Is It Better To Use Cash Or Credit Cards For Purchases?

I put almost all of my purchases on my credit card. I use plastic even for tiny sub-$5 purchases. It’s convenient, I don’t have to deal with the loose coins (which I never use except to go to Aldi), and I earn credit card rewards.

However, I was talking to a friend a while back about the benefits of using credit cards for everyday spending. She said that while she does have a credit card, she rarely uses it. She mostly pays for items with cash. She strongly believed that she spends less money when you use cash instead of credit cards.

So which is better? Let’s look at the pros and cons of using cash versus credit cards.

Benefits of Cash

Spend less

Multiple studies have shown that people will spend less with cash than with credit cards. Credit cards are different from cash both in terms of payment coupling (the link between the purchase of a good and the parting of your money) and payment form (the look of cash versus a gift certificate or credit card).

Businesses know that people will spend more money with non-cash payment methods such as gift certificates or credit cards. Casinos routinely have you bet in chips instead of cash, making you less immune to the pain of gambling losses.

Even arcades are taking a page out of the casino’s playbook. When I go to Dave and Buster’s, instead of putting quarters into the basketball machine, you just swipe your Dave & Busters card. Of course, you still get your winnings in paper tickets, because they want you to have that tangible feeling of success in your hand (and to show off to all the other players at the arcade).

Don’t need to deal with credit card statements

For some, it can be a hassle to pay off credit cards. Some people receive their paper credit card statements in the mail. To pay their bill, they have to write a check (you can’t send cash through the mail), pay for a stamp, and then mail it to the credit card company. You have to remember to pay your bill on time. For all that hassle, it’s easier for some people to just finish every transaction with an exchange of cash.

Can’t go into credit card debt

This is a big one. Credit card debt is the worst kind of debt and has some of the highest interest rates of any type of loan. If you use cash, you can only spend what you have earned. This instills discipline, which is the major reason why Dave Ramsey is a huge proponent for cash, especially as part of an envelope system for budgeting.

More frequently accepted than credit cards

Not every business accepts credit cards. When you buy things with a credit card, the business has to pay a processing fee to the credit card company. For businesses with slim profit margins, accepting only cash can really help the bottom line.

Even at a business that accept credit cards, you can often get a discount by using cash. Gas stations in many areas will charge less if you pay with cash. At some jewelry stores, you can negotiate a lower price if you agree to pay in cash.

Benefit of Credit Cards

Purchase protection

If you lose your wallet or purse, any cash that is missing is gone forever. With credit cards, a quick phone call will freeze your credit card, and you are usually not responsible for any unauthorized purchases. Some credit cards will even offer additional purchase protections if you pay by credit card. Many credit cards will offer primary car rental insurance, so you can decline any insurance the rental agency offers to you.

Convenient

For many people, paying with credit card is more convenient than cash. You never have to go to an ATM, you’ll never have to deal with loose coins, and cash is (literally) dirty. And paying your credit card is really easy in the internet age. You can even link your bank account to your credit card so your balance is automatically paid in full each month.

Credit card rewards

You can earn credit card rewards with purchases. This can be in the form of cash back, or points and miles that can be converted for free travel. Right now, I have four credit cards in my wallet: the Chase Sapphire Reserve, Chase Freedom, Chase Freedom Unlimited, and Fidelity Signature Visa. But you don’t need to carry multiple credit cards in your wallet to get great credit card rewards: using the Citi Double Cash Back or the Fidelity Signature Visa card, you can get 2% unlimited cashback on all purchases.

Easier expense tracking using software or apps

Certainly, you can still track your expenses if you use cash, but this will require you to manually enter and categorize purchases on a notepad or spreadsheet using your receipts. Alternatively, you can pay for expenses out of different envelopes using the envelope system. When you use credit cards, it’s much easier to track expenses and budget using Quicken or Mint. I used to use Quicken, but I now use Mint, which is a free, online alternative to Quicken.

Credit Cards vs. Cash: Convenience vs. Math

From a math perspective, I think that using cash would be the most financially prudent way to pay for purchases. Both social science research and anecdotal experience have found that you will spend more if you use credit cards. This increase in spending likely outpaces any credit card rewards you may receive.

But for me, the convenience of a credit card makes it worth the price of extra consumption. I’m a big proponent of simplicity in personal finance, and paying with credit cards is far simpler than paying with cash.

To blunt the cost of extra spending when you use credit cards, it’s helpful to maximize your credit card rewards whenever possible. If buying online, use a shopping portal such as TopCashback to get additional money off your purchases. Also, because using credit cards makes it so convenient to track your spending, you should use apps such as Mint to track your spending and trim any excess spending.

What do you think? Do you primarily use cash or credit cards for your everyday purchases? Do you think you use more money with credit cards compared to cash?