Editorial Policy

Credit Cards, Prepaid or Cash: Pros and Cons of Using Each for the Holidays

Marcia Frellick

November 13, 2012

Offers of cash back, bonus miles and free balance transfers are floating into mailboxes and inboxes to get consumers to turn their attention to holiday spending.

So now’s a good time to strategize about which payment method will work best for you — credit cards, prepaid cards or cash — this holiday season.

If you’re a disciplined spender and know the pitfalls, credit cards can offer bonuses and protections that can give you more bang for your buck.

But if you need to protect yourself from your own generosity and fear getting caught up in the seasonal shopping frenzy, cash or prepaid cards may be safer.

All three payment options have benefits and drawbacks, so here are some things to think about before hitting the stores.

1. Credit cards

Pros: The beauty of credit cards is that you can spread payments over months if you need to. Of course, that will cost you in interest, but time is on your side here.

Credit cards also offer some valuable protections. For starters, they are covered under the Fair Credit Billing Act, which means you can dispute charges if gifts arrive damaged or don’t show up at all. Credit cards also come with built-in federal protections against loss and theft — so, if your card is stolen and used by a thief, the most you’d be liable for is $50. Some cards also offer price protection, so if you find the same item for a lower price within a certain window of time after you bought it, your card may refund the difference.

Many credit cards also offer to extend manufacturers’ warranties, which could come in handy, especially with electronics purchases.

Also, using a credit card responsibly will help improve your credit score, a plus that prepaid cards and cash don’t have.

Cons: Credit is a convenient way to spend more than you have, so it’s easy to rack up debt. Add late charges to that, and you could set yourself on a dangerous cycle of debt well into the new year. In addition, know that the introductory offers that convinced you to apply for a particular card in the first place will eventually go away and that annual fees and higher annual percentage rates (APRs) may kick in.

2. Prepaid cards

Pros: The main advantage here is you can spend only what you load onto the card, so there are no interest charges, over-the-limit fees or required minimum payments involved as there are with credit cards. Prepaid cards are safer than cash because you need a PIN to use them (keep in mind, however, that many prepaid gift cards do not come with a PIN). Also, if you lose your card, you can call to have it replaced with the funds you already loaded on it (minus a fee).

Prepaid cards are easy to get at grocery stores, drug stores and convenience stores, and, because you load them up with your own money, they don’t require a credit check.

Cons: These cards may not have the federal protections credit cards have. You can also get zapped with multiple fees. These could include fees for loading the card, monthly fees and fees for withdrawing cash at ATMs. Moreover, no matter how much you spend on the prepaid card, it won’t help you build a good credit score, as prepaid cards do not report to the credit bureaus. Plus, if they get lost or stolen, some prepaid card issuers don’t have policies in place to help you get your money refunded.

3. Cash

Pros: As with prepaid cards, you can spend only what you have on hand (as long as you leave your checkbook at home). Also, all merchants take cash for purchases of all sizes (which isn’t always the case for plastic). Some merchants will even offer a discount if you pay this way. This option is open to anyone — you don’t have to qualify to use it.

Cons: If you drop a wad of cash, or someone lifts it from your wallet, it’s gone. There’s no covering the loss.

Record keeping is also tougher with cash. You don’t have the automatic electronic receipts that credit cards and prepaid cards offer, and you won’t be able to log on to a website to view your entire transaction history and monitor your spending patterns.

Also, just as with prepaid cards, spending cash wisely doesn’t help you build up your credit score, but if that’s a top priority with you, there’s no need to be concerned.

Finally, there’s the barrier to Internet shopping. You’ll miss out on online deals if you go cash-only for holiday shopping.

When you’re plotting your strategy, keep in mind some payment forms may work better for some purchases. For instance, if you’re buying plane tickets, credit cards offer protections, such as refunds if an airline goes out of business. Also, charging big purchases can help you rack up rewards for something you need later in the year. For small gifts, cash and prepaid cards may help keep your budget on track.

To help you decide which payment method works best for you, first look at last year’s holiday spending and think long and hard about what kind of spender you are at this time of year. Then think about how you felt about your holiday spending last January.