How to figure out if you should use credit, debit, or cash

• If you're choosing between using cash versus a credit card, chances are that you'll want to go credit.
• Credit and debit keep an electronic record of your purchases, while cash is the most cut-and-dry option.
• The only real time you should use cash, if credit or debit is an option, is if you're in credit card debt and are in danger of overdrafting your checking account
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Most of us have a few options to pay for the things we need (and we're not including bitcoin).

At any given store or retailer, we can generally choose between credit cards, debit cards, and cash.

Credit borrows money from the bank, with the promise we'll pay it back at the end of the month or pay a fee in the form of interest. Debit pulls electronic money straight from our checking account. Cash starts and ends the transaction in plain sight at the register, when we hand over paper and coins. (For our purposes, we're not talking about bank transfers.)

Which should you use? It depends on your situation. Check out the flow chart below to figure out which method is best for your situation, then see a few notes about our thought process.

Why online shoppers should use credit

In the flow chart above, you might notice that the only recommended option for online shoppers is credit. That's because, aside from the fact that you can't exactly hand a website a stack of $20 bills, credit cards provide more purchase and fraud protection than debit cards. Knowing that most of our online information may be subject to hackers, a little protection is a good thing.

Why patrons of small businesses should use debit

Using debit when making a small purchase at a small business may seem arbitrary, but it actually costs small business owners more to process a credit transaction than a debit card or cash. (More on why you'd choose debit over cash below.) Aside from being a conscientious patron, also be aware that if shoppers continue to use credit, said small business may increase its prices to compensate. 

Why you shouldn't max out your credit card

Just because a credit card allows you to spend a certain amount of money doesn't mean you should use every cent. It's always a good idea to leave a little space on your card in case there's some sort of urgent, unexpected need, but primarily, spending every cent is bad for your credit score.

The credit utilization ratio — how much of your available credit you use — is a major component of your credit score, and the less you spend, the better. Ideally, you'll be spending under 10% of your total limit, and a good way to keep your total utilization down is to keep from maxing out any of your individual cards.

Why so few people should use cash

You'll also notice that there's only a very specific set of circumstances in which it's recommended to use cash. Specifically, when you have no other viable options. While some people love cash because it's emotionally harder to part with than it is to hand over a card, in the grand scheme of things, credit and debit are usually better options.

That's because both methods keep an electronic record of your purchases, allowing you to more easily track your spending, see where your money goes, and even stick to a budget. You can hook both cards up to an app like Mint or Personal Capital and have all of your transactions categorized, sorted, and plugged into your budget.

Of course, a little situation-based common sense is needed in addition to the graphic above: If you're in a store planning to use a card and see a "cash only" sign or one with a $10 credit card minimum for your $5 purchase, your decision is made for you.

More coverage from How to Do Everything: Money

• How to combine finances with your partner, whether you're engaged, married, or living together

• How to get a credit card with bad credit

• What is a good credit score?

• How much money to save in your emergency fund

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