Updated on 01.25.15

Debt-Free Payment Methods: Alternatives to Cash

Carrying around a wad of cash Photo: 401(k)

If you’re trying to slash your debt and protect against identity theft, there are alternatives to carrying a wad of cash. Photo: 401(k)

Whether it’s Target, Home Depot, or Sony, it seems like every couple of months another huge corporation is hacked, exposing vast amounts of customer information. So it’s no wonder more Americans are turning to cash for their spending needs.

This solution has its own set of problems, as well as benefits. If you’re thinking of switching to a cash-only spending plan, take these points into consideration.

Pros and Cons of Using Cash

One of the main benefits of going on a cash-only diet is that you begin to evaluate your spending priorities in more tangible terms, and thus spend less frivolously. People who pay with cash tend to stay within their target budgets and are able to save more money.

It’s a smart way to reach your financial goals faster, and fun to stash away cash for spending. Having money in your wallet is always reassuring.

On the flip side, carrying around a lot of cash can be dangerous. There are too many opportunities to lose your wallet or have your purse stolen. It’s also more difficult to track since you may not receive a receipt for your purchase, and have no other way of verifying the amount.

It’s also annoying to run to the ATM each time you need to withdraw money to buy groceries or pay for gas. In fact, a study by MasterCard explains the hidden costs of using cash, with one of the main points being how much time and money is wasted finding a place to access your money.

Cash-only spending means planning ahead, and not everyone has the time, or additional money, to go to the bank every week.

Finally, between online shopping and some brick-and-mortar retailers who no longer accept or carry cash, you may simply have to use plastic to make some purchases. But what if you don’t want to use a credit card or store credit and risk getting into debt?

Here are the best cashless alternatives for budget-minded buyers:

Bank Account Transfers

One of the most popular cashless options is to use your bank account to pay bills, initiate funds transfers, or make purchases with a debit card. It’s very close to using cash because you’re only spending the money in your account, thus limiting your chances of taking on more debt.

Some vendors even offer discounts, or rate decreases, when you set up an electronic funds transfer (EFT) from your bank account. You don’t have to worry about receiving statements in the mail or paying your bill late, and the financial institution knows they’ll receive the payment in a timely manner. It’s a win-win.

Debit cards can basically do everything a credit card can, with the exception of building credit. But you won’t be borrowing money to make purchases and have to pay off the balance each month. For this reason, using a traditional debit card with your bank account is the simplest bet.

Prepaid Debit Cards

You may be thinking a prepaid debit card is still just a debit card, but it differs from a bank card in that it’s not linked to your checking account. Instead of drawing down the balance in your bank account, a prepaid debit card requires you to preload money onto it.

Many prepaid debit cards come with no usage fees, and even offer the ability to earn rewards on your purchases, or get a discount when you fill up at the pump — much like a credit card, but without the debt balance and interest charges.

There are several reasons you may want to use a prepaid debit card instead of a bank account transfer or debit card:

Peace of mind. A prepaid debit card offers the option of better security in the event your debit card number is swiped, or your checking account is compromised. How? Since there’s only a certain amount of money preloaded onto the card, you won’t lose the entire balance in your checking account, or have to wait until the bank refunds the money. You’ll have more peace of mind knowing your bank balance is secure.

Buy with plastic. Sometimes you need to make purchases with plastic, specifically when buying items online, and having a prepaid debit card allows you to do this. If you have bad credit and can’t get approved for a credit card, this is a great alternative.

Stay on budget. If you have a problem staying in your budget with your discretionary spending, you can use a prepaid debit card to stay on track each month. Just load with a preset amount that you’re allowed to spend, then enjoy a night out with friends, or a coffee every day, without worrying about busting your budget. Once the money’s gone, you either stop spending or refill the funds.

Secured Credit Cards

If you want to be more conscious about where you spend money, as well as build up a solid history of credit, using a secured credit card could be a good option.

A secured credit card requires collateral in the form of cash to be deposited to your account. This amount then becomes your line of credit purchasing power, ensuring that what you borrow to pay for purchases will be paid back.

If you put up $500 as collateral, your account will have a $500 spending limit. Not only is this a smart way to build, or rebuild, credit, it allows you to spend more thoughtfully, seeing as you’re responsible for the amount of your credit limit.

A drawback with a secured card is that you may have to pay some fees, so it’s important to shop around. Your goal is to find a secured credit card that doesn’t come with an application fee. The fees that come with the card will reduce your available spending limit, so you want them to be as low as possible. The minimum deposit amount is usually $300 to $500, so you’ll need at least that much before you can apply for an account.

Online and Mobile Payment Processors

Payment processors like PayPal or Apple Pay offer the ability for you to use your mobile phone to pay at stores and restaurants. If you get paid for services or products via PayPal, you can access those funds using a PayPal debit card or app.

Whatever balance you have will also earn a bit of interest. It’s also great for budgeting because if you don’t have a balance in the account, you won’t be able to spend anymore. This is very similar to spending cash, but a little more plastic-friendly.

With Apple Pay, you essentially have a digital wallet that holds your debit or credit card information. You can choose to only use a specific card for each purchase, and it’s compatible with all Apple devices. So if you don’t want to carry around a wallet with cash or cards, this choice offers a bit more security.

Many national and regional banks support Apple Pay, as do some of the country’s largest retailers, including Whole Foods, Walgreens, Macy’s, and McDonald’s. However, for now, it is still somewhat limited in terms of widespread availability.

The only other downside is if you lose your phone or it gets hacked — then you could lose a good portion of your funds. Apple and PayPal have great customer service and a reputation for restoring funds. But it may still be inconvenient. So it’s important to have your mobile phone password protected and backed up in the event your information is compromised.

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