Cash or Credit – How Should You Pay?

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Photo: Rareclass

Trying to figure out the best way to manage your money takes some careful thought. One money management question we face everyday is deceptively simple–should you pay with cash or credit.

On the surface the choice between paying with cash or using a credit card seems straightforward. Many of us make this decision based on practical considerations like whether you have the case on hand, the credit limit on your card, the amount of the purchase, and so forth. I tend to use credit cards for just about everything because of the rewards, convenience, and security.

There are benefits to using both that we will discuss in this article. There is one main consideration, however, to always keep in mind. If you use a credit card for a purchase, will you pay off your balance in full each month? Your answer to this question will go a long way to helping you determine if you should use Cash or Credit on your next purchase.

Assuming you pay your credit cards in full each month, here are some factors to consider when making the choice between cash and credit.

Money Management

Spend Less with Cash

The idea that you spend less when paying with cash has been around forever. There is just something about actually seeing the cash leave your hand that has the ability to keep our spending in check. In fact, many studies have confirmed that we tend to spend more when we pay with credit than we do when we pay for cash (e.g., Always Leave Home Without It: A Further Investigation
of the Credit-Card Effect on Willingness to Pay
(pdf file)).

While these studies suggest we should pay with cash, there is one big caveat to keep in mind. There are some things that we buy where cash versus credit won’t make a bit of difference. For example, I use a credit card to pay my cell phone bill each month, but I don’t spend more because I choose to use a credit card. I also use a credit card for gas, but I don’t drive more because of it. But for things like going out to eat, entertainment and shopping, most people do tend to spend less with cash.

Better Tracking with Credit

When it comes to tracking your spending, credit cards (and debit and prepaid cards) take the cake. I’m sure at one time or another we have all tried to manually track our spending by holding onto receipts or writing down every dime we’ve spent. It can be difficult to keep track of our spending when adopting a cash only policy. It’s much easier to track spending when using a credit card. Online accounts do all the work for us and make it easy to use tools like Mint.com.

Interest Free Loan
If you use a credit card and you pay your bill off each month, then you are basically getting an interest free loan for about 20 to 30 days depending on your billing cycle. Called a grace period, most credit cards do not charge you interest if you pay your credit card statement in full each month.

In a similar vein, you could use a card that offers a 0% introductory rate on purchases. Currently, the Citi Platinum Select MasterCard has the best no interest deal on purchases (0% for 21 months).

Security

Lost or Stolen
Most of us don’t like carrying around a big wad of cash because if we lose it then we’re out of luck. For this reason, credit cards offer more security. Especially when planning to make a big purchase, it’s just much safer and easier to use credit. Cash can’t be replaced, however, if you lose your credit card you are protected under federal law. If your credit card is lost or stolen and someone uses it then the most you are required to pay is $50.

Purchase Protections
Many credit cards offer additional purchase protections and warranties to their card users. These protection services come into play when something goes wrong with your purchase. These protections may include extended warranties, protection against accidental damage, and the ability to return items that the retailer won’t accept. Each card company works differently and you have to review the rules for your card. But, the point is with a credit card your purchases might be protected. This isn’t an option when using cash.

Online Purchases
It’s definitely more convenient to shop online with a credit card. There are some companies that allow you to send them a check for your payment. However, if you shop online with a credit card and something goes wrong with the purchase, you have the option to dispute the charge. If you pay with a check there isn’t a way to dispute the charge. Even with a debit card purchase the dispute process can take longer.

Rewards

Free Money
There’s no reward for using cash. However, with a rewards credit card you are basically earning free money. Whether you use a Cash Back, Points, or Miles card, you earn something back on the purchases you make.

As you can tell, I’m partial to paying with credit. But as I noted above, this all hinges on paying off your credit card bills in full each and every month. If you don’t pay your balance off in full, then you will be charged interest that easily wipes out the rewards you can earn from a card.

Photo via Flickr: Louish Pixel

Published or Updated: January 17, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Zac says:

    I have heard a lot of people use the saying you mentioned “I spend less with cash”. I personally believe it to be untrue.

    Being a credit card person myself, I pay off my balance every month and like the rewards and security of my card, I find that I actually spend more money with cash. With my card I have a clear record of where the money went and if I find that I am spending too much and I can make a note not to do so in the future (I know I am more disciplined than most). I also like the rewards, I get 5% off on Gas (which at $4.00 a gallon is $0.20 off per gallon), as well as miles toward free flights and vacations on my various cards. If you can pay off your balance every month, why turn down free money?

