Many Canadians use Credit Cards for routine purchases. But studies show that Cash is still King when it comes to Canadian spending habits. With Cash Cards however, you can enjoy the benefits of not having to carry around paper bills or loonies and toonies!  

According to a report published late last year by the Bank of Canada (BoC), more than 50% of all shopping transactions in Canada continue to be done using cash, despite there being alternative payment modes available. Compared to cold hard cash, only 31% of Canadians used a “cash alternate” – Debit Cards, and just 19% preferred Credit Cards to cash. This clearly underlines the fact that Cash is definitely King in Canada.

However, before you start stuffing your wallet with paper bills and shiny coins, think about the convenience that going “paper-less” can get you. And the best thing is that you don’t need to over stretch that credit card of yours either. Using a Cash Card can sometimes be the perfect alternate to currency or credit. But you need to understand what that entails first.

Know the Difference

If you operate a Checking account with any of the major banks or credit unions in Canada, chances are that you already are familiar with one version of a Cash Card: The Debit Card. But Debit Cards aren’t the only substitute for good ole’ cash. There are other flavours available that might be more to your liking. But before we get into the different types of them, lets understand what a Cash Card really is.

If you go online, you’ll likely come across any number of definitions of the Cash Card. At the heart of it all however, a Cash Card is a payment vehicle that closely seeks to substitute the use of physical cash (dollars and cents) – and there lies its difference from its nearest cousin, the Credit Card:

  • While a Credit Card grants you access to money that you don’t (yet) have, Cash Cards usually cap your spending to money that you actually do have – either locked up into the card itself, or laying around in a checking account linked to the card

Notice that we have laid emphasis on the word “usually”. That’s because some versions of the Cash card will allow you to spend more than what you have – just like a Credit Card. However, there are some typical similarities and differences between the two modes of payment:

  • Most Cash Cards have a limit (similar to Credit Cards) on the amount of money that you can spend using them
  • Some versions of the card only allow you to withdraw cash from an ATM, and are not accepted by merchants and vendors
  • You may even come across “specialty” Cash Cards issued by high-end retailers. Such cards, popularly called Gift Cards, can be redeemed only at specific locations, and “expire” once the full value has been used up
  • Unlike Credit Cards, most Cash Cards will only allow you to draw or spend money up to the balance that you hold in a linked account (usually a checking account)
  • However, some cards may allow you to over-draw up to a certain amount, but then you are charged overdraft fees by the issuing institution
  • Others allow you to pre-load a certain value on them, and then limit your spending to that pre-loaded amount. Once you spend that amount, you need to re-load your balance once again
  • Purchases made using a Cash Card are usually changed to your account immediately (or shortly) after you make the transaction. A Credit transaction however doesn’t hit your account until your “payment due date”

Crucially though, Credit Cards are limited by the line of credit that you have established over the years, while Cash Cards are restricted to the cash balance that you hold. This important distinction is essential to bear in mind if you are looking to establish your credit score, because Debit/Cash cards don’t impact your credit. They tap into your own savings – NOT on money borrowed from your bank/financial institution.

{Source: http://www.bankofcanada.ca/wp-content/uploads/2017/11/boc-review-autumn2017-fung.pdf Page 21}

When understanding the difference between the two modes of payment, Cash Cards and Credit Cards; and deciding which one to use, one should not forget to factor transaction costs into the mix. According to the BoC report cited earlier, Cash Cards such as Debit Cards are more expensive to use compared to Credit Card alternates.

Why? Because unlike Credit Cards, in most cases, there is usually a withdrawal fee attached with a transaction each time you pull out money using your Debit Card. Additionally, many issuers may limit the number of “free” transactions you can transact using your Cash/Debit cards. The BoC study however concludes that, once you cross a certain threshold ($77.87CAD) in transaction value, then Cash doesn’t remain King anymore! It’s much cheaper to use the cash alternate – Debit Cards!

Play Your Cards Right

Now that you know the similarities and differences between Cash Cards and Credit Cards, the question is: Which one should you use?

There is no right answer, nor is there a “one size fits all” solution to which mode of payment you should favour over the other. There are, however, some guiding principals that you can apply when choosing how you play your cards:

  • In some cases, like at an out-of-town convenience store or a diner that you don’t frequent often, using Cash may be the best strategy
  • If your spending habits revolve mostly around making online purchases, then it’s a no-brainer: Stick to your Credit Card!
  • Temper the use of your Debit Card based on the costs associated with it. If you have only a limited number of “free” transactions per month, or if you often use it at a non-network ATM (and incur additional fees), then cash or credit might be a good alternate
  • Saving your Cash cards for smaller denomination purchases (like buying gas or paying for dinner at a restaurant), while using Credit for larger value transactions (like a down payment for a home entertainment system) might be a good strategy
  • Depending on the balance you carry on your Credit Card, it may also be advisable to check how much the use of your Credit Card will cost you, before you use it for a big-ticket item. You can do that by using the handy online Credit Card calculator from JustCompare
  • If you are security-conscious, you should know that the protections offered for Debit Card transactions is much less than those available to Credit Cards
  • If you are new to a cash-less society, it may behoove you to begin with a pre-loaded Cash Card, instead of immediately applying for a Credit Card

Knowing how you play your cards can not only offer you convenience, but it can also be a source of major savings. Like many Canadians therefore, it may be a good idea to carry a Credit Card (83%), Cash/Debit card (86%) and Cash (87%) – just in case!