Whether you should use cash, credit or a prepaid card depends on a number of factors, including the amount of cash you have on hand, the size and type of the purchase you’re making and your access to credit.

Since each payment type comes with distinct advantages and drawbacks, you’ll need to weigh your options to decide what’s right for you. Consider the pros and cons of each below to help you choose:

  1. When to Use Cash
  2. When to Use Credit
  3. When to Use Prepaid Cards

1. When to Use Cash

  • There’s no denying the convenience of cash: although there are rare occasions where businesses won’t take cash, nearly every retailer accepts it.
  • If you only spend the cash you have, you can’t carry a balance and won’t pay interest on purchases.
  • Tangible currency can be easier to manage. Some people feel that the act of counting their money and handing it over gives them a better appreciation for their savings and makes them less likely to overspend.

But Consider:

  • Cash is by far the most vulnerable to theft. If you lose your wallet, there’s little chance of it being returned with the money untouched. To be safe, those who rely on cash should deposit it in the bank and make regular withdrawals to pay for their purchases.
  • It’s harder to be prepared for an emergency. If you need to drop $500 on a last-minute plane ticket or car repair, you may not have the cash on hand to cover it.
  • Some people say they are more likely to overspend when they have cash in their wallet because it makes them “feel rich.”
  • Cash simply can’t be used to shop online.

2. When to Use Credit

  • Using a credit card can be a more convenient method of payment than using cash. Credit card users are protected from fraudulent transactions by the Fair Credit Billing Act, which limits their fraud liability to $50. But many card issuers waive that requirement by offering a zero-dollar fraud liability policy, meaning that consumers are not responsible for unauthorized purchases on their credit card account. Credit card users are even protected when a charge is authorized, but the goods or services purchased are not delivered, or what is delivered is not as described. In these cases, cardholders can file a dispute against the merchant, an option that is not available to users of cash, checks, or even debit cards.
  • Credit card users are also able to conduct transactions online and over the phone, and hotel and rental cars are much easier to reserve with a credit card than they are with cash.
  • You may be able to earn cash rewards just by making purchases. Many cards offer travel and cash back rewards, like the Discover it® Cash Back card or the Discover it® Miles card , not to mention purchase protection benefits.
  • You’re covered in an emergency. Did your fridge break? You can get a new one without having 100 percent of the money in the bank.

But Consider:

  • Credit cards require discipline. If you don’t pay your entire statement balance in full and on time every month, you will be charged interest on your purchases. And if you miss a payment, you can incur late fees. Successfully taking advantage of the many conveniences credit cards offer requires savvy money management.

3. When to Use Prepaid Cards

  • They might eliminate the need to carry cash.
  • Like a traditional credit card, you may be able to use prepaid cards to shop online, over the phone or in stores.
  • Because the cardholder determines the value of the card based on the amount of money they load onto it, prepaid cards may inherently limit overspending behavior.

But Consider:

  • Prepaid cards are only as valuable as the funds available from them. And unlike credit cards, which allow cardholders in good standing to “buy now, pay later,” when a prepaid card transaction is approved, funds are deducted immediately from the available balance.
  • Some prepaid cards may charge fees based on how and when funds are loaded to the prepaid card, how much or little the prepaid card is used to make purchases, or for other transactions, like checking the prepaid card’s balance.
  • Using a prepaid card might require some advanced planning and careful tracking to keep your balance afloat. Some prepaid cards are designed for extended use and allow cardholders to load funds onto the prepaid card through a number of methods, including using cash or a check at a store that sells/reloads prepaid cards; a transfer from a checking, savings or PayPal® account; or using direct deposit from a paycheck.
  • Because prepaid cards do not involve borrowing, credit bureaus are generally uninformed about activity on them, so prepaid cards generally do not impact a person’s credit history or credit score.

All things considered, each form of payment has its pros and cons. In today’s digital world, a credit card may be the most versatile and reliable form of payment. But, it’s important to weigh your options to decide what’s right for your particular situation.

Published November 10, 2015.

Updated August 4, 2020.

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