Cash vs. credit vs. debit — which should you use?

Spending money can be stressful—don’t you agree?

We need to watch how much we’re spending and what we’re spending our money on.

So we add the layer of money management that drives most people crazy—budgeting.

Once we’ve nailed that down, we have yet another thing to consider—how are we going to pay for our purchases?

Years ago, everyone used cash. Then came debit cards as a convenience. Then credit cards began to make a wave as a means for making everyday purchases. In this article I’ll bring some clarity around each payment method and help you decide when to use each, and which one is best for which situation. Let’s kick it off with cash.

Credit cards have a lot of power when you use them responsibly, but remember that if you don’t pay your bill in full you’ll have to pay interest. Here are some of the best circumstances to use a credit card.

When you’re traveling

When you’re traveling, using a credit card is the ideal payment method. This goes for everything from booking the trip to paying for your hotel and car rental. The points below will support this, but when you travel, you’ll need extra security in case your card gets lost or stolen. With a credit card, you have no liability for fraudulent charges, and you can cancel or freeze your card immediately.

When you’re traveling out of the country, you’ll get better rates for foreign exchange fees than buying currency with American dollars and using it in the country you’re in. In fact, we’ve reviewed the best credit cards that have NO foreign transaction fee at all. These cards also give you nice perks for making travel purchases.

Finally, most good travel rewards cards will also offer travel insurance. For example, the Chase Sapphire Preferred® Card, offers $100 a day of delayed baggage coverage for a maximum of five days.

When you want rewards

Most credit cards now will give you rewards for using them. Cash back credit cards are a fantastic asset since you’re getting money back for things you’re going to buy anyway.

When you’re making charges for work

Many of us need to use a credit card for work expenses—whether we own your own business or have to charge things for our job. Using a credit card is best for this because you don’t have to front the money.

For example, when you travel for work, you’ll need to pay for a hotel, car rental, food, and probably a few other expenses. If you use cash or a debit card, you’re out that money right away. With a credit card, you can charge it, submit your expense report, and get reimbursed—all in time for when the bill comes and is due. This way you’re not taking money out of your wallet to pay for expenses that will be reimbursed later.

It’s funny. Most people I know never carry cash. If they do, they just stick a couple of 20s in their wallets to make sure they have it in case of an emergency.

But data tells us that cash isn’t being used only for emergencies. In fact, a study done by LendEDU showed that, out of 875 Americans polled, 32% of them preferred to use cash for everyday purchases. So this paper money still has its value. Here’s when to use it:

When you have an emergency

Cash is accepted everywhere, so having some on hand is nice in case of an emergency. I would always recommend keeping at least $40 in your wallet (more if you’re comfortable) for the times when you can’t use a credit card.

Another smart way to use cash is to keep up to $200 in an envelope stashed in your glove compartment. This way, if you ever forget your wallet and are in need of money, you’ll have it, and you’re only opening yourself up to a $200 risk if anyone were to ever get into your car.

For more significant emergency purchases, I’d recommend building up a safety net so you can rely on it if you have an unexpected considerable expense—such as an unplanned vet bill, car repairs, or broken appliance in the home. Shockingly, a study from Bankrate showed that only 37% of Americans have enough cash to cover even a $500 emergency expenditure.

Financial expert Dave Ramsey recommends having at least $1,000 in an emergency fund before doing anything else. I agree with this, and would suggest you come up with more than just $1,000 if you can to have as an emergency fund.

When you want to limit your spending

Cash is great for limiting your spending. First of all, it’s a physical piece of paper that you can see. I know that sounds funny, but psychologically we spend less money when we use cash.

This has a lot to do with the fact that you see the money leaving your hand and you can quickly connect that money to the thing you’re buying. With credit, we don’t make those associations as fast.

Try using envelopes with cash in them to budget your money instead of using a credit or debit card and trying to track your purchases. By physically seeing how much money you have left, you’ll be able to manage your spending better.

When you want to make healthier purchases

A study done by the Journal of Consumer Research showed that consumers who pay with cash are less likely to make impulsive purchases on items such as ice cream, chips, and cookies. According to the authors:

The pain of paying in cash can curb impulsive urges to purchase such unhealthy food products. Credit card payments, in contrast, are relatively painless and weaken impulse control. Consequently, consumers are more likely to buy unhealthy food products when they pay by credit card than when they pay in cash.

