Quiz: How Do You Pay?

By Michele Lerner | December 16, 2010 AAA
Quiz: How Do You Pay?

Do you pull out a credit card, a debit card or a wad of cash when it's time to pay for your morning latte and bagel? How about when you buy gas or groceries? Or pay your rent?

For many people, the decision about how to pay for daily necessities is based on their personal financial style. Those who are determined to get out of debt are more likely to use cash or a debit card in order to reduce their credit card balance. Individuals who have a tight grip on their budget may stick to cash, but some choose to use credit cards, paying off the balance in full each month while reaping rewards such as getting cash back on their purchases or building up their frequent flyer miles. (A decade before Mastercard or Visa existed, the first credit card company was introduced. To learn more, read How Credit Cards Built A Plastic Empire.)

IN PICTURES: 6 Major Credit Card Mistakes

Credit Cards Vs. Debit Cards
According to a 2009 Nelson report, nearly 27 billion credit card transactions were handled in 2008 for about $2.1 trillion in purchases. Americans have the reputation of being addicted to their credit cards. In fact, the U.S. Census Bureau predicts that 181 million Americans have at least one credit card in 2010.

Credit cards are used most frequently for buying gas, followed by buying everyday purchases such as food, groceries and clothing from stores. Credit cards are also the most common method of paying for online purchases.

ConsumerAffairs.com reports that the recession has engendered some changes in consumer behavior. While consumer spending has started to rise again in 2010, consumers are demonstrating a preference for cash or debit cards over credit cards. Visa credit transactions dropped by 1.2% during the first half of 2010 compared with the first half of 2009; Mastercard transactions were also down. Spending on debit cards increased by 15% during the first half of 2010 compared with that same time period in 2009, while credit card spending rose by 1.9% when comparing the first half of 2010 with the first half of 2009.

Creditcards.com says that 97% of consumers said they had used a credit card in 2007, but the number dropped to 72% in 2008. At the same time, debit card usage increased from 65% in 2007 to 72% in 2008. However, some financial experts anticipate an 8-12% increase in credit card spending each year for the next few years. (As criminals are becoming more savvy, your money is becoming more vulnerable. Check out Debit Card Fraud: Is Your Money At Risk?)

Consumer Preferences for Bill Paying
When it comes to paying the rent, a credit card bill or the phone bill, more consumers are turning to online banking than ever before. The 2008 Study of Consumer Payment Preferences conducted by BAI and Hitachi Consulting found that 63% of all purchases are made with electronic methods, including online bill payment, credit cards and debit cards as opposed to cash or checks. While internet purchases have always been electronic, in-store retail purchases have been paid with a mix of methods and bills in the past were traditionally paid by check. This new survey shows that the share of bills paid by check or cash shrank from 55% in 2005 to just 38% in 2008.

Do you still use checks? The BAI and Hitachi Consulting study found that the use of checks for in-store purchases dropped to just 8% of all purchases in 2008. Twenty-nine percent of in-store purchases were made with cash.

Should You Use Credit Cards?
A Dunn & Bradstreet study shows that most consumers generally spend 12 to 18% more when they use a credit card to pay for a purchase, even when the consumers are paying off their credit card balance in full each month.

While most people view debit cards and cash as the same thing, since debit cards immediately remove the cash from your checking account, some financial experts say even using a debit card can encourage spending more than you should. If you overuse your debit card you could find yourself low on funds for other necessities. Most credit counselors recommend using cash or debit cards to reduce spending and to develop a stronger sense of where the money is going. (Paycheck to paycheck is no way to live. Learn how to find the help you need. See How To Find A Credit Counselor.)

IN PICTURES: 8 Easy Ways To Slash Your Holiday Budget

Individual decisions about the best method of payment depend on self-discipline. The advantages of credit cards and debit cards are clear: they are convenient, your spending is trackable on your bank statement or credit card statement, they offer rewards such as cash-back or frequent flier miles and offer more protection against theft than carrying cash.

Bottom Line
If you are the type of person who can avoid the temptation of overspending, then your payments are wide open and can include a mix of credit cards, a debit card, online payments, checks and cash.

Find out what happened in financial news this week. Read Water Cooler Finance: Barack Obama Vs. The World.

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