What Should I Use – Cash vs Credit Card?

You’d really like to make a few repairs on your home. Or, maybe you’re thinking about upgrading your wardrobe a bit as you look for a new job. It might be time to schedule that dentist visit you’ve been putting off. Or perhaps you’re simply wanting to take someone special to a nice dinner for their birthday. Whatever the need, in the cash vs credit card competition, what should you do?

You can afford whatever it is – at least, you’re pretty sure you can. But you’ve been considering some of the free financial advice you’ve found here and across the Goalry family. As part of your New Year’s resolutions, you’ve been reading up on the importance of taking more effective control of your personal finances and you want to be as responsible as possible heading into the new year. As a result, you’re thinking a bit more strategically these days about how you spend money. Not just what you spend money on, although that’s obviously pretty important itself. You also want to be smart about how you spend that money.

Most of the time, it seems like there are really only two basic options – cash vs credit card. So, what should it be?

It’s Simple. Wait – Isn’t It?

Let’s be honest. We both know that most of the time, it’s better to spend cash and avoid using credit cards unless there’s a pretty good reason to do otherwise. Credit cards are the Devil’s greased slip’n’slide to overwhelming debt and ruined credit, right? I’d save a lot of pain and suffering if I cut these darned things up right now and fed the pieces down the garbage disposal! (Note: DON’T DO THAT! I said it for dramatic effect.) Boo credit cards! Personally, I’d just as soon never ever EVER use one again!

Wait, I didn’t mean you could take them away from me! Give those back! There are things I just can’t do without them! Plus, that one has my favorite hockey team logo on it! And I get cash back on that one there! Can I just keep… I dunno, three or four of them?

Some of you may have a similar love-hate relationship with your cards. We think we need them, but we also know how much trouble they cause. We’re also pretty sure we HAVE to have them for some things, right? Like, um… oh! Travel! Yep, gotta have plastic to travel – to book a hotel, get a flight, or… I mean, not that we do those things these days. But if we did, boy howdy! Or, um… online shopping! That’s important. Especially when we’re supposed to minimize our contact with others. I mean, we do NEED them, right?

Are you sure about that?

Whatever your answer and your opinion regarding credit cards, let’s assume for the moment that most of us have at least one credit card and that using it is a legitimate option in some circumstances. Of course, just because I CAN do something doesn’t mean that I SHOULD, right? So when it comes to cash vs credit card, when is it a good idea to use a credit card – if ever?

When Is It a Good Idea to Use a Credit Card?

Let me start off by saying unequivocally that most, perhaps ALL, of these potential advantages assume you’re paying your balance in full every month. As this is a sine qua non condition to avoid bad consequences of using a credit card, and a sine qua non condition to use your credit card responsibly.

That matters, because pretty much any possible advantage to using your credit card is quickly neutralized by even a few months’ interest on your unpaid balance. No perks, no convenience, no consumer protection plan is worth a ruined credit score and the swamp of credit card debt so common these days.

One other thing. I realize that “cash” means, well… cash. For our purposes, however, we’ll occasionally broaden that definition a bit to include things like debit cards, prepaid credit cards, or even old-fashioned checks. Why? Because they’re all ways to avoid going into debt in order to make a purchase – and in some situations they offer at least some of the benefits of using plastic without the whole “swamp of debt” element.

If you’re confident in your ability and willingness to avoid a monthly balance, here are few times it MIGHT make sense in the cash vs credit card debate to choose… well… credit card.

1. When You’re Out Of Town

It’s neither convenient nor wise to travel with wads of hundred dollar bills in your pockets. When you’re out of town – especially on business, when everything has to be documented – cautious credit card use might be the best way to go. While you should still save receipts and use the same care as you would with cash, credit cards give you a detailed backup plan.

