The Advantages & Disadvantages of Using Cash vs. Credit

The Advantages & Disadvantages of Using Cash vs. Credit

The Advantages & Disadvantages of Using Cash vs. Credit

Cash is king, or so they say. It's easy to see why. Cash is fast, convenient and gets things done thanks to its almost universal acceptance. Credit cards do have their place, however. They can help make big purchases more manageable and improve your credit score when used responsibly. If cash is king, credit cards are definitely the heir to the throne. Both forms of currency come with drawbacks as well as benefits, however. Cash is easy to steal, while credit card debt can get you into big trouble. Weighing the pros and cons of each payment method will help you choose the right one for your next purchase.

Cash Pros

Everybody loves cash, and it's hard to find a retail establishment or private seller who will refuse it. When you pay with cash, the payee has immediate access to the money. Cash is easy to spend, but it's also easier to hang on to. Everyone knows, for instance, that once you break a $20 or $50 bill, it rapidly disappears. Knowing this phenomenon makes us hesitant to hand them over. When you pay cash for goods and services, you're literally watching your money disappear in a tangible way. This makes most people think twice before making an impulse purchase.

Cash also makes sticking to a budget easier. If you walk into a store with only cash in your wallet, you're forced to stick to your budget. You can't spend more money than what you have in your pocket. Cash also saves vendors money, and some pass the savings on to you through cash discounts. Retailers pay a fee every time they swipe a credit card. To save money, some offer their customers a discount for paying with cash. The discount cash customers get is less than the cost of the credit card processing fee, so retailers still come out ahead.

Cash Cons

Cash is almost impossible to track, so money you lose or that's stolen from you is probably gone for good. When you carry cash, you're limited to spending what you have with you. While this is a plus when you're sticking to a budget, it's a potential problem in an emergency situation. If you operate solely with cash, you might find yourself in trouble if your roof springs a leak or your car breaks down. In these instances, fixing the situation may require more cash than that to which you have access. Distance also creates an issue with cash payments. Cash works as a payment only when you and the seller are together. There is no way to feed cash into your computer when shopping online, so cash purchases aren't always an option.

Credit Card Pros

Credit cards are safer than cash. Thanks to the Fair Credit Billing Act, you're only liable for the first $50 of fraudulent transactions on a lost or stolen credit card. You also have the option of disputing a charge if you're arguing with a vendor over a defective item and they refuse to issue a refund. Some credit cards even provide additional warranty coverage on items you buy. When properly used, credit cards also improve your credit rating, making it easier to get a loan or mortgage.

Credit cards also increase your purchasing power. If you need to make a large purchase like braces for your child or a new refrigerator, charging it lets you get the item now and pay for it over time. It is easier to pay for big purchases when they are broken into smaller chunks. Your credit card may also give you more bang for your buck. With cash back and reward points, credit cards make every dollar you spend go a little further. You can spend those dollars just about anywhere, as credit card acceptance is usually global.

Credit Card Cons

Credit cards charge high interest rates, which makes purchases more expensive if you pay them off over time. Many people use credit cards when in a bind and then fail to pay them off quickly. The result is sometimes a lifetime of debt. Credit card debt happens quickly. It's easy to swipe your card and forget that you're spending real money. Using credit well will boost your credit score, but late payments and high credit card balances do the opposite. Credit cards may look like magic, but they're very much tethered to reality. If you have trouble keeping yours in your wallet, you might be better off without one.

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About the Author

Michelle earned her accounting degree summa cum laude and has extensive experience in business management and accounting. Entrepreneurship is in her blood, and her work focuses on helping small businesses successfully compete in a big market. Michelle also knows the value of a dollar and enjoys helping readers understand how best to maximize their money and enjoy a healthy financial life.