Don't be too keen at the cash machine!

Be careful not to get too carried away at the `hole in the wall', because there are smarter ways to pay for goods...

Last week, I needed to buy some small items from local shops. I had only a few coins in my pocket, so I strolled to the nearest cash machine. I needed £3 at most, but cash machines haven’t stocked fivers for many years. Normally, the smallest withdrawal from an ATM (automated teller machine) is £10 but, on this occasion, the ‘hole in the wall’ was out of tenners.

Hence, I had to withdraw £20 in order to buy a couple of items costing just a few pounds. Several days later, the change from this twenty-pound note was gone, and I was left scratching my head, wondering how I managed to make over £15 disappear without trace!

Why I prefer not to use cash

This episode reminded me of why I prefer not to use cash to pay for goods and services. Thanks to ‘cash inflation’, it’s really hard to get hold of £5 notes these days. (Nowadays, Marks & Spencer and the Post Office are the biggest users of fivers.) Thus, I’m forced to withdraw £10 or £20 at a time, only to find that this cash evaporates at a rapid rate.

Also, another problem with cash is that it doesn’t generate a ‘paper trail’, other than the withdrawal receipt from the ATM. Thus, unless you note down all of your purchases as you go, it’s hard to keep a record of your cash spending. In addition, I prefer not to carry around too much cash for reasons of personal security.

So, if you prefer not to pay by cash, then what are your options?

1.    Cheques

For me, cheques simply don’t do the business. In fact, I haven’t written a cheque for years. Furthermore, cheque use has been declining for two decades. Many retailers, including leading supermarkets, no longer accept cheques at the checkout, and by 2018, cheques will have been completely phased out.

What's more, although cheques are safer to carry around than cash, they are fairly slow and cumbersome, plus they are open to forgery and fraud. Thus, for me, cheques have checked out.

2.    Debit cards

As I revealed in Two decades of debit cards, Barclays launched the UK’s first debit card in June 1987. Debit cards quickly took off, because they allowed users to withdraw cash, make speedy electronic point-of-sale payments, plus get cashback at the till. Today, there are almost 72 million debit cards in issue in the UK.

I’m quite a fan of debit cards, although I use mine only to withdraw cash. However, for people with debt problems, and those wary of borrowing, debit cards are a better bet than credit cards. They enable you to spend only what you have in your current account -- assuming you don’t go overdrawn, that is. In addition, they create a clear record of payments on your bank statement, enabling you to track your transactions and monitor your spending patterns.

3.    Credit cards

In my view, credit cards are the perfect payment method. Indeed, careful use of credit cards can be highly profitable. The first benefit that they offer is an interest-free period lasting up to 59 days. Thus, by always paying your monthly bill in full, you can enjoy almost two months of no-cost credit.

Second, thanks to Section 75 of the Consumer Credit Act, credit cards offer greater legal protection than debit cards. If you order goods or services costing between £100 and £30,000, in the UK or overseas, and pay any deposit with your credit card, then your card issuer ‘stands in the shoes of the supplier’. Thus, if the goods fail to arrive, are damaged or faulty, or are otherwise unfit for their intended purpose, then you can claim a full refund from your credit card issuer.

Third, by using a cashback credit card, such as the American Express Platinum Cashback Card, for all but the most minor transactions, I can earn as I spend. My latest cashback credit card pays me an annual rebate of 1% of my spending. Given that I spend around £2,000 a month on this plastic, I can look forward to a cheque for, say, £240 any day now. In my view, this is money for old rope!

On the other hand, used carelessly, credit cards can become WMDs: Weapons of Money Destruction. So, to avoid learning some hard lessons, make sure that you don’t spend more than you can comfortably afford to repay, and never use your credit cards to withdraw cash. Otherwise, you could end up paying yearly interest rates of 15% to 30% APR. Ouch!

• Watch our video: The three worst things you can do with your credit card

4.    Automated payments

Finally, we come to automated payments: direct debits and standing orders. I find these incredibly useful, because they enable me to put my monthly finances on autopilot and be better at budgeting. Also, paying by direct debit (DD) enables me to enjoy discounts which I wouldn’t get with other payment methods. For example, I enjoy substantial discounts by paying my yearly subscriptions to Private Eye and Viz magazines by DD -- you can’t beat a bit of cut-price humour!

Just be careful if you're setting up what's known as a recurring payment on a credit card because these are far harder to cancel than direct debits.

• Watch our video: Recurring payments

So, the next time you’re at the cash machine, do pause for a moment. Before withdrawing a wad of notes, think about whether you really need this cash. Ask yourself: is there a smarter way to pay?

Don't forget, if you're looking for advice on how to boost your income, lovemoney.com can help. First, adopt this goal: Make some extra money. Next, watch this video: How to save when you've got no money. Finally, why not have a wander over to Q&A and ask other lovemoney.com members for advice?

This article was first published in July 2008 and has since been updated.

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