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, when queuing at the supermarket and observing customers at checkout.

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

So most Canadians are left with the three systems of payment 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 interests are charged. Credits 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 will 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 credit limit. However, most immigrants do not have a credit history when they arrive in Canada, which means that credit card companies cannot judge whether the applicant is “trustworthy.” There are different ways to get a credit card without a Canadian credit history though, and most Canadians end up with several credits cards in their wallets sooner or later.

Why paying with a credit card?

• You may not have the choice: to shop online, to book a hotel or to rent a car, you will likely need a credit card.
• Credit cards are useful for big purchases, such as plane tickets or appliances, as they typically have a higher limit per transaction than debit cards.
• They are convenient: I always use mine at the gas station because I just have to swipe it; debit cards take forever to be processed.
• Some have a point program and the more you use them, the more points you collect towards a reward or discounts.
• Some people like to see exactly how much they spent on groceries, gas, entertainment, etc. This is easy to see on your monthly statement if you charge everything on your credit card.
• Most credits cards offer some kind of enhanced product warranties at no cost, free loss/damage coverage on new purchases, 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 is a reason why so many households are in debt! Remember to always pay your balance in full, the interest rates charged are very high. Finally, don’t collect credit cards in your wallet and 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 his wallet. A debit card is a convenient system of payment linked to your bank account: you can only spend the money you have (unless you sign for overdraft, but that’s another story). Debit cards in Canada generally use the Interac system, which is why “debit”/ “Interac” are often a synonym.

Debit cards used to be swiped but for better fraud protection, most debit cards now come with an embedded chip and a PIN code is assigned to the owner, who has to enter it to validate the transaction.

Why paying with a debit card?

• A lot of merchants offer this payment option, including for very small amounts, because the processing fees associated with the system are lower than with credit cards.
• Virtually every Canadian with a bank account has a debit card in his wallet, and it can easily replace cash.
• Unlike credit and charge cards, payments using a debit card are immediately transferred from the cardholder’s designated bank account, thus making tracking your spending easier.
• There is some fraud protection in place. For instance, when unauthorized transactions were somehow 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 reflects that choice. A lot of accounts offer about 10 debit transactions a month, and extra transactions will incur a small fee (usually about 50 cents). You may be better off with an account with unlimited transactions for a flat fee.

Some places do not accept debit—typically small “mom and pop” shops who can’t afford the processing fee. And the Interac system is sometimes down, so it’s always good to have an alternative method of payment.

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, a $8 lunch there, a $19 top here, and next thing I knew I had spent $100. Ouch.

So a few years ago, I decided to go on a budget. I would withdraw a certain amount at the ATM every two weeks, based on a calculated daily budget, and pay everything cash but bills, gas and occasional large purchases.

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

Why paying cash?

• It’s accepted everywhere.
• It’s a good way to track your spending. If you don’t have the money in your wallet, you will be less likely to be tempted. And if you are, you still have a few minutes to think about the purchase while you head to the nearest ATM.
• Your spending habits aren’t tracked.
• Lower bank fees, if you withdraw a lump sum every once in a while rather than $20 each time you need it.

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 be ready to switch payment method after reading this article?

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