Cash VS Credit: The Pros and Cons

By Mike Peterson
In July 15, 2014

Cash VS Credit: The Pros and Cons

It’s hard to talk about personal finance without talking about credit cards – specifically, the problems that can accompany credit card debt. In fact, read enough personal finance blogs and you might start to wonder if it’s best to ditch your credit cards entirely in favor of a “cash-only” lifestyle.

If you’ve read my blog for a while, you probably know that I’m hesitant about the idea of going completely credit card-free. Although there are some definite benefits to using cash instead of credit cards, it’s not always possible – or even ideal – to use cash for all of your purchases.

We all know the “cons” of credit cards: They make it easy to overspend, and interest can get out of control fast. But, believe it or not, there are a few “cons” to cash, too. Before you make a major change in your payment habits, you should consider the pros and cons of paying cash.

Pro: Cash helps you control your spending. In most cases, people tend to spend more with their credit card than they do with cash. Studies have demonstrated over and over again that we’re more mindful of our spending when we’re parting with cash. That’s good news if you’re trying to stick to a budget: If you’re worried about overspending, simply withdraw a set amount of money for an outing, a weekend, or the week – whatever works best for you – and cut off your spending when it’s gone.

Pro: There’s no danger of additional expenses with cash. If there’s any chance you won’t be able to pay your credit card bill in full at the end of the month, you can expect interest payments to be piled on top of whatever you spend.

The only additional cost associated with cash use, on the other hand, is the possibility of an ATM charge for withdrawals. But even these expenses are easy to sidestep: Stick with your bank’s machines and you can avoid the extra expense.

Con: Cash doesn’t have the same security as credit cards. If your credit card is stolen and used fraudulently, the most you’ll be required to cover is $50. You can also cancel your credit card to prevent further misuse. You have no such protection if your cash is stolen, though. Once cash is gone, it’s gone.

Con: You miss out on rewards. If you use a card with cash-back, reward points, or another kind of incentive program, you’re getting money just to use your card.

Pro: You miss out on rewards. You read that right. I’m putting this in both categories. Rewards are great, but credit card fees and finance charges can often outweigh these extras, especially if you spend more than you can pay. Plus, these reward programs can make it more tempting to make purchases you don’t really need. If you don’t have a lot of willpower when it comes to spending, the reward program may not be worth it.

Con: Some purchases are more difficult with cash. Ever tried to book a hotel room, purchase an airline ticket, or reserve a rental car with cash? It’s not impossible, but it’s definitely not easy. Credit cards make some purchases – especially travel- or reservation-type purchases – a lot simpler.

Con: Cash won’t help you build credit. This is one of the most important reasons to use a credit card, at least occasionally. You need good credit for major purchases, like a car or home. Potential landlords and employers may consider your credit rating, too. Used responsibly, a credit card can be a powerful tool to help you meet some financial goals.

As you can see, paying with cash has its benefits, but the pluses of credit card use shouldn’t be overlooked, either.

The important thing to remember is to use credit cards carefully and to make every effort not to charge more than you can pay in full when your statement arrives.

Here’s to responsible spending – whether you pay cash or credit!

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

Click "More" for important American Credit Foundation client transition information