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What is the best payment method for online purchases?

June 28, 2016

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

Q: What is the best way to pay for stuff online?

A: As commonplace as online commerce has become, it does not pay to get complacent, and you are correct to raise concerns about security. There are also financial differences in the different methods of payment.

Broadly speaking, you have three options: credit cards, debit cards and online payment services like PayPal.

Credit cards

Purchases protected from fraud

From a security standpoint, credit cards offer consumers excellent protection against unauthorized transactions, if they are reported on a timely basis. Financially, credit cards allow people to use the money interest-free until the bill is due, during which time their money could be earning a little extra interest in their savings accounts. Another advantage of credit cards is that many offer rewards programs, so you can get a little something back on your purchases.

Easy to accumulate debt

On the other hand, there are two major problems with credit cards. Credit lines make it easy to spend more than you have, which can lead to racking up an uncontrollable debt balance. And, with credit card interest rates running in excess of 13 percent, that debt costs much more than any potential extra interest on savings accounts. So, use this method only if you are diligent about limiting your spending and paying your balances off in full every month.

Debit cards

Avoid overspending

Debit cards make it easier to limit your spending to what you have in your checking account, and thereby avoid overspending and onerous credit card interest.

Less protection than credit cards

On the other hand, debit cards provide less protection against fraudulent purchases. This is a particular concern because they provide direct access to your checking account. Also, whether the transaction is legitimate or not, directly drawing on your checking account can result in expensive overdraft fees. Finally, while debit cards rewards programs once were commonplace, they have largely disappeared in recent years.

Online payment services

Reduce security risks

Using an online payment service like PayPal can allow you to create a buffer between various online vendors and your actual accounts, so this can limit your security exposure.

Unable to earn interest

At the same time, balances kept with these services do not earn interest, nor are they protected by FDIC insurance. So, be sure to transfer just what you need into these payment accounts, and make your purchases with that money shortly after it is available.

Credit, debit or online payments: Which will you choose?

Face it - all e-commerce is a trade-off between security and convenience. Each vendor you deal with, and each transaction you enter into, is a potential security risk. To the extent you can limit how many vendors you transact with online and consolidate purchases into fewer transactions, you can help rein in the risk you are taking.

Ultimately though, if technology is the source of this security problem, it is also part of the solution. Use technology, such as transaction alerts and online account monitoring, to keep closer track of all activity in your accounts. No approach is completely safe from cyber threats, but vigilance can help you monitor the size of any potential problem.

Comment: How do you prefer to pay for your online shopping purchases?

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