How to Determine Whether You Should Pay in Cash or Credit

Managing your finances takes some careful consideration and planning. The more effort you’ve devoted to developing good fiscal habits, the more prepared you’ll be to deal with the money management questions you’ll face on a daily basis. One common – and deceptively straightforward – example is whether to pay in cash or credit.

Everyone’s financial situation can vary, and there are so many different types and sizes of transactions out there that it can be hard to decide if one way of paying is better than another. Both forms of payment have pros and cons, some of which can change based on circumstances. While some people choose to predominantly pay with credit card or cash regardless, most will decide which to use on a case-by-case basis. Here are a few things to think about what method of payment to use.

When discussing if cash is the right choice for a particular purchase it’s important to note that cash is referred to as money earned sitting in a checking account or other liquid investment account.  Other cash options such as advances from credit cards or prematurely tapping into retirement funds are inadvisable due to the high interest or heavy penalties associated with each.

Cash is very useful in helping to curb any inclination to spend more than you have. By counting out exactly how much cash you want to spend and sticking to that amount or less, you can make it more likely you’ll be able to stick with your budget. Additionally, purchasing goods with a credit card and then failing to pay off the balance at the end of the billing period will leave you incurring interest – often at rates of 15% or higher. So if you had used cash for this purchase instead, you would have ended up spending less on the item in the long run.

That said, carrying tangible paper money around can make some people more impulsive spenders, so it’s important to know yourself well enough to decide if cash could lead to unwanted spending. Also remember that the risk of theft is higher with cash, as hard currency lacks the safeguards that most credit lenders now provide. Debit cards are a good compromise here as they provide a level of modern security and convenience while still giving you direct access to your available cash – helping you avoid overcharging without any bills to pay later on or potential interest to worry about.

However, if your debit card and PIN are compromised, thieves can gain direct access to your checking account for at least a short period of time. On the other hand, credit cards generally offer more advance fraud protection and monitor purchases more closely to scan for irregularities. If you alert them, most will reimburse you for any fraudulent purchases and many will also protect your purchases in case you buy a faulty product. There are also some types of credit cards that offer specific programs that reward your purchasing activity with various goods and services when you reach certain spending levels, and a cash rewards credit card will even give a small percent of money back on each purchase.

Using a credit card responsibly has a lot of advantages in terms of convenience and protection, as well as building your credit score. But credit cards are not for everyone, and choosing to always pay in cash or use a combination of both forms of payment may be the best choice for you depending on your financial situation. Regardless of which route you choose, it’s important to manage your money responsibly.