There are so many different ways out there to conduct transactions that it may be confusing which one is best. Not surprisingly, there is no one way that is best for every situation. I am going to go through many different common payment methods and give you situations in which you would or would not use that method.
Cash
Advantages: Cash is accepted almost anywhere, for almost any on-the-spot transaction. It is VERY rare to overdraft your bank account using cash.
Disadvantages: You can not mail cash. Stolen or lost cash is not replaceable. It can be dangerous to carry too much cash around. Sometimes it is even more of an inconvenience to use cash than a card (think gas stations here). Cash is very hard to track because most people don’t keep a record of it. If you accidentally accept a counterfeit bill, it is your loss.
Use cash: If you want to pay someone immediately, with no hassle to them or yourself. Accept cash up to a few thousand dollars for payment as long as you provide a receipt.
Don’t use cash: If you are paying back a debt or doing any kind of business transaction (such as buying a car), unless both parties have a copy of a receipt of some kind. Also, avoid using cash if you are doing a very large transaction—over several thousand dollars, unless you are in a secure place and have secure transport for the money.
Checks
Advantages: Checks are great for keeping track of purchases, because unlike cash, the bank keeps a copy of every check you write for 7 years. You also have the option of writing on the memo line, which further helps you remember what you spent your money on. Also unlike cash, if money is stolen from your account using a check, the bank will reimburse you (it can take up to a month though). You can also place a stop-payment on a check if it is lost or if you think it might have fallen into the wrong hands.
Disadvantages: Checks are burdensome to carry around and to write, and many places don’t accept checks because of the high risk of insufficient funds. Checks also have your account information, address, and name printed on the front and are sometimes used to steal money from your bank account. Also, once money from a check comes out of your account, you can not get it back unless fraud was somehow involved. For example, if you do business with a shady business person, you can’t get your money back from the bank if you use a check just because the person didn’t deliver the goods/services promised.
Use checks for: sending money in the mail (use a secure mailbox), giving money to family members, businesses, or others you trust, accepting money from family members or others you trust.
Don’t use checks for: Don’t accept checks from a person wanting to buy something from you or pay you for something unless you completely trust that person. Ask for cash; or, if the dollar amount is large, ask for a cashier’s check or wire transfer. Don’t send a check to or give a check to someone who you don’t trust since your account information is right on it.
Debit Card
Advantages: Debit cards are easy to carry around, easy to use, and are accepted almost everywhere. The funds used from a debit card are carefully tracked by the bank, so you can see where your money is going—although sometimes this tracking is somewhat cryptic. Stolen debit cards are replaceable, as are any funds that are stolen with a debit card.
Disadvantages: Couples using one checking account with two debit cards can easily overdraft their bank account if they are not very careful to keep track of and disclose all purchases to each other. Also, because of a complicated hold system that banks and merchants are on, using a debit card to reserve a hotel room or auto rental can cause you not to have access to your other money, usually for about 7 days. Money stolen using your debit card is recoverable, but it sometimes takes up to a month. For some people, this can cause an avalanche of late payments.
Use debit cards for: Everyday purchases, withdrawing from an ATM, getting cash-back at stores. If your debit card has a credit card logo, you can use it anywhere you might otherwise use a credit card. This is especially helpful to those who are careful with their checking account money, but not careful if they are using a credit card.
Don’t use debit cards for: Purchases at a retailer you feel is shady, and all reservations at hotels, flights, and rental cars (see above). You should consider putting large purchases on actual credit cards because they give you more protection. It is also advisable to avoid debit cards if you can’t seem to keep your checking account in the black when you use them.
Money Orders/Cashiers Checks
Advantages: Funds are more guaranteed than with standard checks. You don’t have to have a checking account to get them. You can place a stop-payment on them if they are lost or stolen.
Disadvantages: If you are accepting a cashier’s check, you must remember that the funds are not 100% guaranteed. There is a possibility of stop-payment, and also counterfeit/forged cashier’s checks are common. If you are sending a cashier’s check, it is important to note that once it is cashed, you can not get the money back.
Use Cashier’s checks for: Sending/accepting larger amounts of money to/from someone you love or making purchases from a reputable company. Use money orders to pay bills if you don’t have a checking account since it provides some proof of payment and you can send them in the mail.
Don’t use cashier’s checks for: making purchases from individuals or companies that you are not sure about. Example: you wouldn’t purchase a car from someone with a cashier’s check until you have the keys and title in your hands and you are certain you want the vehicle.
Online Bill-pay
Advantages: The advances in online bill-pay make it easier than ever to pay almost anyone from the comfort of your home with no stamps, envelopes, or checks. Additionally, most bill-pay systems don’t even put your checking account number on the front of the check, and even guarantee on-time payment! Furthermore, they allow you to be in complete control of how much/when your payment is and often even when the money comes out of your account. People who pay their bills online have fewer instances of fraud than those still sending out checks in the mail. Companies like to accept bill-pay because most banks send guaranteed money.
