Yahoo Finance When To Pay With Cash or Card — Experts Weigh In
Our spending habits are largely affected by how we choose to make purchases. Whether one chooses to pay with cash or with a credit card can be a reflection of our broader financial tendencies.
According to Forbes, approximately 70% of people report that they prefer to pay with a card over cash, while 22% of people said they pay in cash most often. Fourteen percent said they prefer to pay cash since it allows them to be more in control of what they spend.
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While there are pros and cons to paying with cash or a card, knowing when it’s best to use which payment type may help you to save money and develop more financially savvy spending habits.
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Benefits of Paying With Cash
While paying with a card or digital payment method may be quicker, there are many perks to making purchases in cash.
Less Risk Than a Credit Card
While paying with a credit card has many benefits, you don’t need to worry about paying off your debt when you pay with cash.
“There is a lot of financial risk with using credit cards if you are not disciplined enough to assume it is cash and pay it off each week or month,” said Bob Chitrathron, CFO and vice president of wealth planning at Simplified Wealth Management. “Typically, weekly is better because if you wait until the end of the month, it could be a high number that you end up not paying all off.”
Paying With Cash Can Save You Money
When paying with cash, one can physically see their money decreasing as they spend it. Therefore, people may be less likely to make unnecessary purchases when they only pay with cash.
“Studies have shown that people spend up to 15% to 20% more when paying with credit than with cash,” said Kyle Enright, president of Achieve Lending.
Additionally, Erika.com founder Erika Kullberg said paying with cash can help if you’re cutting it close to the edge with your budget.
“This is a psychological play – handing over cash and being able to see your money dwindle after a transaction makes a huge impact on our spending habits,” she said. “Compared to the swipe of a card, which is so easy to overlook, paying with cash can help you really see where your money is going.”
Immediate Refunds
Another perk to paying with cash is the chance for an immediate refund on a purchase. If you buy something with your credit card and end up needing a refund, it could take a few days for the transaction to go through.
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Benefits of Paying With a Credit Card
Similar to paying cash, there are many perks to making purchases with a credit card.
It’s Better To Lose Your Card Than Lose Your Cash
If you end up losing the cash you were carrying, this money is gone forever. However, the same can’t be said for a credit card.
“With a credit card, if you lose it, you can stop payments on it and block it,” Chitrathorn said. “You can even get reimbursed for charges that weren’t you.”
Improves Your Credit Score
By regularly using your credit card and paying it off, you can improve your credit score. When it comes to larger purchases, such as renting an apartment or applying for an auto loan, it’s often required that you have a decent credit score.
“In addition, credit can impact the rates you pay on auto insurance, and whether you get a job you want,” Enright said. “To build credit profiles and avoid debt, be very careful to charge no more than you can and will pay back on time in full every month.”
Consumer Protection and Insurance
Credit cards can offer some consumer protections, such as rental car insurance and product warranties.
“A credit card statement can often also serve as proof of purchase in the event an item you buy is lost, stolen or damaged,” Enright said. “And if a vendor does not deliver purchased goods or services, the credit card company can help.”
When To Pay With Cash
While there are both pros and cons to cash and cards, there are some instances where paying with cash may be more beneficial.
If There Is a Discount for Paying With Cash
Some purchases, like gas or furniture, will be discounted if you pay in cash. To save money, it may be best to pay in cash if the cost will be reduced.
“That incentive often is often better when dealing with a small business,” Enright said.
If Small Businesses and Farmers’ Markets Prefer Cash
While many businesses accept card payments, they still need to pay the interchange fees, or the fees that banks charge businesses for having card payments.
“Paying with plastic sends as much as 3% of the total purchase price to the banks instead of the local merchant,” Enright said. “For people trying to help out smaller, local merchants, cash may be a better choice.”
For Smaller Purchases
Ultimately, it’s best to pay cash when you’re making smaller purchases. According to Scott Lieberman, founder of Touchdown Money, taking a minute to consider your cash can help you decide whether or not the small purchase is something you really need.
“Small purchases can add up quickly,” Lieberman said, “and if you buy too many things you don’t need, you can wreck your budget. Switching to cash can fix that.”
When To Pay With a Credit Card
Similar to paying cash, there are several situations where paying with a credit card may be a better financial decision.
For Online Purchases
When buying something online, a credit card can provide better protection against fraud.
“In the event of a fraudulent purchase on your credit card account, reporting it to the credit card company means that they will investigate,” Enright said. “While that’s taking place, the cardholder is not responsible for the charge.”
For Travel Purchases
Additionally, it’s best to pay with a credit card when buying anything related to travel. A credit card is usually required by airlines, lodging companies and rental car companies to hold reservations and for payment.
“If a travel company does accept a debit card, they may place a hold on the bank account associated with that card, so the cardholder is unable to access that amount until the company releases the hold,” Enright said. “Internationally, some places of business may not accept debit cards.”
For Larger Purchases
While it’s best to use cash for small purchases, Lieberman said it’s better to use a credit card for larger purchases.
“Paying with a credit card makes a lot of sense if you’ve got a big purchase that you’ll be able to pay off before your due date,” Lieberman said. “This can be a much safer way to pay for a big-ticket item. Plus, as long as you know you can pay the expense with no interest, the rewards you’ll get can make it a much better deal.”
Is Cash or Card Better?
While there are benefits to both options, paying with cash or a card ultimately depends on a person’s own lifestyle and financial discipline.
“It’s generally advantageous to pay with a credit card over cash, as long as your finances are in control and you can comfortably pay your balance each month,” Kullberg said. “Even if a purchase isn’t earning you big rewards, paying with credit can help you boost your credit score as well as cover you against any potentially fraudulent behavior.”
However, paying with cash means you have a better idea of how much money you are spending and you can end up spending less than you would if you paid with a card.
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