In case of an accident or theft, cash is gone forever, while credit cards can be locked or cancelled with a simple phone call. Most issuers offer decent fraud protection when using their cards; you’re unlikely to find a similar guarantee when fishing around in your wallet for twenties. This is true even when you’re not out of town, but there’s a vulnerability to being away from home that makes everything more difficult when the unexpected occurs.

Most hotels require a credit card for “incidentals,” even if you’re paying your bill in cash. While they won’t charge you unless you incur expenses of some sort, the process places a hold on your card of anywhere from $50 to the cost of your entire stay plus minibar expenses and breaking a few things. It’s no big deal with a regular credit card, as long as you have a comfortable amount of available credit. It can be rather inconvenient with a debit or prepaid card.

If you need to rent a car, the situation is much the same. Good luck getting those keys without a card on file to protect the renter. So, cash vs credit card when travelling? I’d probably go with credit card. That said, there are ways around all of these issues with a little planning. If you prefer not to use cards, it’s doable. Inconvenient, but doable.

2. When Shopping Online

There are alternatives to using a credit card to shop online. I’m a pretty simple guy, so I tend to use PayPal because it’s widely accepted and easy to use in both directions. There are even mechanisms allowing you to dispute a transaction with PayPal or most any other online payment option.

Few of them match the simplicity or reliability of most credit cards, however, when it comes to protecting you with online purchases. If something never arrives, shows up damaged, or otherwise isn’t what you paid for, most credit card issuers protect you while you dispute charges with the merchant or delivery service. Merchants need to be able to process credit cards, and credit card companies need people like you to use them to make purchases (otherwise they don’t make any money). That means that when it comes to merchant-customer disputes, their default position is to be on your side.

Yeah, I know – it’s a bit wacky to think of credit card companies as on your side. I wouldn’t get too comfortable with the idea. It’s all about protecting their own self-interest. It’s just that in these scenarios, your best interest IS their best interest.

Cash vs credit card for online purchases? From major online retailers, it’s probably better to pay as you go using a debit card, PayPal, or other electronic form of payment. Whatever else you can say about Amazon or the other major sites, they’re pretty good about resolving customer problems in your favor. When doing business with individuals or smaller companies you don’t know that well, credit card might just be the safest way to go.

3. When You’re Planning To Buy Lots Of Stuff

There’s a similar dynamic when you’re shopping for back-to-school clothes or making multiple other planned purchases at different places around town. As long as you’re still budgeting for the expenses ahead of time and being strategic about your purchases, it might make more sense to carry plastic than paper. There’s the accuracy issue – it’s hard to lose track of what you’re spending where when you can pull up a detailed statement almost instantly.

Many of the same security features apply as well. Drop your wallet or lose your purse at the mall and the cash is almost certainly gone. As long as you make the appropriate calls, however, you’re generally protected from serious liability related to your plastic.

Then again, as we discussed above, a debit card or prepaid credit card work just as well for these things most of the time. So cash vs credit card for major shopping trips? I’m going 50/50 on this one. But budgeting for your needs ahead of time? Always. You’ll feel better during and after, and you’re fare less likely to end up unable to pay your bills at the end of the month.

4. When You Want Additional Protection

You’re probably tired of being asked if you want to add an extended warranty to pretty much anything you buy these days. Electronics, appliances, even some toys. Personally, I find it odd that anyone would pay even a few extra dollars for an extended 2-year warranty on a $23 coffee pot, but hey – that’s the 21st century life.

Many credit cards include their own protection plans or automatically extend manufacturers’ warranties when you use the card to purchase the item. You don’t have to choose it or pay extra-fees for it; it’s just a feature of the card. If you’re not sure what your card does or doesn’t cover, it’s easy enough to find out.

So cash vs credit card for buying electronics or any other items with potential additional protection? I’m going with the credit card on this one, at least if it offers any benefits regarding protection.

