"Cash only" is the mantra for many people who've had previous credit problems themselves or have seen others deal with credit- or debt-related struggles. While using cash for purchases has some benefits, there are also some really good reasons to use credit. Here's how they stack against each other.
Credit cards give you spending power without the inconvenience of carrying around cash. Plus, with credit cards, you can buy now and pay for the purchase in a few weeks or over a period of time. You don’t have that option when you use cash for your purchases. Paying in cash means you never have to pay interest. But you can also avoid paying interest when using credit if you pay your balance in full before the grace period ends.
With cash, your spending is limited to what you have on hand. Credit cards, on the other hand, provide you with additional purchasing power without the risks that come with carrying the same amount of cash. On the other hand, opting for cash over credit could be a good thing. Studies have shown that people tend to spend more with a credit card than with cash. Using cash for all your purchases minimizes the risk of going into debt.
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 usually at no cost. You don’t have the same protection as cash. If your cash is stolen or you lose your wallet, you’re out of luck and out of whatever cash you were carrying. You’ll have to replace the funds yourself.
Not only do you get fraud protection when you use a credit card, you also have protection against items you purchased but never received or items you received that were damaged or not delivered as promised. 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.
Dozens of credit cards pay rewards on your credit card purchases. You can earn points to use toward merchandise or hotel stays, miles that can be used toward airline tickets, and even cash back. While rewards programs also work with cash purchases, they're usually retailer specific. With the exception of store credit cards, credit card rewards are far more versatile than retailer-specific loyalty rewards.
Building Good Credit
Using cash for all your purchases won’t help you build your credit score, a number that businesses are using more and more to make decisions about you. The whole premise of credit scores is based on how well you use credit. Using a credit card—the right way, of course—helps build your credit score.
Some transactions require a credit card. Renting a car, booking a hotel, or purchasing airline tickets all require you to use a credit card, or at least a debit card. If you're living on cash only, you'll have a harder time completing electronic transactions.
Credit cards give you the flexibility to easily shop online. If you only have cash and want to make an online purchase, you’ll have to figure a way to convert it to an electronic format. That may mean depositing the cash into a checking account using a debit card, purchasing a prepaid card, or having someone with a credit card make the purchase for you.
Credit cards are sometimes faster than cash. You may have seen the credit card commercial where customers using their credit cards move through the line almost instantly while the customer using cash takes more time and holds up the line.
With cash, you have to count out the amount you’re spending and wait for the cashier to give your change—if there’s change due. With a credit card, you just swipe and go.
Depending on the retailer and the amount of the transaction, you may not even have to sign for your credit card purchase.
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. Then, pull out your credit card for bigger-ticket items or the ones that will help you rack up rewards.
Check out this infographic:
Source: The Balance