Swipe your card, sign your name, and your transaction at the cash register is complete. Paying with credit -- credit cards, auto loans or mortgage loans -- is a promise to later pay back your charge with interest. Handing over cash is not as sexy, but it can help dial back your expenses and save money. The exact amount you save depends on the item, so it's impossible to give an exact number. Using cash on everyday items, but knowing when credit is appropriate, puts you on the path to saving money.
Save on Interest
Once your cash transaction is complete, you're done. There is no bill mailed out to pay back the balance with interest. With auto and mortgage loans, you pay back a specified amount of interest each month until the purchase is paid in full -- often several thousand dollars. Credit cards are easier -- pay it in full each month and you do not owe interest. If you fail to pay the balance in full, you're charged interest on the balance.
Save on Fees
Paying with cash means you buy only with the funds you have on hand. However, when you swipe your credit card you could easily overdraft a checking account, bounce a transaction or go over your credit limit. All three scenarios come with additional charges, often $30 or $40 for each occurrence. When you finance a vehicle or house, you might encounter transaction fees, early-payoff fees, processing and handling charges, and fees to process your paperwork, including credit checks and income verification.
According to Bankrate.com, consumers might qualify for cash discounts from a range of businesses including restaurants, gas stations, jewelry stores and medical facilities. Paying with cash means immediate money in the retailer's pocket without the hassle of waiting for your credit transaction to process. Don't automatically expect these discounts; you need to negotiate with the merchant to get them. Another benefit: Many merchants pass off credit processing fees to consumers as convenience fees that increase your total purchase price. Pay with cash and you avoid this convenience fee.
According to the Chicago Tribune, you're likely to spend more when paying with credit than with cash. This is due in part to your ability to pay it back later. With cash on hand, you're limited in the amount you can spend, and you're more likely to make different choices to save your money. Limiting your options helps when you're attempting to stick to a budget.
Limited Cash Reserves
In some cases, there are benefits to paying more by financing a transaction instead of using cash. Buying large-ticket items with cash limits your cash reserves. For instance, buying a house with cash saves you money on interest payments each month. On the other hand, you might be able to invest that money at a higher rate of return than you'd pay in mortgage interest.
To get credit, you need to use credit. Even if you have no desire to ever again finance an item, your credit score affects your financial portfolio. Your car insurance premium is directly affected by your credit score. Your credit score is pulled by landlords and employers. Having no credit history, or a limited one, hurts you in the long run.
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