The 2020 holiday season is upon us. As you prepare your shopping list and head to the stores or online, you may be wondering which payment method is best. More and more options are becoming available when shopping online such as PayPal, Apple Pay, and Google Pay. Even in-store options extend beyond traditional cash or card choices. Different shopping experiences and personal situations call for different methods of payment.
Pros and Cons of Using Cash
Even if you create a budget for holiday spending, it can be easy to stray and buy gifts that cost more than you planned when you have available credit limits. One way to avoid this scenario is by withdrawing a pre-determined amount of cash from your bank account and leave your credit cards at home.
Paying for your holiday purchases in cash can also have a psychological benefit. When you hand over your cash to pay, you can physically see how much money you are spending and can compute how long it took you to earn it. Because a higher price means handing over more money, it is likely that you will spend less. With credit card purchases, the money is not being taken from you right away, which could lead to you spending more than you can really afford. If possible, you should try to avoid racking up credit card debt, as it could have a negative impact on your credit score.
If you are in a position where you need to monitor your spending carefully this year, try using the “envelope system” for budgeting. Place a set amount of cash in an envelope for every category of spending, or person on your list, and only purchase items that you can afford with the cash in that envelope.
One potential downside of using cash for holiday purchases is that it could get lost or stolen. There is no way to replace the money when that happens. To prevent a possible loss, consider carrying only the minimum amount of cash that you need on your person and remain vigilant to your surroundings.
Credit Cards Can Be a Good Choice When Used Wisely
It can be extremely easy to get into debt when using credit cards. If you use a credit card to spend more than you can really afford, you won't be able to repay the entire balance when your minimum payment comes due. Not paying off your entire balance each month will result in your charges accruing interest, which can rack up fast. If interest charges are being added to your balance each month, the amount you owe can quickly grow out of control.
If you feel that you may be easily tempted to overspend, you could ask your credit card issuer for a lower credit limit. However, you'll want to ensure that you still have enough wiggle room with your credit limit so you won't accidentally spend past it. Many credit card issuers charge a penalty when you exceed your credit limit. Creating a budget so you know how much you can charge to your credit cards and realistically pay off at the end of the month is a good way to avoid finding yourself in credit card debt.
Security is one advantage of using credit cards over cash for holiday purchases. If you lose the card or someone steals it, you can contact your credit card company to put a freeze on further purchases. An additional advantage is that many credit card issuers offer rewards as incentive to use your card. Many credit card companies utilize a point system that account holders can convert into cash back, gift cards, airline miles, and more. The best way to take advantage of credit card rewards is to pay your bill in full when a payment is due to avoid incurring interest charges. Credit cards can also be a good way to make purchases online - just be sure you're shopping from a reputable website.
Using a Debit Card Can Be an Alternative to Cash
When you use a debit card, your bank immediately deducts the amount you spent from the bank account the card is linked to. This is different that a credit card which basically loans you the funds, and you pay it back later. Using a debit card can be safer than carrying cash, but it is still possible to overdraw your account since the funds need to available right away. Make sure there are enough funds in your bank account to cover your purchase before you swipe your debit card to avoid insufficient funds fees or overdraft fees.
Like credit cards, debit cards can also be used to make purchases online, but because they don't offer the same liability protections as credit cards, and because your debit card number is tied to your entire bank account, you should use extreme caution when entering your debit card number on any website.
Mobile Payment Options
Although the ability to pay for purchases using card or banking information stored on your phone has existed for a while, people have been slow to warm up to the idea. However, that is changing with ever-increasing concerns about security and people desiring contactless payment methods due to the COVID-19 pandemic. PayPal, Apple Pay, Android Pay, Samsung Pay, and Google Pay are just some of your many options for mobile payments.
Many people are surprised to learn that, like a chip-enabled card, mobile payments offer increased security over swiping a credit or debit card because the transaction is encrypted and does not transfer your actual financial information. Similarly, when you use one of these payment methods when shopping online, your financial information is not received directly by the site you are shopping on. Options such as PayPal handle the transaction and encrypt your payment to the online retailer. One downside is that your favorite retailers may not yet accept the type of mobile payment you want to use.
Whichever payment method you opt for, the most important step is to be sure you have the available funds whether you are paying upfront with cash, using a debit card, or charging the amount to your credit card with the intention of paying it all off when your bill comes due. Having to pay insufficient funds fees, overdraft fees, interest charges, or late fees can add financial stress to you and your family. For more tips on money management this holiday season, visit BankFive.com.
