Increasingly, we are no longer seeing establishments that accept only cash. More businesses are accepting credit cards, and the type of credit card a person has – gold, platinum, black – has even become part of their status.

Also, depending on where you live, and especially if you are over the age of 18 and in college or university, banks are clamouring to give you credit cards. So, it tends to be considered a sign that you are an adult, and if you do not have a credit card, your peers and associates may be wondering what is wrong with you.

However, as much as owning credit cards and having a good credit score is lauded in many societies, there are many among us who has cut up their cards, have little or no debt, and are advocating a cash-based lifestyle. But clearly, there are benefits to using a credit card. We consider the pros and cons of credit cards versus cash.

 

Pros and Cons of Credit Cards

Easy access to funds. A credit card is invaluable when you do not have the cash at hand to pay for goods and services. The limit determines the maximum you are able to charge to the card, which may be considerably higher than the fund you allocate for discretionary spending, but which you can use when needed.

Safe and convenient. Credit cards are also useful when you have big purchases, and it is would be unsafe to carry around cash. Also, if the card is lost or stolen, a quick call to the bank to cancel the card would limit losses, and for unauthorised purchases, your liability would be limited.  

Secure. Coupled with the previous point, credit card companies seek to minimise fraud and losses, and so use analytics to flay potentially fraudulent purchases, which stop a transaction before it is approved. Also, depending on the card company and its offerings, they may offer some protection with certain purchases, such as extending warranties or providing travel or auto insurance, when travelling.

Rewards, cashback and bonuses. As an incentive to use your credit card more, many card companies offer rewards points, cash back on purchases, or various bonuses. When you are able to redeem or apply the incentives, and realise real savings, having a credit card can be a distinct benefit.

Easy to rack up debt.  The biggest drawback of credit cards is that it is easy to accumulate considerable debt. Most credit cards only require a minimum payment to be made, with the outstanding debt being subject to very high-interest rates. It thus means that over a relatively short period of time, with the interest being calculated monthly and so compounded, it is easy for hundreds of dollars of debt to become thousands of dollars debt.

 

Pros and Cons of Cash

Transacting with your own money. One of the biggest benefits of using cash as opposed to credit cards is the fact that you are doing business with your own money, and not the banks. The money at your disposal is not being given to you on credit, which you must repay; hence there may be a greater sense of control over your spending.

Easier to manage debt. In paying only in cash, you must have the fund available to complete a transaction. With a credit card, you do not necessarily need to have the cash at hand at that precise time to complete a purchase. So although it is easier to enjoy the convenience of using a credit card, it is also easier to lose track of your spending and accumulate debt.

Easier to budget. Following on the previous point, in having a budget and paying in cash, it is easier to track exactly how you’re spending your money and stick to your budget.

Cash is still king. Although credit cards are widely accepted, it is very rarely that cash is not accepted. Moreover, depending on the country, there may be processing fees merchants incur when accepting credit cards and would prefer to receive cash instead. Also, if you are prepared to pay cash, it may be possible to negotiate a good deal, especially for large purchases.

No security from theft or loss. There is no identity attached to cash, and so if it is lost or stolen, it can be difficult, if not impossible to recover. Once cash is gone, it’s gone.

Some purchases are difficult with cash. Some transactions are difficult to complete with cash – particularly those that are being done online. Hence for reservations or bookings, credit cards tend to be the preferred payment option. But also some in-person purchases are difficult to complete, such as paying for hotel rooms. Even if you intend to settle your bill in cash, hotels generally want you to secure the room with a credit card, or have it on file to cover unforeseen expenses.

 

So Which One to Choose?

Based on the above, credit cards and cash each have their pros and cons; hence the objective should be to capitalise on the benefits and minimise the drawbacks. In order to determine which one you should choose, consider your own spending habits and money management practices, along with life and lifestyle. Are you fairly disciplined with money? Are you carrying a lot of debt, especially credit card debt? Do you travel a lot and need to make online bookings?

If you are pretty disciplined in managing your money and have developed the practice of clearing all of your credit card charges before the due date, it may certainly benefit you to continue using your credit card as your primary payment option. If on the other hand, you have a lot of credit card debt and find yourself spending more than you should, it may be prudent to use cash primarily and not rely on your credit card unless it is an emergency or absolutely necessary.

Ultimately, determining whether you operate better with credit or cash is crucial to successful budgeting and money management, and consequently, it is an important step on your way to financial literacy and achieving many of your money-related goals.

 

 

Image:  benzoix (freepik)