Credit vs. debit vs. cash: Which payment method do people use most?

Man and woman are at an ATM debating credit vs debit vs cash Image: Man and woman are at an ATM debating credit vs debit vs cash

In a Nutshell

A recent LendEDU poll suggests that consumers currently prefer traditional payment options like cash and debit cards. Understanding the benefits of using credit, debit, cash or a mobile wallet can help you make the best choice to achieve your financial goals.

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PayPal. Square Cash. Venmo. Zelle.

In the age of mobile wallets, it can be difficult to keep track of our options for making everyday payments, let alone decide which one to use. Credit vs. debit? Debit vs. cash? Cash vs. … a smartphone?

If you prefer more traditional payment methods, you’re not alone. LendEDU, an online marketplace for student loans and other financial products, frequently conducts studies on the spending habits of millennials. One of its polls found that, among consumers 18 and older, traditional payment methods such as credit, debit and cash are still far more popular than new alternatives.

Perhaps most surprising, debit cards outranked the next most popular payment method — cash — by more than 10 percentage points.

When asked to project five years into the future, only about 10 percent of poll respondents expect to transition to a mobile wallet.

A Federal Reserve poll suggests a similar trend. When asked how they would typically make a $10 purchase at a local store, respondents overwhelmingly preferred traditional payment options. More than 37% said they would use a debit card, followed by cash (36.8%) and a credit card (24.3%).

The kicker? Only 0.1%  said they would typically use a mobile app.

So, what does it all mean?

Are consumers hesitant to embrace new options? Are we using debit cards and cash to avoid accruing debt?

Whatever the motivations, it’s important for the budget-conscious consumer to understand when it’s most beneficial to break out cash, swipe a debit or credit card, or even use a mobile wallet.

Let’s dig deeper into when you might want to use each payment method. Spoiler alert: There’s no one right answer for every scenario. If you’re mindful of budgetary restrictions, building credit and avoiding fees, a strategic mix of options used at the right time can be most beneficial.

Credit vs. debit vs. cash vs. mobile wallets: A practical guide for everyday spending


When to use credit

When you know you can do so responsibly

Consumers may be using credit cards less frequently than cash and debit cards, but that doesn’t necessarily mean they’re using them responsibly.

If you’re in the habit of building up high balances without the means to pay them off on a monthly basis, you could be setting yourself up for financial hardship.

As a general rule of thumb, avoid charging more on a credit card than you can pay back within a month. Not only can this help keep your credit card utilization low, but it will help ensure that you don’t pay too much in interest charges.

If you’re new to credit and worried about things getting out of hand, start by using your credit card exclusively to cover a small, recurring charge, like a media subscription or gym membership.

When you want to earn rewards 

If you’re disciplined about spending within your means and always pay off your balance on time each month, a rewards credit card can be a compelling reason to opt for credit over debit.

Rewards cards come in a variety of flavors. With cash back cards like the Citi® Double Cash Card , you’ll earn cash back on everyday purchases.

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Other rewards cards focus primarily on travel. A card like the  Chase Sapphire Preferred® Card , for example, can help you earn points to redeem on airfare, hotels, car rentals and more.

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When you want to build credit 

Unlike a debit card or cash, a credit card can help you build credit with responsible use.

To build up your credit, you’ll need to establish a good credit history. This means keeping your credit card utilization low, paying off your balances each month and never missing a payment.

If you’re having trouble getting approved for a traditional credit card, try applying for a secured card to help you get started. These cards require a cash deposit that serves as collateral if you miss a payment.


When to use debit

When you want to avoid debt and interest charges

Do you like the convenience of credit cards but want to avoid spending money you don’t have?

A debit card could be the answer. Because you’re using your own money from your checking account to pay for your purchases, debit cards can feel more like “real money” and may help you control your spending.

You may not earn rewards with a debit card, but you typically won’t have to worry about interest charges or late fees. That can be a good trade-off, though it doesn’t give you carte blanche to go on a spending spree. If you’re not careful, you may spend more money than you have in your checking account and incur an overdraft fee.

There’s a reason debit cards are so popular — they can be a great tool. The goal of becoming debt free is much easier to achieve when you’re not saddled down with interest charges.


When to use cash

When you’re really trying to limit spending

Even more so than debit cards, cash is the ultimate budget-friendly option.

According to LendEDU’s poll, using cash may help consumers cut back on purchases. Among poll respondents who primarily carry and use cash, 42% said that seeing the physical transaction take place helps them limit their spending.

Deciding how much cash to carry before you leave the house means you can set limits on your spending before being exposed to a variety of daily temptations.

In case of an emergency

Keeping a little cash on hand is always a good idea. Among all the payment options in this article, it’s the only one that’s universally accepted offline.

We recommend carrying a bit of cash on your person at all times. You’ll be glad you came prepared when you need to make a purchase from a vendor who only accepts cash, or if you find yourself in an emergency situation.

This last point is key. Depending on where you are, having no cash could mean having no access to road maps, bus fares, medicine and any number of other essentials. Carrying cash makes you that much less likely to be left out in the cold.


When to use a mobile wallet

When convenience is king

Mobile wallets can be the best payment option for small, frequent transactions, such as those between friends.

According to a Pew Research Center fact sheet from January 2017, 77% of U.S. adults own a smartphone. That means that — even though phones do occasionally die — the majority of us can potentially make payments from virtually anywhere, at any time, with a tool that we’ve already got on hand.

Mobile wallets not only make financial transactions quick and easy where they’re accepted, but they can alleviate some of the need for carrying physical payment methods such as credit and debit cards. Just don’t look at a mobile wallet as an alternative to cash, because they’re not accepted everywhere (yet).

For peer-to-peer transactions

Mobile wallets can be the best payment option for small, frequent transactions, such as those between friends.

Instead of remembering who owes what to whom, using a mobile wallet can help you make a quick payment and relieve you from keeping tabs or passing cash back and forth.

They’re also great for replacing larger payments you might have previously made with a check, such as rent and utility bills paid to a roommate.


Bottom line

The LendEDU poll suggests that consumers are adapting to newer payment options. But despite the promises of convenience and added security, we’ve found old habits are hard to break.

Consumers still opt for debit and cash most often. These options can help control spending, but they won’t help you build credit or earn rewards on everyday purchases. For that, you’ll want to turn to a credit card — but only if you can use it responsibly. No matter what your preferred payment method, it’s important to avoid spending money that you don’t have.

Taking a little time to explore both old and new options, and planning ahead for how you’ll make your purchases, can help you transform these various payment options into tools to achieve your financial goals.