Minnesota resident Jennifer Orr has herself on a cash diet this holiday season. “I’m already in debt and I don’t want it to get even worse,” she tells MainStreet, explaining that a series of unfortunate events, including a brief stint of unemployment, left her finances in dire straits.
Orr isn’t the only one in the red this December. A recent Consumer Reports poll found that 13.6 million Americans are still saddled with last year’s leftover holiday debt [link to MS rather], which may be why the majority of consumers say they plan on paying cash for their holiday purchases this year.
But is cash really the best way to pay for your holiday gifts? According to experts, it depends on the person.
“Part of the reason people go to cash is it forces you to adopt an envelope mentality,” says Marc Schwanhausser, senior multi-channel financial services analyst at Javelin Research & Strategy, a market research firm that monitors consumers’ spending habits. “Once the envelope is empty, you stop spending.”
So if, for example, you find yourself in a situation similar to Orr’s or you’re a shopaholic, cash – which Schwanhauser calls “a time-tested effective way” of staying within your budget – should absolutely be your king.
When to Use Credit Cards
California resident Hatti Hamlin, who doesn’t carry any outstanding credit card debt, is putting all of her holiday gifts on a credit card this year. “[It] gives me mileage rewards,” she tells MainStreet. If you’re able to keep paying your bills and avoid interest charges, you might want to keep the plastic on hand.
“If you’re someone who pays off their bill on time, there’s no reason not to get something back for it,” Schwanhausser says, pointing out that rewards programs aren’t the only thing that credit cards have going for them. In addition to offering consumers certain protections on their money (you are, after all, spending somebody else’s at first swipe), credit cards make up for some of cash’s more inherent disadvantages.
You shouldn’t, after all, carry large amounts of cash on your person and online retailers haven’t exactly found a way to take cash payments. Moreover, for the disciplined shopper, monthly credit card statements can be an adequate way of tracking what it is specifically that you spend your money on over time.
This is also an advantage of using a debit card, many Americans’ current go-to payment method.
When to Use Debit Cards
The credit card’s distant cousin isn’t without its drawbacks either.
“Many people flow a lot of money through their checking accounts,” says J.J. Montanero, a financial planner with USAA [what’s this?], explaining that consumers electing to “rob Peter to pay Paul” (or, say, use rent money to buy mom a pair of Ferragamo shoes for Christmas) may end with an equally big financial deficit come the new year.
But What’s Right for Me?
Those with middle of the road spending habits may have a harder time selecting what to use to pay for gifts this year. So how can you figure out what method of payment is right for you?
“It begins with a certain amount of introspection,” Schwanhausser says, explaining that at the end of the day, no payment method is right or wrong, some are just better suited to the needs on a particular individual. “You need to ask yourself ‘what’s my money personality?”
Anita Eisthen, certified financial adviser and finance expert for JustAnswer.com agrees, explaining that each person needs to carefully reflect on their spending habits before choosing one method over another. According to Eisthen, there are six criteria a person can apply when trying to chose between cash, credit and debit. MainStreet broke down the questions you can ask yourself to help you figure out what to store in your wallet this holiday shopping season.
- Budgeting. Are you prone to overspend, or do carefully monitor your money on a day to day basis? Eisthen agrees that those in tough situations need to stick to cash until their financial situation improves.
- Safety and Security. Some forms of payment are more easily lost or stolen (cash), while others may expose consumers to identity theft (debit, credit).
- Cash Flows. What money do you have in your accounts right now, and what money are you expecting? Eisthen points out that those who are guaranteed Christmas bonuses in January may not need to abandon their credit card in December.”It is easier to justify using a credit card now, especially if you are short of funds today,” she says.
- Cost of Funds. Are you carrying a balance on your credit card? Because if you are, it’s going to cost you more than the sticker price to pay for a gift. Credit cards carry interest rates of up to 30% on balances that carry over from month to month. Debit cards can also carry unexpected fees, such as charges for a negative balance, that need to be taken into consideration when choosing how to buy a particular item.
- Bonuses. Does your credit or debit card have a rewards program you are failing to take advantage of? Many consumers benefit from cash-back or points rewards when they use their card for purchases.
- Cash Outlay. “Some methods of payment require no cash outlay,” Eisthen says. This includes using rewards points on credit cards or using a barter system to buy gifts. If you have no cash to your name, you may want to pursue these less common alternatives.
How exactly do credit and debit card differ? Find out in this MainStreet article on dealing with debit card fraud!
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.