How to choose the best payment method for your purchases - KCTV5

How to choose the best payment method for your purchases

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© iStockphoto.com / Tatiana Popova © iStockphoto.com / Tatiana Popova


By Andrew Housser

When it comes time to make a purchase, even financially astute consumers can find themselves stumped about what payment method makes the most sense to sue. These tips offer guidance on the smartest way to pay for common expenses – and what methods to avoid.
 

Prepaid debit cards

Completely prepaid cards can be purchased at any major retailer. They usually come branded with the Visa, MasterCard or American Express logo. You pay a fee – usually under $5 – to load the card using cash or money order at the retail register. Then you can use the card anywhere you might use a debit card, including other retail stores, gas stations and online.

When to use them: Prepaid debit cards can work well for people who do not have a bank account; individuals can load all or part of their paychecks onto the cards. They also help anyone with budgeting. When the money on the card is gone, you cannot overspend. For the same reason, prepaid debit cards make a good financial planning tool for teens. They also can be a very useful financial tool when traveling overseas.

When to be cautious: Some prepaid debit cards come with fees. Read the fine print before you buy.
 

Payday lender prepaid debit cards

Buyer beware! Payday lenders – also called check-cashing services – are well known for high interest rates. Consumers bring pay stubs to these companies to receive an advance on their next paycheck, and pay for the convenience in a major way. Now, some of these services are issuing debit cards. These cards are not the same as regular prepaid debit cards. Payday lenders cards may include their regular trademark interest rate – which can top 300 percent per year – as well as overdraft charges, very high late fees and, in at least one case, even a fee for paying the loan off. If you slip up, these companies have your paycheck information and can take money out of your next check.

When to use them: Never – avoid at all costs.
 

Traditional debit cards

Regular debit cards pull money from your bank account when you swipe or insert them. They are useful tools to replace old-fashioned paper checks.

When to use them: For most retail purchases, debit cards work well. They can help people keep spending in check.

When to be cautious: Some studies have shown that people spend more when using plastic (debit or credit) than when using cash. If you have enacted automatic transfer or overdraft protection, your debit card could put you into debt unintentionally.
 

Secured credit cards

Secured cards require users to put down a cash security deposit with the credit card lender. The deposit is your credit limit. You will only be able to charge up to that limit or a set percentage above it. Within that limitation, secured credit cards work like regular cards. You make charges and repay the charges each month. Charges that are not repaid incur interest fees. If you do not make a payment, the company takes the payment from your security deposit.

When to use them: These credit cards are designed primarily for individuals who do not have credit histories or who are rebuilding their credit histories.

When to be cautious: Some cards charge high annual fees or application fees. Shop around before choosing a lender. When you have proven yourself for several months to a year, you should be able to qualify for an unsecured credit card, which lenders look more favorably upon.
 

Traditional (unsecured) credit cards

Credit cards are helpful conveniences, and most adults find it helpful (or necessary) to manage one card for personal business.

When to use them: Credit cards are the safest method of payment for online purchases. The credit card company forms a buffer to protect users from fraud and identity theft. For travel, a credit card allows you to make reservations without having a security deposit placed on hold in your bank account, as a debit card might. For those who are building credit history, it can be good practice to have a small bill charged to a credit account each month. As you pay it off each month, your credit rating will improve.

When to be cautious: The greatest risk from credit cards comes when you cannot pay off the entire balance every month. If you find yourself in this situation, immediately stop using credit cards and work to pay off the balance.
 

Mortgage Loans

Mortgage debt can be productive debt if used wisely.

When to use them: For a home purchase, mortgage interest is generally tax-deductible. In addition, it is often better to pay a home off over time so that you can use cash in hand for emergency fund and retirement savings.

When to be cautious: As with any debt, it is dangerous to get in too deep. Never borrow more than you can afford to repay. People who are nearing retirement age might find it most prudent to pay off their homes rather than to borrow.
 

Cash

Cash is accepted everywhere.

When to use it: Most purchases are great candidates for cash payment. In some cases – from car purchases to garage sales – cash can put you in a good position to negotiate an item’s price.

When to be cautious: For big-ticket items, be cautious. If you think it might be useful to have the weight of a big company behind you in case of a problem, use a credit card and repay the bill immediately with your cash savings.
 

The most important aspect is to live within your means. The best spending tool is the one that allows you to stay out of debt and repay any debts that you do have, in addition to saving to build a stronger financial future.
 

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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