Disadvantages: You have to have access to a computer with internet, and some banks have confusing systems. Also, since you are still in complete control, if you don’t set up an automatic, recurring payment, you might still be late on your payment if you forget to send it out.
Use bill-pay for: Paying almost all of your bills. Some banks even allow you to send a paper check with bill-pay to anyone in the United States—and they pay the postage.
Don’t use bill-pay for: Paying someone who needs money today or tomorrow because banks frequently still have to mail a check just like you would.
E-pay, automatic payment, electronic billing, etc
E-pay is when a company electronically takes money out of your account or credit card automatically, without sending a check or using your bank’s bill-pay.
Advantages: Since the money is sent electronically, it is very fast—often the same day. If you sign up for recurring e-pay, you will never have a late payment with that company unless the money is not in your account on the day the debit should happen. Many companies will give you some kind of incentive to set up e-pay since they are much less likely to have to deal with insufficient funds checks and late payments. E-payments are also disputable with your bank.
Disadvantages: You are giving this company access to your account. Some companies have been known to just take from you whatever amount they think you owe, if at one time you gave them authorization to make an e-pay. Gyms, insurance companies, internet service providers, and cell phone companies are often problematic. It is much harder to dispute a bill after you have paid it, and if you allow a company to have e-pay access to your account, it is difficult to prevent them from getting the money they think they are owed. Sometimes, unscrupulous companies can get an e-pay through even if you place a stop-payment on the payment simply by changing the dollar amount by a few cents or slightly altering the requestor’s name.
Use e-pay for: making payments to any company who you trust and does not make frequent changes to your monthly bill. To make it safer, you can often also use e-pay through your credit card, that way if you run into problems, you can just shut down your card instead of your checking account.
Don’t use e-pay for: making payments to anyone who you don’t trust, and it is recommended to avoid such payments to anyone who has any type of renewable contract.
Wire Transfer
Advantages: Wire transfer is an excellent way to get guaranteed money from one place to another very quickly.
Disadvantages: Wire transfers nearly always cost money. The amount of the fee depends on the financial institution, but be aware that both the sender and the receiver almost always have to pay something. Also, it is important to note that once you send a wire transfer, the money is gone, just like cash. For this reason, many scam artists request to be paid via wire transfer.
Use wire transfers for: Sending money to a foreign country; sending money quickly to a loved one; sending large amounts of money between two of your accounts, sending guaranteed funds to a business you trust.
Don’t use wire transfers for: sending money to anyone you don’t completely trust, or for goods/services not yet provided. Remember, there is no way to get wired money back.
Direct Deposit
Advantages: The money goes into your account automatically. You don’t have to go to the bank, you don’t have to drive to pick up your check if you are sick or on vacation, and your money is available immediately to pay checks or pull out cash. Most banks will give you a better checking account if you can get direct deposit set up because they know you will more likely stay with their bank if you do.
Disadvantages: Direct deposit payments can generally only be sent to you by an employer or government institution. Some employers give non-direct deposit employees their checks a day earlier than the direct deposit goes in. It generally takes a couple of pay-periods for direct deposit to set up, change, or cancel. Small employers who have trouble making payroll are not going to be better just because they have direct deposit. Use Direct deposit: For employment checks, tax returns, and social security payments.
Don’t use direct deposit: If you are planning to change banks very soon.
Credit Card
Advantages: Credit cards are easy to use, and have many purchase incentives to urge frequent use. They are also the safest way to do transactions with non-reputable companies or people since you can usually dispute them if something goes wrong. Another extremely nice benefit is that if someone (such as a rental car company) puts a hold on your credit card for say, $300, it will not affect the money in your checking account (and possibly ruin your vacation). It is better to have a disputed item on a credit card, because unlike a debit card, which ties up your money until the dispute is resolved, you are not required to pay the disputed amount (or interest on it) unless the dispute falls through.
Disadvantages: most people have a very hard time resisting making superfluous purchases with a credit card. Studies have shown over and over again that people spend more if they are using a credit card vs. cash or even a debit card. Rewards and points are making the problem even worse. Credit cards are responsible for the financial ruin of many people, and it is not hard to see why, when you consider that a) people spend more on their cards than they otherwise would—making it difficult or impossible to pay off every month b) interest rates are generally very high and c) late fees and other fees are often overwhelming.
Use credit cards: For any purchase from a company you don’t trust; internet purchases; for large purchases to get a free warranty (check with your card to see details); for rental cars to get automatic insurance (again, check your card); for hotel rooms, and for flights. You can also usually safely accept credit cards through companies like paypal for things you sell to people either online or elsewhere, as long as the amount isn’t too large.
Don’t use credit cards: to get cash advances; to put money in your account; or to make everyday purchases if you are afraid you are not disciplined enough to do so responsibly.
