American ExpressAmerican ExpressAmerican ExpressAmerican ExpressAmerican Express
United StatesChange Country

Cash, Debit, or Credit—How to Choose
Which to Use?

By Megan Doyle

At-A-Glance

 

>    If you’re coming from a country where cash is the dominant form of payment, prepare for a surprise!

 

>    Credit and debit cards dominate American payments of $25 or more.

 

>    Paper checks—or cheques—are more often reserved for paying the rent/mortgage. 

 

Paying for things is such a common act that it can be easy to forget that payment methods and customs can vary tremendously from country to country. Here’s a striking example: If cash is dominant in your country, you might be surprised by how widely credit and debit cards are used in the United States instead of cash. 


If you’re new to the U.S., it can help you to understand all the common ways Americans choose to use cash, check, debit, or credit, depending on the type of payment and the amount. There are pros and cons to each payment method, and not all of them can be used for any given purchase.

When To Use Cash

 

In a June 2019 study, the U.S. Federal Reserve found that cash is used in 26 percent of all transactions—but only in 10 percent of transactions worth $25 or more.1 Generally, the Fed said, cash is most often used for low value, in-person purchases. Compare this to Mexico, where nearly 90 percent of consumer transactions were paid in cash in 2017.2 Or India, where 95 percent of transactions were paid in cash in 2016.3 Governments in both countries, however, have more recently begun campaigns to reduce the use of cash. 

 

  • Pros of paying cash
    • Most of U.S. businesses accept cash.
    • You can't incur debt because you can't spend more than you have.
    • You can easily see exactly how much money you have on hand.
    • Cash comes in handy if a retailer requires a minimum amount for credit card payments.
  • Cons of paying with cash
    • You likely can't move online purchases or e-payments (unless the seller allows cash on delivery).
    • Cash offers no protection against fraud or robbery.
    • There is no automatic record keeping, as there is when using a debit or credit card.
    • You generally can't use cash to rent a car or reserve a hotel room.
    • Carrying enough cash for large transactions can be cumbersome or inconvenient.

Use Credit Cards to Make Payments—and Build Credit

 

Credit cards were used for 23 percent of all transactions in the Fed payments study, but are usually used for more expensive purchases since the buyers do not have to pay immediately..4


More than 60 percent of Americans have at least one credit card, and those who do, on average, have four credit cards each.5 In fact, Americans are likely to use their credit card even if they don’t have the cash to pay the bill within 30 days.6 In all, Americans had just slightly more than $1 trillion in credit card debt during the summer of 2019, according to a separate Fed report.7


Credit and debit cards may look the same, but they’re very different. While debit cards are a plastic alternative to cash, credit cards are like instant mini-loans. Credit cards are also different because they help consumers build their credit history, especially if payments are made in full and on time. They also tend to offer rewards, like a small percent of cash back on most purchases, or points that can be redeemed for products and services.


To get a credit card, you need good credit history. But to build a credit history, you need to use credit. That can be a tricky situation if you’re new to the U.S. However, there are options. Secured credit cards, for example, are backed by a cash deposit that acts as collateral. They can help you establish a credit history and boost your credit score. But your credit limit is generally very low—equal to your cash deposit, no more. Increasingly, though, expatriates’ access to standard credit cards is improving. For example, American Express has announced a new partnership with Nova Credit to access your credit history from certain countries so you can be considered for a U.S. credit card.


Importantly, credit cards are not to be confused with charge cards. Though similar, charge card purchases must be paid off in full every month. Comparatively, charge cards are less common in the U.S. because they require excellent credit and have less flexibility than credit cards.


Pros of credit cards

  • They provide a mini-loan without interest cost—as long as you pay the full balance every month by the due date.
  • Credit cards help you build credit history.
  • You can get rewards for purchases you’re already making.
  • Many credit cards have additional perks like extended warranties or free baggage insurance when traveling.
  • Credit cards can help you cover an emergency, such as a last-minute plane ticket or medical expense. 
  • There are many different credit card types to choose from, all with different benefits.