If you think about your last trip to the grocery store when you paid with cash, you were probably much more conscious of what you were buying, right?

When you want to have a better relationship with the things you buy

This one is fascinating. One study showed that people who use a “more painful” form of payment, such as cash, felt a stronger connection to not only the item they purchased but also the place they purchased it from.

One example might be buying a gift from a local antique store. This article argues that if you pay with cash, you might feel a deeper sense of connection and pride in the item you purchased as a gift, and also a connection with the store you bought it from – so you might go back. The authors say this:

…individuals who pay with more painful forms of payment increase their emotional attachment to a product, decrease their commitment to nonchosen alternatives, are more likely to publicly signal their commitment to an organization, and are more likely to make a repeat transaction.

You’re more in-tune with what you buy, and you become more loyal to a store. This, in turn, can help you become much more conscious about how much you’re spending, where you’re spending it, and what you’re spending it on.

When you want to make a small purchase at a small store

Have you ever gone to buy something at a small, independently owned store and you saw a sign that said something like “Credit card transactions require a $10 minimum” or something along those lines? That’s because businesses want to encourage you to use cash.

But why?

According to the National Retail Federation, credit cards charge, on average, 2% to process a transaction. So for every dollar you spend on something at a small store, they’re losing two cents off the top automatically. Most small businesses operate with such a small margin, to begin with, to avoid getting outshined by the “big guys” that two cents can end up making a big difference.

So stores will opt to require a minimum purchase for using a credit card or choose not to accept credit cards at all. That’s why if you’re going to a small store, you should always have cash on hand. Also, using cash may be one of the best things you can do to support a small business and its surrounding community.

The study done by LendEDU (referenced above) found that debit cards were the preferred methods of payment by the people surveyed. In fact, nearly 44% of the people asked responded as debit being the best method of payment for them. Let’s explore some of the cases when using debit makes the most sense.

When you want to avoid getting into (more) debt

If you don’t have any debt, using a debit card is a great way to stay out of it. Since your debit card is connected to a checking account, you can theoretically only spend what is in the account (which may or may not be a lot).

ValuePenguin found that the average credit card debt in the United States was nearly $6,000. That number jumps to over $9,000 when you look at households who carry balances on their credit cards. With over 41% of households carrying some form of debt, it’s always smart to find ways to avoid it when you can. A debit card can provide the same convenience of a credit card without the worry of accumulating more debt.

You want to pay for everyday purchases conveniently

There’s something about a debit card that makes it convenient when you’re paying for everyday purchases. Things like gas, groceries, and coffee are relatively smaller purchases, and you don’t have to worry about them breaking the bank. In fact, ConsumerCredit.com did a study on this and found that every single respondent who was between 18 to 24 years old used a debit card for everyday purchases. 80% of their respondents overall used a debit card for everyday purchases, as well.

When you’re bad at paying bills

If you have enough self-awareness to know that you’re no good at paying bills, then you should use a debit card. Unlike a credit card, you won’t receive any bills for using it. Many banks now offer excellent online tools to budget and manage your money, so you can control where you spend your cash without having to worry about racking up a massive bill that you can’t afford at the end of the month.

When you want to limit your spending, but don’t want to carry cash

Building off the point above, if you’re going to manage your spending, I told you cash was a great option. But what if you don’t want to deal with all of the singles, fives, and loose change? It can get annoying quick.

A debit card provides an excellent solution for those who want to manage their spending. Those of you that have read my articles before know I’m a massive fan of YNAB. YNAB started with the assumption that you’d be using a debit card, so the software works the best when you do that. If you’re looking for an easy way to manage how much you spend, double down with both a debit card and a YNAB subscription.

» MORE: Read our YNAB review.

When you want the best of both worlds

I look at debit cards as the best of both worlds between cash and credit. You get the ease and spending limitations of using cash as well as the convenience and some of the protections (see more below) of using a credit card. It’s no wonder we see so many studies showing how frequently people use this type of payment method.

To determine which payment method is best, you have to consider many different factors. There are certain situations where it’s going to be best to use cash. Other cases may call for a debit card or even a credit card. My advice to you is first to identify what your financial goals are (i.e., are you trying to stay out of debt or curb your spending) then choose a default payment method that suits you best.

Another thing to consider is using all three methods. For example, you can keep cash in your wallet for unexpected expenses, use a debit card for all your everyday purchases, and then use your credit card for large purchases and travel.