    With cash I just seem to spend it until it is gone. For example, if I am at a restaurant and the bill, with a 18% tip, would be $18.28; Usually I would just toss in a $20 and call it good, not wanting to wait for change. If I used my card and had to wait anyway I could do the math to leave a 18% tip. I find a similar scenario with change, the tip jar looks awfully inviting when I get $0.32 back from a purchase (in addition to the regular tip I was going to leave); I just don’t like carrying change. The same thing goes if you split a purchase with someone (either at a restaurant or a general purchase) if a bill denomination is close to half I usually write it off as good, as it would be a pain to find a cashier to change my large bill in to coins and smaller bills. If I split the purchase at the point of sale I could just say “just put half on the card”.

    I am not trying to say that I tip less, or am cheap with a card, I just seem to round things up to the nearest dollar amount and spend more so as not have to deal with the hassle of exact change which causes my cash supply on hand to dwindle much faster than my credit line would fill.

  2. Kim says:

    That’s why you put cash in different envelopes for different types of spending. When the cash runs out for the month, you’re done. That will help you to spend less.

    > As you can tell, I’m partial to paying with credit

    For bigger purchases, you can negotiate some fantastic deals with cash. When we bought flowers for our wedding, I was able to negotiate a $400 discount because I paid cash. If I paid by credit card, the cash back rewards would not come close.

    It also makes sense to pay cash sometimes at gas stations if you get a big enough cash discount.

    • Zac says:

      You make a good point about negotiating for a discount. Even gas stations, usually small privately owned ones, will sometimes offer a discount or at least pump your gas for free if you pay cash.

      I have a charge account with a hardware store, they require I pay my monthly statement by a check but give me 10% discount if I pay my balance by the 10th of the month. That is certainly more back than I would get on my credit card using it every time I went in there.

  3. Des says:

    @Zac – You can’t just “believe it to be untrue” then site anecdotal evidence when studies have been done that confirm the contrary. Everyone thinks they’re the exception to the rule (hence, so many fund managers still try to beat the market, even when studies show they can’t with any predictable consistency), but smart people know they are fallible. Paying your bill in full doesn’t negate this, either, it only means you can afford the extra.

    I used to feel the same way as the author regarding cards vs cash, but decided to give it a try. I found that when we first switched to cash, it felt like play money because it wasn’t tracked online. That lasted a couple months. The reason for that was both months we ran out of cash 2-3 weeks in and had to go without. I wanted a cold beer on a summer evening and had to return pop cans and pennies to do it. That was humbling, and hasn’t happened again. It hurts to spend $1 when I only have a few left. It doesn’t hurt to swipe a card. That doesn’t affect bills or bigger purchases, but small daily things add up.

    I find that most confirmed “card advocates” have never really tried a cash budget for any length of time. I would strongly encourage anyone who has never done it to try a cash-only budget for 6 months, then see how they feel.

    • Zac says:

      I wasn’t saying for all people; just in my personal experience, “I find it untrue in my own life”. That is not to say that it works for everyone. I used to not use cards at all and did budget everything with cash. I then discovered what I posted to be true for my personal spending habits, hence why I switched to using my card for virtually all transactions. The examples I listed were not meant to be random anecdotes, rather examples of why I, myself, spend less money on my card.

      I check my card balance and activity all the time and monitor my monthly budget that way; rather than the amount of cash in my pocket / stuffed in an envelope under the mattress. If I go over my preset “budget” I stop using my card like you would if you ran out of cash. Once when I “had to stop using my card” I experienced the same humbling experience when you ran out of cash; I have since kept better track of my expenses both through mobile apps and other programs. I find the accounting method of checking the balance easier than waiting until I run out of bills.

      You do have a good point that small daily purchases can add up quickly. Coffee alone can cost hundreds of dollars a year if you buy it every day. If you do not stick to your budget with a card / monitor your balance, it IS much easier to run up the balance on a card that it would be in a cash only system. My point was I personally think with my spending habits I spend less with my card in general.

      TeKGems did make a good point about a cash discount, which I mentioned in my reply comment. Credit card accounting can be great, but the ultimate goal of any accounting system (cash or card) would be to save the most money / get the greatest benefit and rewards. If a store or business offered you a cash discount, it would make more sense to pay with cash (or a check).

