Using a Credit Card vs Cash

a stack of credits cards resting on a $20 bill
••• Image Source / Getty

It's not uncommon for people who've had credit or debt problems before to steer away from credit cards. While using cash for purchases has some benefits, there are many good reasons to use credit cards. Here's how they stack up against each other.

Convenience

Credit cards give you spending power without the inconvenience of carrying around large amounts of physical cash. A single card is all you're responsible for, and it can fit in your wallet or purse with ease. You also get the convenience of purchasing items now and paying for them in the future, which gives you time to get the funds if you don't currently have them available. As long as you pay your bill in full each cycle, you won't pay interest on any purchases.

Paying with cash eliminates the possibility of overspending. You can't spend more than you have, so there's no danger in spending and not being able to pay your bill off at the end of the cycle—resulting in interest being charged. Cash also gives you the flexibility to purchase items from cash-only merchants and those with minimum spends on credit cards.

Spending Ability

With cash, your spending is limited to what you have in your possession. Credit cards, on the other hand, allow you to spend what you have available, providing you with additional purchasing power without the risks that come with carrying the same amount of cash. Opting for cash over credit can still be a good thing, however. Studies have shown that people tend to spend more with a credit card than with cash. Because you can only spend the cash available to you, you reduce the risk of going into debt by forgoing credit cards.

Level of Protection

Federal law and credit card fraud protection policies limit your liability for fraudulent charges made on a lost or stolen credit card. Your credit card issuer will send you a new credit card—often with a new account number—to replace the missing card. There's no comparable protection when you use cash. If your cash is stolen or you lose your wallet, you're out of luck and however much cash you were carrying.

Not only do you get fraud protection when you use a credit card, but you also have protection against items you never received, damaged items, and items not delivered as promised. When you have an issue with products or services you purchased with cash, your only option is to resolve these issuers directly with the merchant. Credit cards give you the ability to dispute transactions if the merchant isn't handling an issue to your satisfaction.

Rewards

Lots of credit cards offer rewards on your purchases. You can earn points to use toward merchandise, hotel stays, airline miles, and cashback. If you have the funds available, using your credit card for purchases may be worth earning the reward points—especially if you use the cash you would've used for the purchase to pay on your credit card.

Rewards programs also work with cash purchases, but they're usually retailer-specific and offer little to no benefit with other retailers. These types of reward programs generally come in the form of a free product or service after a specific number of visits or purchases. With the exception of store credit cards, credit card rewards are far more versatile than retailer-specific loyalty rewards.

There are many offers to choose from, but The Balance has picked out the best rewards credit cards available right now. If you're on the market for a new card, use our list to make your selection process super easy.

Building Good Credit

Your credit score is an essential financial aspect of your life; it's how businesses will make decisions about you before offering you loans and other services. Good credit is necessary if you need to borrow money to buy a house or car, rent an apartment, or even get a competitive auto insurance rate.

Unfortunately, using cash for all your purchases won't help you build your credit score. The whole premise of credit scores is based on how well you use credit, so you generally need a credit card to begin building credit. Using a credit card—the right way, of course—is the best way to build good credit

Retailer Requirements

Some transactions—such as renting a car, booking a hotel, or purchasing airline tickets—require a credit card. Or, at the very least, a debit card. If you're living on cash only, you'll have a hard time booking these services.

Some car rental agencies and hotels require you to use a credit card for your reservation. Those that accept debit cards may require a large security deposit and may even run a credit check before allowing you to pay with debit.

Credit cards give you the flexibility to easily pay online. If you only have cash and want to make an online purchase, you'll either have to put it into a checking account, purchase a prepaid card, or have someone with a credit card make the purchase for you.

The Bottom Line

Credit cards aren't without their drawbacks, but if you use them correctly, you can offset or even eliminate the disadvantages. Of course, there's no reason you can't have both credit cards and cash in your wallet. You can use cash for smaller purchases that don't need credit card protection and use your credit card for bigger-ticket items and to gain reward points.

Article Sources

  1. Consumer Financial Protection Bureau. "What is a Grace Period for a Credit Card?" Accessed March 4, 2020.

  2. Sloan School of Management, MIT. "Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay," Page 1. Accessed March 4, 2020.

  3. Federal Trade Commission. "Disputing Credit Card Charges." Accessed March 4, 2020.