Pros and Cons of Using Cash
Even if you create a budget for holiday spending, it can be easy to stray and buy gifts that cost more than you planned when you have available credit limits. One way to avoid this scenario is by withdrawing a pre-determined amount of cash from your bank account and leave your credit cards at home.
Paying for your holiday purchases in cash can also have a psychological benefit. When you hand over your cash to pay, you can physically see how much money you are spending and can compute how long it took you to earn it. Because a higher price means handing over more money, it is likely that you will spend less. With credit card purchases, the money is not being taken from you right away, which could lead to you spending more than you can really afford. If possible, you should try to avoid racking up credit card debt, as it could have a negative impact on your credit score.
If you are in a position where you need to monitor your spending carefully this year, try using the “envelope system” for budgeting. Place a set amount of cash in an envelope for every category of spending, or person on your list, and only purchase items that you can afford with the cash in that envelope.
One potential downside of using cash for holiday purchases is that it could get lost or stolen. There is no way to replace the money when that happens. To prevent a possible loss, consider carrying only the minimum amount of cash that you need on your person and remain vigilant to your surroundings.
Credit Cards Can Be a Good Choice When Used Wisely
It can be extremely easy to get into debt when using credit cards. If you use a credit card to spend more than you can really afford, you won't be able to repay the entire balance when your minimum payment comes due. Not paying off your entire balance each month will result in your charges accruing interest, which can rack up fast. If interest charges are being added to your balance each month, the amount you owe can quickly grow out of control.
If you feel that you may be easily tempted to overspend, you could ask your credit card issuer for a lower credit limit. However, you'll want to ensure that you still have enough wiggle room with your credit limit so you won't accidentally spend past it. Many credit card issuers charge a penalty when you exceed your credit limit. Creating a budget so you know how much you can charge to your credit cards and realistically pay off at the end of the month is a good way to avoid finding yourself in credit card debt.
Security is one advantage of using credit cards over cash for holiday purchases. If you lose the card or someone steals it, you can contact your credit card company to put a freeze on further purchases. An additional advantage is that many credit card issuers offer rewards as incentive to use your card. Many credit card companies utilize a point system that account holders can convert into cash back, gift cards, airline miles, and more. The best way to take advantage of credit card rewards is to pay your bill in full when a payment is due to avoid incurring interest charges. Credit cards can also be a good way to make purchases online - just be sure you're shopping from a reputable website.
Using a Debit Card Can Be an Alternative to Cash
When you use a debit card, your bank immediately deducts the amount you spent from the bank account the card is linked to. This is different that a credit card which basically loans you the funds, and you pay it back later. Using a debit card can be safer than carrying cash, but it is still possible to overdraw your account since the funds need to available right away. Make sure there are enough funds in your bank account to cover your purchase before you swipe your debit card to avoid insufficient funds fees or overdraft fees.
Like credit cards, debit cards can also be used to make purchases online, but because they don't offer the same liability protections as credit cards, and because your debit card number is tied to your entire bank account, you should use extreme caution when entering your debit card number on any website.
Mobile Payment Options
Although the ability to pay for purchases using card or banking information stored on your phone has existed for a while, people have been slow to warm up to the idea. However, that is changing with ever-increasing concerns about security and people desiring contactless payment methods due to the COVID-19 pandemic. PayPal, Apple Pay, Android Pay, Samsung Pay, and Google Pay are just some of your many options for mobile payments.
Many people are surprised to learn that, like a chip-enabled card, mobile payments offer increased security over swiping a credit or debit card because the transaction is encrypted and does not transfer your actual financial information. Similarly, when you use one of these payment methods when shopping online, your financial information is not received directly by the site you are shopping on. Options such as PayPal handle the transaction and encrypt your payment to the online retailer. One downside is that your favorite retailers may not yet accept the type of mobile payment you want to use.
Whichever payment method you opt for, the most important step is to be sure you have the available funds whether you are paying upfront with cash, using a debit card, or charging the amount to your credit card with the intention of paying it all off when your bill comes due. Having to pay insufficient funds fees, overdraft fees, interest charges, or late fees can add financial stress to you and your family. For more tips on money management this holiday season, visit BankFive.com.