With the introduction of bitcoin, Samsung Pay and the likes, there are so many options to choose from for making a purchase. