Pros & Cons of Cash Vs. Credit Cards

Whether it's getting your groceries, paying your utility bills or eating out, you have to be able to pay for your activities. How you pay is up to you – usually. Credit cards and cash both have their pros and cons, and which one is best for you might be very different than what's best for your spouse or best friend.

Paying with a credit card offers several benefits besides just convenience. Each time you pay your credit card bill on time, it adds positive history to your credit report and improves your credit score. In addition, if you use a rewards credit card, you can earn cash back or other incentives. Finally, you have protection against charges if you lose your card. Thanks to the Electronic Funds Transfer Act, $50 would be the most you'd be liable for in unauthorized purchases as long as you report a missing or stolen card within two days.

Paying with a credit card lets you insert your chip, forget about the bill for a month and, unless you've exceeded your limit, not let your future spending be hampered by your purchase. This can work against you. For example, if you budget $50 for new clothes with the money and you see a cute dress that's calling your name for $150, you can hand over your card and not feel the impact until the bill comes. And if you've overspent so much that you can't pay your bill, you may have to pay interest at a high rate.

The biggest advantage to paying with cash is that you're limited to how much you can spend. If you don't have the money in your wallet, you're not able to just swipe away your savings. In addition, you don't have to pay a credit card company any annual fees when you carry cash. You don't have to worry about missing a monthly payment and having your credit card company sock you with late payment fees and interest. Finally, some companies don't take credit cards; they accept only cash.

Paying with cash forces you to carry around enough money to make all of your purchases. If you're just stopping at the store for a gallon of milk, this probably isn't a problem. However, if you're getting your groceries for the week, refilling your gas tank and buying a new suit, you're carrying a lot of cash. If your wallet is lost or stolen, that money's gone.