April 2011

Sourcing Debit vs. Cash

http://www.liveoncash.com/blog/cash-debit-card-or-credit-card-pros-and-cons-part-1-of-3

Drivers Seat

Advantages of using cash for payment

Cash has many advantages as a form of payment, especially for people who are trying to gain control over their spending and finances:

  1. Cash is real money. The effect of spending cash is real and immediate. Nothing keeps us in financial reality like dealing with cash.
  2. Cash limits spending. It is hard to part with cash. We are reluctant to hand it over and think twice before we do it.
  3. Using cash eliminates the risk of debt. We cannot spend more cash than we have. Cash forces us to at least live within our means.
  4. Cash is anonymous. Using cash for payment removes the threat of identity theft and fraud.
  5. Cash is simple. No record keeping is required when cash is used, not even for tracking the budget if the envelope method is employed. There are no monthly statements to reconcile or balances to monitor.
  6. Cash is cheap to use. There are no fees associated with the use of cash for payment. Sometimes we even get a discount for using cash. When paying for personal services, we can often negotiate a better price by offering to pay with cash.
  7. Cash is widely accepted. Rarely is cash refused as a method of payment in face-to-face transactions. With the advent of payment services such as PayPal, cash can be used to make electronic payments, as well.

Disadvantages of using cash for payment

While cash has many advantages and is the recommended form of payment for those who are attempting to get out of debt, it is not the best option in all situations. Using cash has its drawbacks:

  1. Cash is not flexible. While inflexibility is an advantage when a person is trying to control spending, it is a disadvantage for the careful shopper. The limitations of cash may force us to pass up an opportunity to take advantage of a sale. At the very least, it may require us to make an extra trip to the store.
  2. There is a risk of loss or theft. The practical use of cash may require us to carry a large amount of it with us. Thus, we run the risk of losing part or all of it or of having it stolen. Unlike the loss or theft of a debit or credit card, which can be canceled and replaced, once cash is gone, it’s gone.
  3. Cash offers no consumer protection benefits. Once the cash is exchanged for a good or service, it can be very difficult to get it back if the transaction results in a dispute of some kind. There is no intermediary in a cash transaction. The consumer is at the mercy of the seller for a refund or other remedy.
  4. No rewards are earned when cash is used. Unlike debit cards and credit cards, spending cash earns no reward points. Sellers build the cost of rewards points into the price of goods. In this sense, paying with cash may be more expensive than using other forms of payment.
  5. Cash is not practical in some situations. It is awkward and sometimes impossible to use cash to obtain lodging or a rental car. Some governmental agencies will not accept cash in payment.
  6. Cash is cumbersome. We must plan in advance to make sure we have enough cash on hand to cover our spending. Then there are those times when we need to produce the exact amount of money required, because the other party to the transaction may have trouble making change.
  7. Cash earns no interest. The cash we keep on hand to use for payment does not earn interest. With other forms of payment, the money remains in the bank, earning interest, until it is actually spent.

There are some situations in which only cash will do, making a Craig’s List purchase comes to mind. But these are becoming fewer as prices increase. In some locations, even parking meters are outfitted to accept debit and credit cards. While cash is suitable for many transactions, it is not the best payment option most of the time. Debit and credit cards offer advantages over cash for those who have a good grasp on their spending and their finances. Read installments two and three of this series for more details.

K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages.

http://moneygirl.quickanddirtytips.com/pros-and-cons-of-debit-cards.aspx

Advantages of Using a Debit Card

Ok, let's start out with the major advantages of paying with a debit card instead of paying with cash, check or a credit card:

1. Convenience is certainly the number one advantage in my book! You don't have to carry just the right amount of cash, write out a paper check and enter it into a register, or make a credit card payment at a later date.

2. It takes less time to complete a purchase. Debit cards are accepted by merchants with less scrutiny than are checks or credit cards. And swiping a card is much faster than writing out a check.

3. It keeps you within budget. When you use a debit card you're limited to spending the amount of money you have in the associated account. This prevents you from accumulating debt or being charged interest and those annoying late fees from a credit card company. Quick Tip: opting out of overdraft coverage and enrolling in a linked acount ensures that you don't overspend and avoid hefty fees.

