Cash, credit and debit cards: Use a combination of all three to manage money better, here’s how

Dubai: While we know for a fact that when it comes to managing money, debit cards are as convenient as a credit card, yet they don’t add to your debt like the latter does. However, don’t write off credit cards just yet as they have been proven useful in tracking your finances too.

“At the most basic level, credit cards have two valuable uses for budgeting: They help you manage cash flow by granting you 30 days to pay, interest-free and secondly, they help you track every expense you make – very helpful for budgeting,” said Rupesh Naish, a Dubai-based independent debt consultant.

“The cash flow advantage helps you smooth out your income and spending needs throughout the month so you don’t get caught with a big expense on the 25th when your salary doesn’t arrive until the 30th.”

Credit cards come with tools to chart expenses

Tracking your expenses help you understand where you spend all of your money on a month-to-month basis. Some credit cards even come with helpful online tools that help you categorise and chart your expenses.

There are other benefits to a credit card that cash or debit cards don’t offer, like building credit history, providing flexibility between salaries, and earning rewards. The trick, planners add, is to spend smarter with your credit card, so that you don’t end up trapped under a mountain of credit.

Downside with using only credit cards or cash?

“Those who choose to use credit cards to manage their personal finances face different challenges, especially when it comes to going over budget. Since credit cards are easy to use and the bills aren't due right away, it can be hard to stay on track,” added Naish. But then what if you use only cash?

“To stay within a monthly budget, some people opt to shop only using cash. But that method has limits – especially when it comes to shopping online or using app-based services.” “

However, there’s also another payment type that combines the benefits of both these approaches: using the debit card linked to your bank account.

How can you tap into the benefits of your debit card?

Using your debit card as your go-to payment method can be a cost-effective way to stick to a budget. Using a debit card may make it easier to stick to a budget since you can see the effect on your account pretty quickly.

“With a debit card linked to your account, the amount of money is deducted from your account up-front – unlike using a credit card, where you borrow money you have to repay,” said Mirin Raul, a Dubai-based personal finance counsellor, who coaches those with issues tracking costs and debts.

“Also, because you’re not adding credit card debt, you don’t have to worry about things like interest rates and minimum payments. However, note that by using a debit card won’t help you build credit or improve your credit score, whereas with a credit card you can.”

What are the risks with using just a debit card?

You still need to be careful with a debit card to avoid overdraft fees. When there are no funds in your salary account or current account, you can apply for an overdraft facility and get a loan as per the overdraft limit on your account.

There will be a specific rate of interest added to this. Not just the interest rate, some banks also charge an overdraft fee on availing such features. “However, with digital banking, you can track your spending and manage your accounts easily – and at any time,” added Raul.

“For example, before making a purchase, you can quickly see how much you have in your account using your financial institution’s mobile application or online banking. Knowing that can help you decide whether it’s something you can afford to buy right now or if it can wait.”

With a debit card linked to your account, the amount of money is deducted from your account up-front – unlike using a credit card, where you borrow money you have to repay

- Mirin Raul, a Dubai-based personal finance counsellor

What’s the right mix: Cash, credit and debit cards?

With perks and rewards, credit cards might sound like a financially sound decision for all your buys — but don’t rule out debit cards and cash yet, because using credit is also dependent on your ability to live within your means.

So, it’s a question of, are you using credit cards as a secondary income source or a way to take advantage of perks? As credit card bills have become the biggest source of debt, you need to know what you can and can’t afford before making any purchase.

Keep cash, debit and credit card handy at all times

“If you’re using a credit card to live beyond your means, or to pay for everyday purchases because you can’t otherwise afford them, you may be better served using a debit card,” added Naish.

As it is advised to keep cash, debit and credit card handy at all times, and as most of us do, planners advice to not use one payment-mode for all payment types.

While it might range from constantly keeping handy a couple of hundred dirhams in your wallet in a month to maybe say Dh1,000, it differs with your income and expenses.

Using cash has the same effect as using a debit card?

“Using cash has the same financial effects as using a debit card, but with cash you may spend less than you would swiping a card because it’s more tangible,” Raul noted.

For some, being restricted to using only cash may be a better approach. If you still want to rack up credit card rewards, financial planners reiterate in being deliberate in the way you use your card.

“Perhaps it is a mix of different methods that work for you. You may use cash for buying dinner, but use a credit card for bigger purchases just because it suits your budgeting style better,” she added.