One of the few occasions when checks are more convenient than other payment methods is when you're paying another individual and don't want to use cash-if you're paying back your sister for splitting the cost of dad's birthday gift, for example. If you are mailing checks, be very wary of putting a check in your mailbox for outgoing mail. Again, a thief only needs to pluck it out of the box.

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Check washing is a scam in which a thief steals a check and chemically erases-or washes-the payee and amount, fills in new payment information for himself, and cleans out your bank account. You can avoid check washing by using special pens, such as the Uni-ball 207 gel pen, which retails for about $2. Its ink cannot be chemically erased.

Layaway and No-No-No Sales.

The hallmark of a bad way to pay is one that allows or entices you to buy stuff you cannot afford. By "afford," I mean having money to pay for it before you make the purchase. Timing is crucial. The right way is: money first, then buy. That's as opposed to the typical way: Buy first, and then figure out how to pay later.

That's the biggest reason to avoid layaway and sales featuring "no down payment, no interest, no payments."

* Layaway. Layaway isn't evil. It's just illogical and unnecessary.

Layaway is when you select items you want to buy, take them to a special layaway department, and place a down payment on the purchases, usually with an additional service fee of $5 or $10. You leave items at the retailer and periodically return to make payments on the items. When they're paid off, you take them home.

Some shoppers are fierce supporters of layaway. A segment of customers were furious at Wal-Mart in 2006, when it discontinued its layaway program.

Layaway can be useful for nabbing hard-to-get items, such as a hot-selling toy while it's in stock and locking in a sale price that won't be available later when you have the cash. A potential third reason comes during the holidays when you need to hide gifts from nosy children. You can leave them in the layaway department at a store rather than risk discovery in your home.

But for any other reason, layaway is among the worst of purchasing scenarios-the retailer has your money and the merchandise. You leave the store with nothing. If you fail to finish making your payments, you don't get the goods and you often incur an additional fee.

A predominant att.i.tude among layaway lovers is that it's a better idea than paying by credit card and incurring interest charges. But that's based on a false premise because it disregards two better choices: saving the money first or not buying it at all.

Instead of making payments on your layaway merchandise, what if you shoved cash for those payments under a mattress or into a cookie jar? The outcome would be the same. You return to the store when you have enough money and buy it. It takes no more time-you get the merchandise just as quickly-and you avoid the layaway fee. If you have the discipline to use layaway, you should certainly have the discipline to stash away some cash, which takes less effort.

And in some cases, layaway is mathematically worse than charging on a credit card. Imagine you pay a $5 fee for a 30-day layaway on a $100 purchase. If you instead used a credit card with an annual interest rate of 18 percent, it would charge 1.5 percent for that same 30-day period, or $1.50. In that scenario, layaway costs three times more.

* No-no-no sales. Take a hint from the name, and consider these a no-no. "No down payment, no interest, no payments for 12 months" sales usually feature a fine-print gotcha. In some cases, the slightest slip-up in payment, such as missing a payment or not paying the balance by the end of the promotional period, means you'll be back-charged exorbitant interest from the date of purchase. In addition, many no-no-no sales require you to apply for a store's charge card, which is likely to lower your credit score, at least temporarily.

Granted, diligent and savvy consumers can use no-no-no sales to their advantage by earning bank interest on their money for the duration of the no-payments period. But why? The interest you'll earn is miniscule and the penalty for a minor mistake is harsh.

Don't outfox yourself. When you buy something, pay for it.

Credit Cards.

"Guns don't kill people, people kill people, and monkeys do too-if they have a gun."

-Comedian Eddie Izzard A credit card is like a loaded handgun. It's not the tool that makes it good or bad. It's the user. That's why credit cards, as a payment method, deserve their own section in this book. They can be a convenient and even lucrative form of payment, or they can be disastrous. They are, at once, good and evil.

