Cash Vs. Credit Cards: The Pros And Cons And How To Choose

When it comes to payment methods, cash or credit cards are both popular and perfectly valid ways to pay for goods and services. Understanding the benefits and drawbacks to using cash vs. credit will help you determine which method is the best for you.

Which one you use will depend on your comfort level, what the retailer accepts as well as other factors like your credit limit.

Is It Better To Use Cash Or Credit?

It may be better to use cash over a credit card if you’re trying to avoid credit card fees or overspending. But there are certain circumstances when it’s better to use a credit card, like when you need to make an online purchase, when you run into a financial emergency or when you’re trying to build credit.

In other words, using a credit card to make a purchase offers secure protection, additional benefits and is convenient for larger or online purchases. A credit card is also a logical choice for an individual that can make full monthly payments on their credit card, which will help them increase their credit score and avoid interest fees.

Ultimately it depends on the type of purchases you make and your individual financial situation.

The Pros And Cons Of Cash Vs. Credit Cards

Either cash or credit card has its benefits and drawbacks. When deciding which method of payment to use, consider the following pros and cons.

Pros Of Using Credit Cards Over Cash

As long as you are responsible with your credit card, this method of payment offers many benefits:

• Ability to build credit: You can positively impact your credit history if you pay on time and not max out your credit card. This in turn will help to boost your credit score, which can open the door for more competitive interest rates on products like mortgage loans, credit cards and personal loans.
• Rewards: You can earn credit card rewards like travel points or miles that go toward hotels, flights, cruises and more. Some credit cards may even give you the opportunity to earn signup bonus points worth hundreds of dollars.
• Cash-back incentives: Credit card issuers may also offer cash-back rewards through cash-back credit cards which can help you save on each qualifying purchase.
• Consumer protections: Credit card purchases offer some protections that cash may not. For one, fraud liability ensures that if there are fraudulent purchases, you’re not liable (up to a certain extent). Some card issuers may even offer extended warranties on certain purchases and other benefits such as car and limited travel insurance.

Cons Of Using Credit Cards Over Cash

Some of the downsides of using a credit card include:

• Potential to overspend: Having a credit limit may make you feel like you can spend up to that amount, increasing the risk of spending more than you can afford to pay back. You may struggle to make payments if you can’t afford it in the first place. If you do, not making on-time payments and maxing out the card can negatively impact your credit score and add expensive interest and fees to your balance owed.
• Damaged credit score: You could risk your credit score dropping because of missed payments on your credit card.
• Interest payments: Credit cards charge an APR (annual percentage rate) that comes into effect, usually after an initial lower-rate grace period. If you pay off the entire statement balance each month within the grace period, you won’t have to pay interest. On the other hand, if you choose to carry a balance, you’ll have to pay interest on the entire amount owed — typically in the double digits.
• Additional fees: There may be fees you have to pay when using your credit card whether you end up paying interest or not. Some of these fees include annual fees, convenience fees if you want to get a cash advance, or late fees. Be sure to read the fine print before applying for a new card.
• Identity theft: If you like to go online shopping, hackers can steal your payment details whether you shop online or at a brick-and-mortar location. The risk of identity theft is real, and you may not even know someone has your information until you see that someone has racked up thousands of dollars’ worth of purchases without your consent.

Pros Of Using Cash Over A Credit Card

Reasons why it may be better to use cash instead of a credit card include:

• No interest charges: There are no interest charges to worry about when using cash since you’re using your own money instead of borrowing someone else's.
• No additional fees: There are usually no fees (and often a slightly reduced total due) for using cash for purchases.
• Lower chance of overspending: With cash, you won’t have to worry about factors like a credit limit because you can generally only spend what you have.
• Convenience: There are places where credit cards aren’t accepted, such as smaller retailers, yard sales and flea markets. In this case, having cash on hand will help you purchase what you need.

Cons Of Using Cash Over A Credit Card

There are some disadvantages to using cash over a credit card, such as:

• Risk of theft: While carrying a small amount of cash is fine, having too much on hand can be risky. If your cash ends up being stolen or lost, you’re out of luck. The chances of recovering it are slim unless someone finds it and is honest enough to give it back.
• Lack of preparation for emergencies: Cash may not be practical for financial emergencies because you may not have enough cash on hand to pay. Think of situations where you need a significant sum of money like car repairs or medical bills.
• Chance of retailers not accepting cash: Certain retailers may not accept cash, such as hotels and airlines.

Debit Cards Vs. Cash Vs. Credit Cards

Credit cards are a form of payment issued by banks that allow you to borrow money up to a credit limit. You will be charged interest on purchases if you don’t pay off your entire balance by a set date each month.

Cash and debit cards are similar to each other in that you can only use what you have on hand. Debit cards are a form of payment in which you can use your card to withdraw cash from the ATM or make purchases at a retailer. Some online retailers may also accept this form of payment. It’s best to use a debit card if you want the convenience of a credit card, but don’t want to be charged interest for purchases.

Unlike cash, there is a way to track where your cash goes, though you don’t have many consumer protections like credit cards. For instance, you may not have extended warranties on qualifying purchases or insurance on car rentals.

How To Decide Between Cash Or Credit Card

Some of the following questions you can ask when choosing between cash credit may be useful to help you arrive at a decision.

If you answered yes to the following questions, cash may be the right form of payment:

• Do I have enough cash to make this purchase?
• Do I have enough in my emergency fund to make this purchase?
• Do I have cash on hand if credit cards aren’t accepted?
• Will this purchase negatively affect my credit score?

If you answered yes to the following questions, a credit card may be the right form of payment:

• Can I afford to make the credit card payments on this purchase?
• Will this purchase go over my credit limit?
• Do I have a credit card if cash isn’t accepted?

The Bottom Line

Ultimately, the decision to use cash or card rests with you. By understanding the advantages and disadvantages of each payment method, you can make the best financial decision. That includes assessing your current credit situation to determine whether you can qualify for a credit card and use it responsibly.

Want to find other ways to manage your finances responsibly? You can sign up with Rocket Money^SM to assess your spending and find ways to save. It’s free.