Is it best to shop with cash, credit or debit?

Both credit and debit cards are advantageous because they provide proof of ownership -- your name (and sometimes photo) emblazoned right there on the front of the card. But credit cards extend this protection further. Under the Fair Credit Billing Act, the owner of a lost or stolen credit card is responsible for only up to $50 worth of fraudulent purchases. Even more, many credit cards automatically grant you an extended warranty on items you purchase using them.

Debit cards offer similar security through another U.S. law, the Electronic Fund Transfer Act. This law limits a debit card holder's fraud liability to $50 as long as he or she alerts the issuing bank of the fraud within two days of discovery. After the initial two day period, the liability for the cardholder increases to $500 [source: Bankrate]. While most retailers will demand you produce a photo ID when making a credit card purchase, you aren't bound by law to do so; only a card bearing your signature is required by credit card companies to validate the transaction. Since most banks offer debit cards with personal identification numbers (PINs) that only the cardholder knows (or should know), the card should be useless if it's stolen. So, debit cards actually have a leg up over credit cards as far as security goes.

­Cash and debit cards hold another advantage over credit cards; they lack the fees associated with credit cards. Credit card companies make their money by charging interest on balances each month, which can be significant, since Americans that use credit cards carry an average of $16,635 in debt, not including home mortgages [source: U.S. News and World Report]. Cash, if withdrawn from the bank where the account is held, is issued both fee- and interest-free. Debit cards can also come ­without fees. Most banks offer some kind of fee-free debit card account, but beware: Banks have come to make money from the debit cards' popularity with consumers by charging overdraft fees. These fees average almost $35, and pull an annual windfall of $17.5 billion for the banking industry [source: Lorek].

Overall, debit cards tend to emerge as the clear winner among this triumvirate of payment methods. They provide the security of a credit card and the fee-free benefit of cash -- if you pay close attention to your account. Being attentive to your account can keep you from the pains of overdrawing and its associated fees, and help alert you to any fraud.

­The advantages of using cash, credit or debit are largely context-specific. Depending on the type of shopper and how security-conscious you are, each form has its merits.

If you're a shopaholic who wants to become more frugal, cash is the way to go. Studies of consumer psychology suggest that people who use cash are less likely to spend it frivolously or impulsively. This is due to the "pain of paying," based on the transparency cash provides [source: APA]. When you pay for an item using cash, you literally watch your money part from you. With credit or debit cards, the transaction is less transparent and the pain of paying is put off until a later date, generally when the credit card bill arrives or the bank account is balanced. By then, however, the purchase has long since been made.

Cash's fatal flaw is that it's easily compromised. Any cash found in a wallet that's stolen is gone for good -- there are few ways your local police force can link you to lost cash. This isn't the case with debit cards and credit cards; from a security standpoint, both forms of plastic beat cash.