With holiday shopping gearing up, a plethora of stressful decisions includes not only what you buy and how much you spend but how you pay.
Cash, credit card, debit card, prepaid card, electronic and mobile payment, personal check, layaway, deferred-interest financing — the choices seem endless.
What's the best way to pay during the holidays to ensure you are paying wisely and protecting yourself against identity theft and unnecessary debt?
The short answer is that no one payment method is a clear winner, but using credit cards and paying off the monthly balance probably has the most advantages, as long as credit cards are not your Spending Smart kryptonite.
"The No. 1 choice is definitely going to be a credit card," said Paul Stephens, director of policy and advocacy at the Privacy Rights Clearinghouse, adding that cash, at least for smaller purchases, would be his second choice.
Most Americans apparently disagree, at least for in-store purchases on Black Friday. A recent survey by Bankrate.com found that 38 percent plan to pay with cash, 34 percent with debit cards and 24 percent with credit cards. Among millennials, just 11 percent preferred credit cards.
Credit cards. Some people despise credit cards for the potentially pricey debt risk they present, but if you're OK with them, they're hard to beat on a number of criteria. They're great for security. While credit card numbers are easy to steal, your liability for fraudulent purchases is very limited and almost always zero. Most importantly, if fraud happens, you haven't laid out any of your money yet, so it's the bank's money at stake, not yours.
Advantages include helping to build a credit history, and with reward cards, earning money back. Little-known, or oft-forgotten, benefits include extended manufacturer warranties on products bought with the card. American Express cards have the best policies for such warranties, according to a recent study by CardHub.com.
Of course, the key is to use them as charge cards, not credit cards, paying off the balance each month and not incurring ridiculous finance charges, late payments or over-limit fees. Then you get all the goodies and none of the downside.
One strategy: Put all holiday spending on a separate credit card with a low limit, and commit to paying it in full or, at the least, repaying that debt in the first quarter of 2015. That will not only allow you to avoid paying excessive interest, but will prevent holiday spending from being mingled with existing debt.
Debit cards. These are great for controlling spending; it's like paying with cash you already have in your checking account. But debit cards are lousy for security because federal protections aren't as strong as for credit cards — although card companies, such as Visa and MasterCard, say they won't hold you liable for fraud. The main drawback is that if fraud occurs, your money is actually missing from your bank account, unlike with a credit card. And by federal law, banks can take up to two weeks to replace your money, potentially putting a stranglehold on your cash flow.
"For many people, particularly during the holidays, this can be a shock to their finances," Stephens said. "We've been preaching not to use debit cards for many years ... before point-of-sale breaches were becoming a daily occurrence."
Prepaid cards. Many consumers use reloadable prepaid cards as an alternative to traditional checking accounts. The cards typically are loaded with funds by the consumer or a third party, such as an employer. Consumers can use the cards to make payments, store money, get cash at ATMs, receive direct deposits and send money to other consumers.
The Consumer Financial Protection Bureau recently proposed enhanced consumer protections for prepaid cards, which for many have taken the place of debit cards and whose use is growing exponentially. But proposed protections would not be in place for this holiday shopping season.
Fees are the main downside of prepaid cards. "You really need to look at the terms very carefully," Stephens said.
The advantage is you can't overspend or incur interest charges.
If you opt for prepaid cards, make sure they are the type you can register. If a card is lost or stolen, you have a way to restore the money, Stephens said.
Another little-known downside of prepaid cards: If you attempt to return merchandise, many retailers will issue the refund only to the same card. If it's a prepaid card, you might have disposed of it already. "So if you use a prepaid card, make sure you keep it," Stephens said.
Consumer Reports rated the Bluebird card by American Express and Wal-Mart as best. It comes without a monthly fee, no inactivity fees or fees for calling customer service, along with a bill-paying feature. It also liked the Chase Liquid Visa and American Express Serve.
Payment apps. Smartphone apps and electronic payment systems aren't really separate forms of payment, but Apple Pay, PayPal and Google Wallet are different ways to pay. For security and debt risk, it depends on what the underlying payment method is, a credit or debit card, for example. "You certainly don't want it to be billed to your cellphone account because that gives you virtually no consumer protections," Stephens said. And people tend to not safeguard their phones like their wallets, so at least use a security code on your phone or activate its fingerprint reader. Logging out of payment apps every time and requiring an additional password for the apps is a good idea, Stephens said.
Deferred-interest financing. That's a fancy term for enticing retailer come-ons such as "No-interest financing until 2017!" Of course, there's a gotcha. If you don't pay in full by the end of the promotional period, high-rate interest is applied retroactively to the entire original balance. Consumer Reports voted deferred-interest credit cards as 2014's "worst idea" in credit cards, and its advocacy arm has called for a ban on them, calling them "dangerous debt traps."
Personal checks. Hardly a favored form of payment for many people anymore, checks are not only inconvenient but a security risk. Bank account and routing numbers are printed on the check, along with your name and possibly address.
However, using checks doesn't incur debt and, with the check register, you'll have an up-to-the-minute record of your spending and money available, notes Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Another downside? "People in the line behind you will give you dirty looks," she said. If you must write checks, use a gel pen that will prevent a fraud called check-washing.
Cash. Money just works, doesn't create debt, controls overspending and doesn't lead to identity theft. The main risks of cash are that you will be mugged or lose the money, it's impractical to use for expensive items, you can't use cash online and you may incur ATM withdrawal fees.
Layaway. Layaway offers few upsides if you can use a credit card instead. Rather than paying layaway fees and making several trips to the store to make installment payments, you might as well periodically stash money under your mattress and purchase the item when you have enough. An exception might be using layaway for a gift item that might sell out before you have the cash to buy it.