4. They're easier to get than a credit card. Most bank checking and savings accounts offer you the option to have a debit card linked to your account, without having to complete a lengthy application.

5. You can easily get cash. You can opt for "cash back" at most stores or use your debit card as an ATM card at cash machines.

Cons of Using a Debit Card

On the flip side, here are the disadvantages of using a debit card over other payment methods:

1. Disputed charges can be more difficult to resolve. Since money was spent out of your account at the moment of purchase, you have more risk with a debit card than with a credit card if the item is defective, misrepresented, or never gets delivered to you.

2. Some banks may charge you extra fees. There could be monthly service charges, over-limit fees, per transaction costs, or penalties for dropping below a minimum required balance that result from using a debit card.

3. You don't improve your credit score. Building up your credit score is an important consideration for your financial future. Paying bills, such as credit card payments, on time is the most effective way to increase your rating or to maintain a high credit score.

4. You can't take advantage of reward points. One of my favorite reasons for using a credit card when making any large purchase is the opportunity to get travel reward points. There are many different types of cards that offer a variety of great incentives, and I have an entire episode devoted to rewards credit cards to prove it.

5. It gives you lower levels of fraud protection. If a thief gets your Personal Identification Number, they could easily empty your bank account. Fraud certainly happens with credit card use as well. However, most credit card companies put a hold an any account that shows unusual activity.

6. And lastly, your potential liability for misuse is unlimited. This contrasts the low risk that comes from misuse or theft of a credit card.

The United States Federal Trade Commission established two acts to address the issue of lost or stolen cards. The FTC website address is ftc.gov. The Federal Reserve Board also has information about credit protection laws on their site at federalreserve.gov. I'll be sure to include a link to all this information in the show notes, at quickanddirtytips.com.

Credit Card Fraud--You Are Protected

According to the Fair Credit Billing Act, your maximum liability for unauthorized use of your credit card is just $50. If your card was stolen, and you report the theft before any misuse occurs, your liability is $0! If you have the card in your possession, but someone stole your credit card number, your liability is still $0.

Debit Card Fraud--Report Lost Cards Quickly to Limit Your Liability

Your liability for misuse or theft of a debit card under the Electronic Fund Transfer Act is very different. It completely depends on when you report the loss. When it comes to debit card fraud, please remember that you must act very quickly to give yourself as much protection as possible.

If you report a debit card loss before it's used without your permission, your liability is $0, just like with a credit card. But if you wait to report a stolen card or theft of your debit card number, your financial risk increases as follows:

Protect Yourself from Debit Card Fraud

So, what can be done to lower the risk of using a debit card? Well, I strongly recommend using debit cards only for smaller purchases from trusted merchants. It's a good idea to never let the card leave your sight during a purchase. Illegal electronic skimmer devices are very small and can easily be hidden and quickly used by identity thieves to copy your information. When making a big ticket purchase or buying over the phone or Internet, always use a credit card.

Here are some additional tips that can save you lots of potential frustration and grief:

http://www.creditcards.com/credit-card-news/line-of-credit-versus-cash-1271.php

http://seniortravel.about.com/od/seniortravelbasics/f/TravelMoney.htm

Let’s look at the pros and cons of each type of travel money.

Cash

Pros

Cons

Debit Card

Pros

Cons

Travelers Checks

Pros

Cons

Prepaid Travel Cards

Prepaid travel cards, such as Visa TravelMoney, look like credit cards but function more like travelers checks. You “load” the card with money from your bank account, and you use it like a debit card at ATMs and like a credit card at merchants and hotels. You can replace a prepaid travel card like you would a travelers check if it is lost or stolen.

Pros

Cons

Credit Cards

Pros

Cons

The Bottom Line

Many travelers choose a combination of two or three travel money options. Before you decide which one will work best for you, call your bank and ask about transaction fees and currency conversion charges. If your bank’s fees are high, consider getting a new credit or debit card for your trip.