How should you pay: cash or credit? - FOX 18 - Quad Cities News and Weather

By Andrew Housser

If you are making purchases with cash (or even with a debit card, using the cash in your checking account) rather than credit cards, you are probably making a responsible decision -- and you are not alone. Old-fashioned cash is making a comeback in many areas, and debit card volume continues to grow, with Visa Inc. reporting U.S. debit payment volume up 15.4 percent in its first fiscal quarter of 2010.

It often is more prudent to make purchases with cash. Sometimes, however, using a credit card is a wise way to protect yourself or your credit profile. Let these guidelines help you choose what to take out of your wallet:

Best for credit card use

Significant purchases: It can be worth using a credit card when making a significant purchase, like electronics, where you might need to take advantage of the extended warranty that sometimes is offered with a card.

Online purchases: A credit card is a better choice to use for online purchases, as it offers greater protection against fraud. If you need to dispute a transaction, you can report it to the card issuer. You are not liable for the charge until the dispute is resolved. Do not make online purchases at all, however, unless you are confident of the security of the transaction. Watch for the "secure page" symbol at the bottom of the page to be sure that scammers cannot intercept your details. And for your financial well-being, be wary of overspending online with a credit card.

Travel- and transportation-related expenses (rental car/hotel reservations, gas purchases): Credit cards are good choices when you are making rental car or hotel reservations, or purchasing gas. Some vendors place a temporary hold on a debit card (called "blocking") to make sure the funds are available. This means an amount greater than your purchase might be unavailable to you for several days. With a credit card, a hold won't affect your spending picture (as long as you are below your credit limit).

Credit cards also provide an extra measure of protection when traveling. If a credit card is stolen, you can notify the company to cancel the account. If cash is stolen, you usually are unprotected. Use a single card for all travel expenses, and track the balance by phone or online to stay aware of what you owe.

To help build a credit history: Responsible use of credit shows that you can manage and repay debt. Build a credit score by making small purchases using a credit card and repaying the full balance, on time, every month. Be aware that debit cards do not help build a credit history.

Best for cash/debit card use

To manage debt: A debit card might make sense if you have trouble managing debt. With a debit card, you can't spend yourself into the hole -- unless you have overdraft protection. New rules mean consumers soon will have to opt in for overdraft protection. But if you have trouble keeping track of your balance, you'll run into declined charges and added stress.

To help stick to a budget: With cash, you can never spend more than you have in your wallet. Simplify budgeting by allotting your budgeted amounts of cash by week. Store it in envelopes or different sections of your wallet -- whatever helps you remember how much belongs to each category.

To keep spending in check: If you are an overspender, paying with cash makes sense. Some studies show that people spend more when paying with credit.

To obtain a discount: Paying cash sometimes provides a discount with big purchases. Of course, you have to be careful about flashing a wad of bills. But if you have been responsible and saved up money for your new sofa, you might be able to swing a deal by offering to put cold, hard cash on the table. That incentive often is even sweeter when you are dealing with a small business in almost any industry. 

Whether you use cash or credit, the key principles of financial freedom remain constant: Always remember to live within your means, pay all bills on time, build your savings and avoid debt (especially credit card debt) as much as possible.