mentioned here is the protection your credit card purchase for extending warranties. For example, you purchase a product with cash and the warranty lasts as long as the manufacturer offers (i.e. 90 days, 1 year, etc). However, credit card issuers will often extend that warranty by double or longer.

My $ 1800 HP laptop had a part (the display screen) go bad 1 year and 1 month after purchase. HP warranted the computer for 1 year and offered to fix it for $ 700. My credit card company offered free double warranty (2 years from date of purchase) and covered the part and repair by HP at no extra cost.

[Andrea D]

It all depends on the integrity of the credit lender. I have only one credit card and it's with Alaska USA Federal Credit Union, which is one of the five largest credit unions in the country, last I checked. The best thing about Alaska USA, along with the security and stability they offer, is that they offer a great interest rate, do not tack on rediculous fees, do not change your interest rate, and over all have proven that I can trust that they are not going to gouge me every chance they get just to make a profit for themselves. All the fuss I hear about the evil CC companies and how they are treating their customers... I've never had to worry about that. It's like shopping at Costco, you know you're getting the best deal for a great product, no need to shop around. I don't know if it's this way at all Credit Unions, but I for one will never do my banking business with a bank, when there are Credit Unions out there. Just pick a strong one.