Know when to stash your cash and pay with plastic

Choosing the best way to pay for something – credit or cash – can make a real dollar difference for you. So knowing when to do which is key.

Personal finance experts say it’s especially smart to avoid using cash for these five types of purchases:

• Digital services. This includes e-books, games on Facebook, ring tones – anything delivered digitally. If you pay with cash, or more likely with a debit card, the money is gone from your account immediately. Credit cards offer protections if you didn’t get what you paid for.
• Electronics and other products with warranties. Using a credit card often extends the warranty by up to a year.
• Products and services that have not yet been received. If the flowers aren’t delivered, the furniture is damaged or the movers didn’t do everything the contract said, you’re not immediately out of the money if you used a credit card.
• Travel. You may need a card to reserve your hotel room, and if you use a debit card, there can be a “hold” on your card for at least the expected total. If you use a debit card for gasoline, the hold it puts on your money may be for more money than you actually used. In contrast, putting air travel on an airline credit card can often give you perks like free baggage. And many credit cards offer free car rental insurance and trip interruption insurance.
• Event tickets. Counterfeits abound. And if you paid cash for tickets that won’t get you in the gate, it’s gone.

Dan Andrews, a certified financial planner in Fort Collins, Colorado, warns that cash and, more recently, prepaid cards are the preferred currency of scam artists. And once you hand over cash or funds from a prepaid card to a scammer, it’s likely lost forever.

Another advantage of using plastic: Your credit card company will help you if you don’t get what you paid for, says Morris Armstrong of Armstrong Financial Strategies in Cheshire, Connecticut.

“The beauty of credit is, you always have recourse,” he says.

If you pay with cash, your best shot at recovering your money when there’s a disagreement is in small claims court, Armstrong says.

Armstrong and Andrews say that keeping your tax-deductible expenses on a credit card can be a big help at tax time, too.

Of course, cash is often the only option when you’re buying something from a garage sale or on Craigslist. So the price of a vacuum cleaner found at a moving sale may well be worth the risk of paying cash.

Cash also can be an easy way to stick to a budget, if you give yourself a set allowance each week. But if you pay off your credit bills each month, using a credit card could help you earn rewards and protect your purchases.

Usually, the choice is fairly straightforward, says Megan McCoy, a financial therapist. “Use a credit card if you can pay off your balance. Don’t do it if you can’t.”

The potential rewards for using a card won’t outweigh what you’ll pay in interest if you carry a balance. And if you normally carry a balance, McCoy says, you may want to take a look at building a more realistic budget.