There are three main ways to pay for goods and services in Canada—cash, debit, or credit. But which one is the best payment method? That’s the question I asked myself recently while queuing at the supermarket and observing customers at checkout.

Unlike in France, few people use personal cheques, and even fewer businesses accept them. Cheques are seen as a liability—they can bounce and incur fees—and customers have to buy cheques in bulk, so it’s not a “free” payment method. Cheques are typically used to pay rent or taxes. I use about one cheque a year, and I’m ashamed to say I’m not a natural at writing them!

So most Canadians are left with the three payment systems mentioned above—cash, debit, or credit.

Credit Cards

A credit card is basically a revolving account with a line of credit, and the balance must be paid monthly in full—or criminally high interest rates are charged. Credit cards are heavily advertised and marketed in Canada, but getting one can be tricky for newcomers.

Indeed, anyone can apply for a credit card (and you’ll certainly be solicited to do so at major banks or retailers), but not everyone is approved. The better your credit history, the easier it is to get a credit card with a high limit. However, most immigrants don’t have a credit history when they arrive in Canada, which means credit card companies can’t judge whether the applicant is “trustworthy.” There are different ways to get a credit card without a Canadian credit history, and most Canadians end up with several credit cards in their wallets sooner or later.

Why pay with a credit card?

• You may not have a choice—to shop online, book a hotel, or rent a car, you’ll likely need a credit card.
• Credit cards are useful for big purchases, such as plane tickets or appliances, as they typically have higher limits per transaction than debit cards.
• They’re convenient: I always use mine at the gas station because I just have to swipe it; debit cards take forever to process.
• Some offer rewards programs—the more you use them, the more points you collect toward rewards or discounts.
• It’s easy to track your spending on groceries, gas, entertainment, etc. This is all visible on your monthly statement if you charge everything to your credit card.
• Most credit cards offer some kind of enhanced product warranty at no cost, free loss/damage coverage on new purchases, and various insurance protections—for example, rental car insurance, common carrier accident protection, and travel medical insurance.

Watch out for…

It’s very easy to lose track of your spending with a credit card. There’s a reason why so many households are in debt! Always pay your balance in full—the interest rates are very high. Finally, don’t collect too many credit cards or constantly apply for new ones; it can actually damage your credit history.

Debit Cards

Virtually every Canadian with a bank account has a debit card in their wallet. A debit card is a convenient payment system linked directly to your bank account: you can only spend the money you have (unless you’ve signed up for overdraft—but that’s another story). Debit cards in Canada generally use the Interac system, which is why “debit” and “Interac” are often synonymous.

Debit cards used to be swiped, but for better fraud protection, most now come with an embedded chip and a PIN code. The owner must enter the PIN to validate each transaction.

Why pay with a debit card?

• Many merchants offer this payment option, even for small amounts, because processing fees are lower than with credit cards.
• Virtually every Canadian with a bank account has a debit card, and it can easily replace cash.
• Unlike credit or charge cards, payments using a debit card are immediately withdrawn from your bank account, making it easier to track your spending.
• There’s some fraud protection. For instance, when unauthorized transactions were made with my debit card earlier this year (see How My Bank Account Was Compromised [And Depleted]), the bank refunded me (phew!).

Watch out for…

If you use debit a lot, make sure to select a banking package that fits your habits. Many accounts include about 10 debit transactions per month; extra transactions incur a small fee (usually about 50 cents). You may be better off with an account offering unlimited transactions for a flat monthly fee.

Some places don’t accept debit—typically small “mom and pop” shops that can’t afford the processing fee. And because the Interac system can occasionally go down, it’s always good to have an alternative payment method.

Cash

I admit it—I like to pay cash. Like so many Canadians, I was addicted to debit until I realized I was losing track of my spending. Swipe your card for a fancy $4 coffee here, an $8 lunch there, a $19 top somewhere else… and before I knew it, I had spent $100. Ouch.

So a few years ago, I decided to go on a budget. I withdrew a set amount at the ATM every two weeks, based on a calculated daily budget, and paid for everything in cash except bills, gas, and the occasional large purchase.

The first month was painful. I hated carrying more than $20 in my wallet, and I often forgot to take some of the budgeted cash from the drawer at home where I kept it—oops. But little by little, I got used to it, and it really helped me realize how much I was spending.

Why pay cash?

• It’s accepted everywhere.
• It’s a great way to track your spending. If you don’t have the money in your wallet, you’re less likely to be tempted. And if you are, you still have a few minutes to think about the purchase on your way to the nearest ATM.
• Your spending habits aren’t tracked.
• Lower bank fees—if you withdraw a lump sum occasionally instead of $20 each time you need cash.

Watch out for…

If you lose it, well, it’s gone for good.

How about you? What payment method do you use most? Any preference? Would you switch methods after reading this article?