Is It Better To Use Cash Or Credit Cards?

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

As you get ready for some holiday shopping, you are probably, like most Americans, planning to use a credit card. After all, they are quick to use and very convenient. That is very true. 

On the other hand, it is very easy to overspend with a credit card and add to your existing credit card debt. Since the average American carries a credit card debt of $5,525, you’ll be adding to that and will be paying for your purchases for a long time. Managing and paying off  credit card debt can be a delicate balance, especially on a tight budget.

Should you withdraw cash or use ATMs along the way instead? That depends! There are disadvantages to cash and disadvantages to credit cards. Before you make a decision, let’s look at the pros and cons to see which you should use.  There are various factors to consider when choosing between cash and credit, each with its own set of advantages and disadvantages.

Psychology of Spending

Using cash makes you more aware of what you are spending since you physically see the money leaving your wallet. This tactile experience can help curb overspending. Handing over cash creates a feeling of loss that credit cards do not.

With credit cards, you don't experience the immediate impact of parting with money. There's no visual reminder of how much you've spent. The pain of payment is delayed until the bill arrives. As a result, credit cards can easily lead to overspending beyond your means.

Research shows that people are willing to spend more when using credit vs cash for the same purchase. The psychological effect of plastic causes them to treat credit cards almost like play money.

Building Credit

One of the fastest ways to build a credit history is to use a credit card (and pay it off on time). One of the fastest ways to ruin your credit report is to overuse your credit card and fail to make timely payments, so finding the most effective methods to address  credit card debt is crucial.

Cash doesn’t make a difference to your credit report. Maintaining good to excellent credit scores is crucial, which involves  responsible credit card use and timely payments.

Spending Limits

The advantage of spending cash is that, for most people, it is a finite resource. In other words, you can’t spend what you don’t have. A credit card will allow you to spend up to your credit limit and sometimes over that amount. At that point, you will be hit with fees that will make your purchases even more expensive. 

Most people find it easier to hand over a credit card than a stack of money. Cash makes the amount you are paying more real. Paying cash usually means you will hunt for bargains and stick to a spending budget. 

Budgeting

Creating and sticking to a budget is generally easier with cash than credit cards. When you only have a fixed amount of bills in your wallet, you can't spend more than that. Cash allotments provide a firm limit on spending.

With credit cards, your available balance fluctuates and limits can be raised. You may find yourself tempted to overspend beyond your budget. To curb overspending, set a firm monthly budget for your credit cards just as you would for a cash allowance. Track spending closely to ensure you stay below your credit card budget.

Apps and online banking tools can help by sending alerts when you approach your credit card budget for the month. This keeps your spending visible day to day.

Security

Carrying cash means that you become a target for physical thieves. If you are robbed or you lose the cash, you are usually out the money. However, every time you use a credit card, you set yourself up for identity theft. A debit card may be an alternative to a wad of cash, but they are vulnerable to identity theft as well. If your debit card is stolen, you are generally out the money, although many banks have protections if notified promptly. If your credit card is stolen and you notify the credit issuer, you do not pay for those charges. 

With debit cards, your liability depends on how quickly you report unauthorized transactions:

• $0 if reported before unauthorized use
• $50 if reported within 2 business days
• $500 if reported 2-60 days after unauthorized use
• Unlimited liability after 60 days

If your wallet is lost or your cards are stolen, immediately call your credit card issuers and bank to report lost cards. Ask to freeze accounts if unauthorized charges show up. Dispute any fraudulent transactions you find on statements.

To avoid fraud, regularly check statements and credit reports for suspicious activity. When possible, use credit cards with EMV chips and tap payment options like Apple Pay which are more secure than magnetic stripes.

Fees

Cash purchases do not come with fees unless you are using an out-of-network ATM. Credit card purchases do. You may be charged a convenience fee by the store for using a credit card. If you carry a revolving balance or make late payments, you will definitely be charged fees by the credit card company. 

Convenience

You know what is accepted almost everywhere? Cash. Not all businesses, especially street vendors, are set up to accept credit cards. About the only places you can not use cash are when making airline, hotel, or rental car reservations.

Travel 

If you plan to travel, you will need a credit card. Rental car agencies, hotels, and airlines require a credit card to book their services. Sure you can use a debit card, but for instance, the hotel will place a hold on the cost of the room plus the damage fee on your debit card. They eventually release the damage fee, provided you did not damage anything, but it takes several days and that money is unavailable until that point.

Deals

Using cash, especially for big-ticket items, can mean deals. Not only does the store save on fees charged to them by credit card companies, but they know the item is 100% paid in full. If you have the cash, ask if they will make you a good deal.

Consumer Protection

Credit cards can be a great way to purchase expensive items, provided you can pay off the card immediately. Many credit cards offer warranties or other protections on purchased items. You may also be eligible for price protection and a refund if the price drops within a specified amount of time. You may also get travel protection or additional rental car insurance when using your card. Check with your card to see what protections you are offered.

Rewards and Cashback

The rewards and cashback may be a great reason to use credit cards. The problem is that the cost to use that card in terms of interest and fees may outweigh the cashback or rewards. Airline miles and other perks have a use-by-date and if you miss that date, you lose the rewards. Do not use your credit card expecting the rewards and cashback to make up for the debt you are acquiring.

Grace Period

A grace period is a time between the charge on a credit card and when it starts to accrue interest. If you can pay off your credit card immediately and take advantage of the grace period, it makes sense to use the card. If you can not pay it off within the grace period or will forget, then do not use the card!

Online Shopping

Obviously, it is very difficult to shop online and use cash. Instead of a credit card, use a debit card. You must have the money in an account, so you are not running up debt. Always have a daily spending limit on your debit card so that if your debit card is hacked, you will not lose all the money in your banking account. These spending limits are set through your bank and can be lifted with a phone call to the bank.

Boost Your Credit Score

Using a credit card responsibly helps build your credit history and improve your scores over time. Credit mix also factors in, so having both revolving (credit cards) and installment (mortgages, student loans) accounts can improve your profile.

Keep credit utilization low on cards - experts recommend keeping it under 30% of your total credit limits and even lower is better. Ask your card issuer for a limit increase after several months of on-time payments. This will lower your utilization.

Pay all credit card bills on time each month. Payment history is a major factor in your scores. Set up autopay if needed to avoid missed payments.

Review credit reports regularly and dispute any errors immediately to keep your credit profile accurate. Maintaining good credit saves money on loans and insurance over your lifetime.

Non-Payment Fees

Credit cards and debit cards both incur fees for late payments, over-limit charges and returned payments. 

But there are some key differences:

• Debit cards can incur overdraft fees if you overspend your account balance. Credit cards do not charge overdraft fees.
• Late fees are typically higher on credit cards than on debit cards. Average late fees range from $25-$38 for credit cards but only $10-$20 for debit cards.
• Credit cards charge returned payment fees of around $35. For debit, returned payment fees average $30.

You can avoid credit and debit card fees by:

• Setting up autopay for the minimum or full balance each month
• Using account alerts to avoid overspending your limit
• Paying on time - set reminders if needed
• Avoiding overspending beyond your available balance

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