Credit, debit or cash? We break down the risks, fees and fine points

cash, credit card, debit, ATM card, walletWe at WalletPop spend a lot of time warning you about fees slapped onto credit cards, ways debit cards can trip you up and caveats about cash. But all the details are hard to remember and a little confusing so we've broken it down to help you decide when it's best to use each kind of payment.

Here's what our experts had to say about the best payment methods for you:


Credit cards: Credit cards represent the go-to method for any type of online purchase or any transaction where your account could be compromised. As Odysseas Papadimitriou, founder and CEO of CardHub.com, points out, while debit card protections against fraud are very similar to credit cards in terms of the consumer protections they offer, there's one big difference. During the dispute process through which the bank determines whether a fraudster ran up charges using your money, you're not responsible for the charges in question on your credit card. But if your debit card is compromised, you don't get access to those dollars until the situation is resolved.

Papadimitriou points out that even though your bank will almost always return your money if your debit card account gets drained by a thief, you probably still want to avoid that heart-stopping moment when you find out your account's been emptied. "The liability protections are the same, but psychologically, I wouldn't be able to open up my bank account and see that it was empty," says Papadimitriou.

It can take several days for your bank to determine that you're not liable for a thief's spending spree, which means you could be without your money until then. Save yourself that stress by using a credit card instead for online purchases -- if that card is compromised, at least you won't be on the hook. What's more, if you're not in the habit of checking your balance regularly, you could wind up overdrawing your account or bouncing checks.

You'll also want to turn to a credit card for big-ticket purchases and travel purchases, since many card issuers include protections, such as dispute resolution if your new flat-screen TV fizzles out after two Sunday night football games or travel insurance if you have to deal with your luggage disappearing. "For purchases for which you want dispute protection, you have that option," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "With a debit card, the money is long gone."

Another reason credit cards are better than debit for travel-related purchases is that many vendors, such as rental car companies and hotels, will often put a hold on the account from the time you make the reservation until as much as a few days after you've left the hotel or returned the vehicle. We've warned you about this situation before; using a debit card can lead to your funds being frozen, so it's best to use a credit card. Just keep in mind not to use one that's near the limit, since a higher-than-expected hold amount could result in you getting socked with over-limit fees.

One place you never want to use your credit card is at an ATM, warns Papadimitriou. "Many people, especially those new to credit, don't realize there's a cash advance fee and that the interest rate begins immediately," he says, adding that the cash advance APR is generally several percentage points higher than that for purchases.

Debit card: If you opt out of overdraft protection, a debit card can be a good tool for the budget-challenged. "If you're able to pay your bills and keep good track of your spending, debit is the best choice," says Richard Barrington, a personal finance expert for MoneyRates.com. "A debit card is a great tool as an alternative to carrying cash around, but you may find you have to impose a little bit more overt discipline" to avoid coming up short at the cash register. If fiscal discipline isn't your forte, he adds, stick to cash.

Our experts all agree that debit cards are ideal for everyday purchases, such as grocery store runs, pharmacy visits or movie rentals. The one exception is gas stations, since many of them will place a hold on your card, similar to the ones used by rental car companies or hotels. This could lead to your funds getting tied up unnecessarily.

Since every purchase is tracked, debit cards are also handy if you're trying to get a handle on how much you spend. And debit cards are a better alternative to cash when you're making a charitable donation, points out Gail Cunningham, since you have a paper trail of your donation for tax purposes. She adds that writing a check instead of giving cash also serves this purpose.

Cash: Plain old American greenbacks are good for a number of reasons: Cash is accepted everywhere, a bank can't slap a fee on you for using it, and it's impossible to spend more than you have. Mary Ann Campbell, professor at the University of Central Arkansas and spokeswoman for IndexCreditCards.com, says this might be your best option if you're on a tight budget, since numerous studies show that people tend to spend more -- even if only by a bit -- when paying with a credit or debit card. Of course, drawbacks exist: It's close to outright impossible to make a purchase online, make travel arrangements, or pay your mortgage or utility bills with cash. Plus if your money is lost or stolen, you're out of luck.

While credit and debit cards offer convenience, cash is the gold standard if you have a tough time sticking to a budget, our experts say. "Cash helps people stay within a budget, but people don't like to carry a lot of cash on them," says Campbell. "For small items and to help yourself stay within a budget, have small amounts of cash on you and keep receipts if you need them," she advises.

Papadimitriou says cash is the best choice if you're unsure about the safety of your card. If you're in a restaurant in an unfamiliar city, for instance, you may prefer to pay cash rather than run the risk of having your card "skimmed" by an unscrupulous staffer who wants to steal the number for his or her own use. Finally, if you're at a mom-and-pop establishment that offers a discount for paying cash, the best method is obvious, says Papadimitrou; if cash will cost you less, it's the best pick.

Which method of payment works best for you? Tell us.

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