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

What series of mental comparisons led to this woman's decision to choose paper over plastic? See more banking pictures.
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­­Life comes with many choices. Fresh or frozen? Blonde or brunette? Creamy or chunky? Republican or Democrat? Paper or plastic?

That last choice covers two completely different situations. Should you choose paper or plastic bags when shopping, and should you pay for the items going in whichever type of bag you choose with paper money or a plastic card? And if you choose plastic, should you go with credit or debit? Life is nothing if not a flurry of decisions.

If you're a typical American, you have access to all three of these most commonly accepted forms of payment. But when you're jostled against throngs of other shoppers at the mall, which type is best if one of those shoppers adroitly lifts your wallet without your knowledge? And when all the shopping receipts come in, which type will take the smallest bite from your finances and mental health?

­If author Tony Howlett is correct, debating the virtues of one of the three -- paper money -- will be a purely academic exercise. "Cash will die a natural death; we will willingly abandon it for more convenient financial tools," Howlett theorizes [source: Howlett]. For most consumers, this isn't such a bad thing. Plastic forms of payment offer convenience. However, a loss of cash also equals a loss of anonymity, Howlett points out. Purchases made using computerized methods of payment like credit and debit cards are easily tracked. This is good for law enforcement, but bad for criminals, for example.

Howlett, an IT professional, banking consultant an­d author of Open Source Security Tools, admits his theory is a bit nutty -- he lists it under "Bold Claims" in a presentation based on his book, The Death of Cash [source: Howlett]. However, the numbers support his hypothesis: There were 984 million credit and debit card accounts extant in the United States in 2006 issued by Visa and MasterCard alone [source: Woolsey and Shulz]. That said, it may be a few years before cash dies its natural death. In the meanwhile, read on to find out which is better, cash, credit or debit.

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Advantages of Cash, Credit and Debit

Cash's fatal flaw? It's easily stolen.
Cash's fatal flaw? It's easily stolen.
Bay Ismoyo/AFP/­Getty Images

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.

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Sources

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  • Lazarony, Lucy. "The ins and outs of debit cards." Bankrate. Accessed November 21, 2008. http://www.bankrate.com/brm/news/cc/20010813a2.asp
  • Lorek, L.A. "More consumers using credit cards." San Antonio Express. November 10, 2008. http://www.mysanantonio.com/business/34236884.html
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