Cash Vs. Credit: What’s The Better Option?

Sarah Li Cain4-Minute Read
August 11, 2021

When it comes to payment methods, cash or credit cards are both popular and perfectly valid ways to pay for goods and services. Of course, there are both benefits and drawbacks to using cash vs credit. Which one you use will depend on your comfort level, what the retailer accepts as well as other factors like your credit limit. We’ll discuss these points and more below.

Paying With A Credit Card

A credit card is a revolving line of credit that you, the consumer, can use to pay for goods and services up to a certain amount, called a credit limit. The amount charged on the card can then be paid back over time, often with a grace period. As you pay the amount back, your credit limit will go back up, and you can keep using your card, assuming you’re in good standing.

Benefits Of Using A Credit Card

Using a credit card offers plenty of benefits, assuming you use it responsibly.

Some of these advantages include:

  • Build your credit: If you make sure that you don’t max out your credit card and make on-time payments, you can positively impact your credit history. This in turn will help to boost your credit score, which can open the door for more competitive interest rates on products like mortgage loans, credit cards and personal loans.
  • Earn reward points: Depending on the card you use, you can earn travel points or miles that go toward hotels, flights, cruises and more. Some even give you the opportunity to earn signup bonus points worth hundreds of dollars in travel.
  • Receive cash back incentives: Instead of travel rewards, there are plenty of credit cards that offer cash-back rewards, helping you save money on each purchase.
  • Take advantage of consumer protections: Fraud liability ensures that if there are fraudulent purchases, you’re not liable (up to a certain extent). Some may even offer extended warranties on certain purchases and if your shipped item arrives damaged. There are also other benefits such as car and limited travel insurance.

Disadvantages Of Using A Credit Card

Before signing up for a credit card, you want to be aware of some of the downsides of using this payment method.

Some disadvantages include:

  • Potential misuse: Having a credit limit may feel like you can spend up to that amount. The truth is, if you can’t afford it in the first place, you may struggle to make payments. If you do, not making on-time payments and maxing out the card can negatively impact your credit score.
  • Interest payments: Credit cards charge an APR, or an annual percentage rate that comes into effect after your grace period is over. If you pay off the entire statement balance each month, you won’t have to pay interest. However, if you only make partial payments, you’ll have to pay interest — typically in the double digits. Plus, if you only make minimum payments, you’ll pay a large amount of interest that’ll take a long time to pay off.
  • Fees: Even if you don’t end up paying interest, you may still have to pay to use your credit card. Some charge annual fees, and plenty others charge convenience fees if you want to get a cash advance, for instance. Be sure to read the fine print before applying for a new card.
  • Risk of identity theft: If you like to go online shopping, hackers can steal your payment details. Some might also be able to steal your credit card information at brick-and-mortar locations by tampering with point of sale systems. Before you know it, someone will have racked up thousands of dollars’ worth of purchases without your consent.

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Paying With Cash

It’s easy to pay with cash: simply hand over an amount, and receive change back. Let’s take a look at when it’s a good idea to use cash, and when it isn’t.

Benefits Of Using Cash

There are many benefits for using cash. Reasons why it’s better to use cash instead of a credit card include:

  • Avoid interest charges: Using cash means you don’t have to pay interest charges, since you’re using your own money instead of borrowing someone else's.
  • More convenient: There are places where credit cards aren’t accepted, such as smaller retailers, yard sales and flea markets. In this case, having cash on hand will help you purchase what you need.
  • No chance of overspending: With a credit card, you can use up to the credit limit, which may increase your chances of overspending. With cash, you won’t have to worry about it because you can only spend what you have.
  • No credit card fees: There are no fees for using cash for purchases.

Disadvantages Of Using Cash

Although you won’t have to pay annual fees and you overspend, there are some drawbacks to paying with cash:

  • Risk of theft: Carrying a small amount of cash is fine. However, having too much on hand can be risky because if it’s stolen or lost, you’re out of luck. The chances of recovering it are slim unless someone finds it and is honest enough to give it back.
  • Not practical for emergencies: If there’s ever a situation where you need a large amount of money (think car repairs or medical bills), you may not have enough cash on hand to pay.
  • Can’t be used for all transactions: Some retailers, like hotels and airlines, may not allow you to pay with cash.

Is It Better To Pay Cash Or Credit Card?

Using a credit card to make a purchase offers secure protection, greater benefits and is convenient for larger or online purchases. A credit card is also a logical choice for an individual that can make full payments on their credit card, which will help them increase their credit score and avoid interest fees.

Ultimately it depends on the type of purchases you make and your individual financial situation.

The Bottom Line: Cash Vs. Credit

Ultimately, the decision to use cash or card rests with the individual. By understanding the advantages and disadvantages of each payment method, you can make the best financial decision. That includes assessing your current credit situation to determine whether you can qualify for credit card and use it responsibly. Check out the Rocket HQSM personal finance learning center for more tips.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.