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.
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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.
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.
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.
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.
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.