Maybe the single-biggest advantage to credit cards is being able to use somebody else's money-that of the bank issuing the card. Think about it. When paying with cash, checks, and debit cards, you're putting your money at risk in the transaction. With credit cards, you put the bank's money at risk. You can dispute a charge and the bank has to fight with the vendor. Meanwhile, you don't pay. If a card is stolen, you just report it. Your cash is not vulnerable.

Used well, the credit card is the only form of payment that builds your credit history so you can obtain lower rates on other products such as auto loans and insurance. Credit cards also provide rewards, such as cash, airline miles, or merchandise points. Some offer extended warranties on products purchased with the card and other perks that vary among cards.

At the same time, credit cards carry the biggest downsides of any payment method. Namely, consumers frequently spend more when they charge purchases, as we said previously, and many incur outrageous finance charges that sometimes top 30 percent. Late-payment and over-the-limit fees are also punitive. Those disadvantages, if they apply to you, dwarf any advantages of credit cards.

If you are philosophically opposed to credit cards, I have no problem with that. Don't use them. Just realize you're forgoing some convenience, consumer protections, and rewards that credit cards provide. But if you spend less as a result of using cash only, you could be adequately compensated for your philosophical stand.

Here's how to get the most out of your credit cards.

Credit Cards, 1-2-3.

1. Never carry a balance.

2. Know your perks.

3. Maintain your card.

1. Never Carry a Balance.

Never is a strong word. But carrying balances on credit cards from month to month is so destructive to your finances that it's worth using strong language.

For those who carry a credit card balance from month to month, credit cards can be downright evil. Interest rates can easily top 20 percent and push toward 30 percent, which is outrageous. You could be in big money trouble if you're paying only the minimum payment each month. It's wildly expensive. See Figure 6.4.

FIGURE 6.4 Minimum payment predicament What if you made only the minimum payment of $200 on a balance of $8,000?

Credit card balance: $8,000 Interest rate: 18% Minimum payment: $200 Years to pay off: 30 Interest paid: $11,615.

So, paying high interest on credit cards, if you can possibly avoid it, is foolish. If you regularly carry balances, you have already figured that out.

Yet, nearly half of American households carry a balance from month to month, according to the Federal Reserve. You can view this statistic a couple of different ways. First, it's shameful that almost half of American households are borrowing money on their credit cards, with many paying outrageous interest rates. That's even truer if much of the balance includes dinners out, unnecessary electronic gadgets, and other highly optional charges.

The second way to look at the statistic is that half of Americans carry no balance at all. So, if you justify having a balance "because everybody does," it just ain't so.

Also, don't take comfort in reports that say the average balance on credit cards is $10,000. MSN Money columnist Liz Pulliam Weston is the foremost crusader against this so-called fact, which originates from CardWeb.com. It has been reported by the media literally hundreds of times in recent years. CardWeb.com reported that in 2007 outstanding credit card debt was $9,840 per household. Weston points out that the number only includes households that have a credit card, which eliminates from the average all those households with zero balances because they don't have cards. The stat also includes business credit cards, which can have huge balances, especially with business travel. What business credit card balances have to do with household debt, I have no idea. Just as important, it reports the total balance as a snapshot, regardless of how many of those people paid off the balance before incurring finance charges.

The point is, not everybody is carrying credit card balances, and you shouldn't either.

As I alluded to earlier, part of the reason people run balances on credit cards is because credit cards don't seem like real money. Handing over plastic to a cashier doesn't stimulate the same emotional pain as handing over a fistful of twenty-dollar bills. Indeed, studies have shown that consumers spend more with credit cards than cash, which explains the growing presence of card readers at every retail cash register. Retailers want you to overspend.

So, even people who pay off balances every month could be overspending just by virtue of the payment method they're using.

