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Ask the expert: How should I pay for the holidays?

November 18, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: This holiday season, am I better off paying my bills with cash, credit cards, or a debit card?

A: As you head out to do your holiday shopping, there are three things you should think about when choosing whether to pay with cash, credit card, or debit card:

  1. Convenience
  2. Cost
  3. Budgeting

Cash, credit cards, and debit cards each have their advantages and disadvantages with regard to these three factors. Which is best for you depends on how you handle your finances generally:

  • Cash can give you an easy way to stay within your budget -- just fill your wallet with the amount you intend to spend, and it will be obvious when you've reached your limit. Cash also shouldn't cost you anything, as long as you stick to your own bank's ATMs. The drawback is that it is not always convenient (or safe) to carry around enough cash to cover holiday shopping.
  • Debit cards solve the inconvenience of cash, but they mean you have to keep a tighter track of your spending to stay on budget. Also, if you have opted in for overdraft protection, you have to make sure you stay up-to-date on what your checking account balance is so you don't overdraft your account. Holiday shopping is expensive enough without adding overdraft fees.
  • Credit cards are also convenient, but they make it all too easy to exceed your budget. There is also a cost involved if you don't pay off your balance within the first month, though on most purchases the interest on a credit card balance is a cheaper price to pay for overspending than overdraft fees on a debit card.

All-in-all, a debit card is probably best for disciplined shoppers -- those who regularly stay within budget and avoid overdrafts. If you have trouble keeping track of your spending, a cash allowance for holiday shopping might be the best way to go.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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