Paper or plastic? That’s usually not what you think of when it comes to spending money, but its something you should absolutely think about each time you reach for your wallet. Credit vs cash is an important financial decision and its definitely something you should understand. Let’s take a look at the benefits and drawbacks to making a purchase with cash and credit.
Credit Card Pros
Easy to track expenses
Credit cards are great because they make it really easy to track your spending.
Did you really eat at Chipotle 17 times this month? Wait… you ordered 11 lattes in the past two weeks?
Small purchases like these can get lost when you’re always using cash. With a credit card, you get an unbiased view of your spending trends.
Plus, linking your credit card with apps like Personal Capital (my personal fave) and Mint, make it easy to track your overall financial health. This way, you’ll able to see if you’re widening the gap between how much you make and how much you spend.
Builds your credit score
It’s probably not a surprise that using credit wisely will help build your credit score. But here’s why its important. Having good credit helps you in the long term when making expensive purchases, like buying a home, car, kitchen appliances, etc. You can easily spread out the costs and you may even pay less in interest and fees as compared to someone with worse credit. Also, when you decide to start a business, having good credit makes it easier to obtain a small business loan.
Redeem Rewards
Credit cards offer lots of great rewards, just for shopping! There are two common types of rewards, cash back and travel. Generally, cards that offer cash back give you a fixed percentage of cash for every purchase you make. For instance, the Chase Freedom Unlimited Card currently offers 1.5% back on every purchase.Other cards offer travel rewards for spending. For instance, you can score 50,000 bonus miles if you spend $3,000 in the first three months of opening a Capitol One Venture Rewards Card. What’s great about this card in particular, is that you can purchase flights on any website! It doesn’t restrict you to buying flights only their site, like many other cards do.
A word of caution: Remember to use your credit card(s) responsibly and purchase things that you know you can afford. As a rule of thumb, I rarely buy anything that I don’t already have the cash to pay for. This way, I’m able to immediately pay of the balance, while still reaping the credit card rewards. In other words, be smart and use the system, don’t let it use you.
Fraud Protection
Fraud protection is one of the best perks of using a credit card. If you ever lose your card, credit cards are superior to cash when it comes to getting your money back. You’re immediately alerted to suspicious activity, and in most cases, you are not liable for fraudulent purchases. Compare this to losing your cash, which is likely gone for good before you ever realize it.
Tip: Consider getting a card for everyday purchases and a card for autopay expenses. This way if your everyday card is breached, you at least won’t have to worry about changing your autopay accounts and potentially getting charged a late fee.
Credit Card Cons
You can easily overspend with credit
Its much easier to overspend with credit, since you don’t physically see the money leaving your hand. Its like buying things with magic, only you’ll have to pay it back with real money days later. Spend wisely my friends!
Annual Fees and Interest rates
If you’re ever late on a payment, you’ll get charged interest on the amount you owe; which ultimately means you’re paying more than the purchase price. And if you couldn’t afford the purchase to begin with, its that much harder to pay off the balance.
If that wasn’t enough, some cards even charge an annual fee just for having the card. While these cards tend to offer higher rewards, you’re essentially paying to borrow money. Unless you can justify the cost of the annual fee with the return on the loan, it’s wise to avoid cards with an annual fee attached.
Cash Pros
Cash is universal
Cash is great because its widely accepted. Whether you’re at your local grocery store or half-way around the world, cash is king.
Also, when you’re making large purchases, having the full payment in cash can score you a great deal, since this means that the merchant won’t have to wait to get paid. Having cash can mean higher leverage and bigger savings!
No interest or fees
When you use cash, the payment is settled immediately. That means you don’t have to pay interest on the purchase (provided that you’ve paid for the item in full), and that there aren’t any attached fees. In fact, sometimes small merchants will incentivize you to pay with cash since this is money in their pockets right away, as opposed to them having to pay a percentage to the credit card company.
Cash is tangible
There’s a psychological difference to spending hard cash. You have to stand there, count the cash and watch it leave your hands. Piece by piece. And at the end of the transaction, you can feel your wallet get that much lighter. You know what you’ve done, lol.
And you can’t really overspend with cash you don’t have, making you less likely to enter into bad debt. It’s like having a built in budget!
Identity Protection
Cash payments make you anonymous to the person on the other end. With cash, your identity is safe guarded because you don’t need to provide your name, address, or any other billing information that comes with using a credit card. The threat of someone stealing any identifying information with cash is almost next to none.
Cash Cons
Hard to track your spending
Unless you are committed to manually entering in every purchase, everyday, for the rest of your life, cash purchases are simply too much to track. It requires you to remember and keep documents of everything.
No theft protection
Let’s face it, if your cash is ever stolen, you have a low probability of ever getting that money back. Simply put, cash offers anonymity to everyone involved, including the thief who stole it from you.
Where to go from here
Personally, credit cards seem to have a lot of benefits that can’t be matched by cash. With that said, it really depends on the purchase and your financial goals. If you’re making a large purchase that can be bought with a credit card (i.e. buying a washer/dryer), it may make more sense to put that purchase on your credit card, even if you can afford to buy it outright with cash. Unless the merchant offers you a sweet deal for paying with cash, credit cards give you travel and cash back rewards that you can use in the future. On the flip side, if you’re buying a bag of chips at a small somewhat sketch corner store, it makes sense to just purchase with cash and not take the chance of having your identity stolen.
Overall the choice is yours, and hopefully now you understand the benefits and drawbacks to each. Knowing how to use each in the right way can go a long way to helping you reach financial independence sooner and more easily. Let me know which you prefer and why in the comments below! Until next time!