2. Know Your Perks.

Despite all those negatives, credit cards have advantages-for "deadbeats." You would think credit card "deadbeats" is a term for people who don't pay their bills. But, in fact, deadbeats are what credit card companies call customers who pay off their balances each month. These customers don't pay the issuer any interest or fees. In essence, they give themselves a free ride by enjoying all the advantages of credit cards and suffering none of the downsides. Don't feel too sorry for credit card companies, though. They still make money from the merchants you buy from.

Being a credit-card deadbeat is a good thing.

One of the advantages of credit cards is they help establish and maintain your credit rating, which translates to real money. You can get less-expensive mortgages and car loans when you have a better credit rating. And you might even get cheaper auto insurance, as some insurers now use credit ratings in determining your premiums.

Another huge benefit is putting the credit card company between the merchant and your cash. That's why it's best to use a credit card for online and mail-order purchases in case a dispute arises.

Cards have many fringe benefits too. Most people overlook these perks. They include purchase protection, extended warranties, merchandise discounts, travel insurance, rental car insurance, price protection, lost luggage help, favorable exchange rates on foreign currencies, and others.

I won't go into details about these offerings because they vary by card. But make a note on your to-do list to investigate all the perks of credit cards you carry in your wallet. You can read about the benefits online at the card-issuer's Web site or call the phone number on the back of your card and ask, "What are my card perks?"

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Merchants can't require a minimum purchase for using a Visa or MasterCard credit card. A provision in their agreements with card companies requires them to accept charges of any amount. Of course, there's not much you can do about a merchant refusing to make a small sale, except report them to the credit card company.

3. Maintain Your Card.

Maintaining your card doesn't mean keeping the card free of fingerprints or making sure the signature on the back is legible. It means continually negotiating better terms on your credit card account.

One secret of the credit card industry is this: As bad as card issuers sometimes treat their customers, they hate to lose them.

It's very expensive to acquire new customers. So, threatening to stop using the card-or better yet threatening to transfer your balances to another card-can be effective with customer service representatives on the phone.

The point is you have leverage. And you should use it at least annually to improve the terms of your deal with the bank issuing the card. This remained true, even after the credit crunch that began in 2008.

The first thing to do is ask your card issuer for a better interest rate, even if you don't carry a balance. That's because, for better or worse, credit cards are a short-term source of funds. You never know when you might have to break the cardinal rule of "never carry a balance."

Call the number on the back of the card, and just ask. If you're unsatisfied with the answer, ask for a supervisor. Still not satisfied? Call back in a few weeks and do it again. The better payment history you have, the more likely you'll succeed.

The next thing to do is call back and ask for a higher credit limit. This is a tactic discussed earlier about how to improve your credit score. Be sure to ask, "How much can you raise my limit, without pulling my credit report?" That's because an official inquiry into your credit report could temporarily lower your credit score. You're looking for something for nothing here. The point of raising your limit is to improve your credit score by lowering your ratio of credit used to your credit limit. A secondary reason for raising your limit is to avoid over-the-limit penalty fees, if you're the type of person who nearly maxes out your credit cards.

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Speaking of maxing out, if you're at the video store wondering which blockbuster to rent next, head over to the doc.u.mentary aisle and check out the 2007 movie, Maxed Out. It's a disturbing and enlightening expose on how credit card companies prey on the weak in society. In fact, their profits depend on it.

The final thing to ask your credit card company is for fees to be waived, even if it's your fault. If the card company hits you with a $40 late-payment fee or over-the-limit fee, call up and just ask for them to waive it. If you're a good customer and it's your first slip-up, they will almost certainly waive the fee. It's worth a phone call.

How to Choose a Rewards Credit Card.

In choosing any credit card, the primary question is: Will you carry a balance? If so, get the lowest interest rate you can and pay off the balance. Forget rewards cards, which typically have higher interest rates.

But if you're what the industry calls a deadbeat, meaning you pay your credit card bill in full every month, you probably want a rewards card.

How to Choose a Rewards Credit Card, 1-2-3.

1. Go online.

2. Choose cash back.