5. When You Care About Rewards, Points, or Perks

I hesitate to even include this one, but there’s no denying that it’s possible to milk maximum benefit out of your credit cards without sliding into a destructive cycle of debt. My wife is a shining example of this. I don’t think she’s paid a dime of interest to a credit card company in the time I’ve known her. On the other hand, she weighs and considers cash back options, earns points towards this or that, and is perhaps the most strategic person I know when it comes to budgeting and spending over the long term.

I mean, I’ve done the long crawl out of debt and experienced how it changes the way I view money and think about spending. I budget and plan more than I’d have thought possible – let alone necessary – a few decades ago. But she’s never gone to the dark side. She just loves being organized. I think the purchases she makes with her cash back savings or the other perks she uses give her the same rush I get when I finally beat the Destroyer or R.A.M. or whatever on the family X-Box (by which I mean “my personal stay-away-or-else X-Box”).

Also, I don’t actually get anything for beating a big boss baddie. I have a warm toasty feeling, I guess – but she has a new laptop, PLUS a warm toasty feeling. Clearly she’s doing something right.

If you have the opportunity to earn discounts or other perks FOR STUFF YOU’D ACTUALLY USE OR BUY ANYWAY, and you have a budget that allows you to pay your card balance in full each month, a strategic selection and use of credit cards can let you do this. Be honest with yourself, however. If you know you’re not likely to keep track of everything the way you should, or you don’t really need the specific perks or options they’re dangling in front of you, walk away. Cash vs credit card for perks and points? You know yourself. What do you think?

6. When You’re Trying To Build (or Rebuild) Your Credit

I know, I know – completely counterintuitive, right? Using credit cards to IMPROVE your credit? Just hear me out on this one.

Your credit score, as well as your overall credit report, are all about your credit worthiness. The basic question lenders want answered is, “Can I count on this person to pay back my loan?” One of the ways to prove you can manage debt effectively is to, well… manage some debt. Paying cash may be the safer, more responsible thing to do, but it won’t help you get a lower interest rate on your mortgage or next vehicle loan because it does little or nothing for your credit score or overall credit history.

Your bank or other lender doesn’t need to know how reliable you are when you have cash to cover the entire amount. They want to know how reliable you are when you don’t.

Available credit is one of the factors making up your credit score. If you have a card with a $3,000 limit, for example, but your balance is usually a few hundred dollars or less, you have at least some good credit by definition. It’s there, waiting for you to spend it, and you’re not. Responsible credit card use helps strengthen your credit. Credit card debt in and of itself, on the other hand, does not.

When To Stick With Cash (Or Your Debit Card)

I’ll offer a comprehensive list:

1. Every other time you spend money.
2. Also, many of the times listed above.
3. There are times it might be a good idea to use your credit card; it’s almost never a bad idea NOT to use it.

Let’s not forget that most places still accept cash. Some even prefer it. This is especially true for small businesses or those with very narrow profit margins. It costs them a percentage every time they accept your credit card for payment, so if you can pay cash you may find them much more cooperative. You might even get a small discount or two.

If you are in a spot where you feel like you have to use your credit card to pay for medical care or an unexpected repair, maybe that’s just one of those times. First, though, ask about making payment arrangements direction, especially with health care services. Many are surprisingly flexible if you demonstrate good will and stick to whatever arrangements you agree to.

Want to make absolutely sure your kids don’t overspend when you send them to the mall? Only give them cash. Want to make sure YOU don’t overspend? Same thing.

More Than Two Options

Remember at the top when I said it often seemed like there were really only two basic options – cash vs credit card? It does often seem that way. But it’s not true.

Sometimes a low-interest personal loan is the best way to handle a need or unexpected circumstances. The right debt consolidation loan has helped many people restructure and better manage their debt so they can get out of the swamp. Credit cards also come in many different varieties these days – maybe some cards are right for you and others aren’t.

Conclusion

Whatever your situation, never forget that you almost always have more options than may first suggest themselves. Part of taking more effective control of your personal finances is learning more about those options – preferably before you need them. Perhaps there’s more available to you than cash vs credit card when it comes down to it!