Cons of credit cards

  • Credit cards require discipline because it can be easy to overspend and end up with a large debt.
  • You must watch out for interest and other fees.
  • Debt can grow out of control quickly due to high interest rates.
  • Can be harder to get than a debit card because you must have a positive credit history.

It’s Important to Be Careful with Credit Cards

Since credit cards offer so many benefits, they can seem like the best payment method in a lot of situations. But with reward comes risk. By using a credit card, you incur debt with every purchase. If you fail to pay your bills in full every month by the due date, you are charged interest fees that add to your total debt. When using a credit card, it’s important to have good money management skills, pay bills on time, and avoid overspending.

Debit Cards Are an Electronic Alternative to Cash

Debit cards have become the most common payment method in the U.S., making up 28 percent of all transactions in the Fed study. To have a standard non-prepaid debit card, you must have a bank account.


Like cash, debit cards are most often used when making smaller payments for general merchandise. But they are often used online, not just in-person. 

 

  • Pros of debit cards
    • Debit cards are accepted almost everywhere.
    • They can be used for online payments.
    • You cannot incur much debt because you can only spend what is in your bank account plus a small “courtesy overdraft” amount (overdraft fee).8
    • They are quick, and more convenient than cash or check in most cases.
    • You can use a debit card to withdraw cash from an ATM.
  • Cons of debit cards
    • You must have a bank account with sufficient funds.
    • Debit cards do not help build credit history.
    • Fraud protection is less than with credit cards.

Paying by Check for Housing Payments

 

Compared to cash, checks are quite uncommon, representing only 6 percent of all American transactions in the Fed study. Checks are rarely used for merchandise or entertainment since many stores do not accept them, but they can still come in handy. 


Checks are often used for housing related payments, such as rent.9 This is because many landlords do not accept credit or debit cards, and paying rent in cash would require large sums. Checks are also often used for government and nonprofit payments like tax returns or donations.

 

  • Pros of paying by check
    • Good for large payments when debit or credit isn’t accepted, like rent, property taxes, or home repair and related services.
  • Cons of paying by check
    • You must have a checking account.
    • Many merchants don’t accept checks.
    • You cannot make online purchases unless the merchant accepts checks on delivery.
    • Checks can “bounce” or be rejected if your account lacks sufficient funds. You’ll be charged a fee for bounced checks.
    • Checks are susceptible to forgery and fraud.

The Takeaway

Credit and debit cards are Americans’ most popular payment methods, with cash used mostly for low-value purchases. Checks are the least used, but still come in handy for certain types of transactions. Each payment method comes with its own positives and negatives, and not all are always accepted.

The Author

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.


1 2019 Findings from the Diary of Consumer Payment Choice, The Federal Reserve; https://www.frbsf.org/cash/files/2019-Findings-from-the-Diary-of-Consumer-Payment-Choice-June2019.pdf

2 Global Cash Index Mexico Analysis, PYMNTS; https://www.pymnts.com/cash/2017/in-mexico-ecommerce-has-a-crush-on-cash-usage-payment-methods-javier-vallaure-allpago/

3 Cash Remains Central To India’s Economy, But Competition Is Growing, PYMNTS; https://www.pymnts.com/cash/2018/india-economy-demonetization-digital-payments/

4 2019 Findings from the Diary of Consumer Payment Choice, The Federal Reserve; https://www.frbsf.org/cash/files/2019-Findings-from-the-Diary-of-Consumer-Payment-Choice-June2019.pdf

5 A Look at U.S. Consumer Credit Card Debt, Experian; https://www.experian.com/blogs/ask-experian/state-of-credit-cards/

6 Do People In Other Countries Use Credit Cards As Much As Americans?, NerdWallet; https://www.nerdwallet.com/blog/credit-cards/people-countries-credit-cards-americans/

7 Consumer Credit – G19, The Federal Reserve; https://www.federalreserve.gov/releases/g19/current/

8 Courtesy overdraft: bad for customers, Bankrate; https://www.bankrate.com/banking/checking/courtesy-overdraft-bad-for-customers/

9 2019 Findings from the Diary of Consumer Payment Choice, The Federal Reserve; https://www.frbsf.org/cash/files/2019-Findings-from-the-Diary-of-Consumer-Payment-Choice-June2019.pdf