      A cash discount can be tricky though. When I pay my water bill (it is billed quarterly by my town) they charge me a transaction fee to use my credit card. I did the math out and if I use my cash back credit card, I would get more cash back from using the card than I would save by paying with a check. Most of the time however if they offer a cash / check discount it is worth it to pay without a card (see TekGems example of her wedding flowers)

      • Kim says:

        Paying cash vs card also factors in how much you get back in “rewards”. I use a Sallie Mae 2% cash back card for any type of purchase. I know for Q1 2012 Chase Freedom card gives you 5% back on gas stations and Amazon.com.

        Therefore, cash discount will have to be greater than 2% or 5% in some instances.

  4. Earlene Fujimoto says:

    really a nice post. we should pay by cards in order to get the rewards points.
    thanks for sharing the post keep posting

  5. RichUncle EL says:

    I would say it depends on your situation, if you are very responsible with managing your credit card and you have a favorable income to expenses ratio then you should purchase all your items using a good cash back or points based credit card if you can pay it off everymonth. Now if you are attempting to pay off massive amounts of debt and are not good with CC then you should pay with cash. Plus theres a misconception out there that you will make a lot of money with cash back cards, and that is just wrong. To get a lot back you have to spend a boat load of money so its all relative to your income. Thanks.

    • Zac says:

      You make a great point about “a misconception out there that you will make a lot of money with cash back cards”

      The best cash back cards today offer around 5% in specific categories, then 1% everywhere else. Chase freedom even limits the amount of 5% you can earn to $75 reward dollars per quarter. For a $600 flight ticket you would need to spend ~$36,000 – $60,000. The airline cards are not much better requiring ~25,000 to 50,000 miles per ticket with each dollar spend earning 1 mile.

      If you spend a lot of money on your card / have many cards so you can maximize the rewards in each category / or wait for them to add up you can earn a lot from them. But 5% can take a long time to add up with 1% taking even longer. However every little bit helps

  6. Tyler S. says:

    I think for many people this comes down to personal preference. The way I see it, if you’re paying off your balance in full each month, why not get a small percentage back through rewards with your credit card.

    I’d never considered the idea of negotiating in bigger transactions to try to get discounts for paying with cash – definitely something I will keep in mind for the future!

  7. Hannah says:

    I really hate credit cards BUT I love the rewards that come with it. Right now, I’m with Bank of America and I have a checking account as well as a credit card. The nice thing about it is that my balance will show up immediately on my screen when I log in. What I can do is spend with my credit card and then instantly transfer my checking money to my credit card. This is my way of getting debit bonuses with points, ha ha.

    I’ve found with credit cards over the year that it just takes discipline. I can look at my friends that don’t know how to save and I can just tell by the way they swipe their card. They work $10/hr jobs with college loans, but they still spend $250 every time we shop?

    I think if you know how to manage credit cards, use it! BUT if you know you can’t handle it, just stick with cash. It’s going to be worth it in the end :)

  8. Cenor says:

    Currently I’m using Citibank Cash Back. Once the accumulated cash back reach $50, it will be credited into my credit card’s account. Based on my monthly credit card expenses, I’m constantly received $50 in every 2 months. Definitely I will not go back to bonus or rewards type credit card.

  9. Michael Gonzales says:

    My wife and I have just finished paying off over 17K in basically CRAP credit card debt. We both agree that after being married for 9 years we had nothing to show for out outstanding debt we got into. Now that we are free and clear and ten years smarter we realized that the CC life style was not for us. Now we only use our debit bank cards for everyday purchases. We just had to replace our refrigerator so we put that on our zero balance card and will pay it off in two payments. The lesson for us is credit is nice to carry if you plan on spending during the week on unexpected purchases. Other than that our cards stay in the safe at home and don’t come out. One last thing if you are in need of a major credit score boost stop spending on your cards. The longer you don’t use them as the balance goes down the better your credit will look. The formula is called Debt to Income Ratio. I’t not the most exciting read on the internet but when I bought my new used truck this year the salesman shook my hand and said 2% instead of nodding his head in sorrow like they used to once upon a time ten years ago. I really enjoy reading money blogs. We all have unique experiences in life to add. I hope someone can learn from mine.

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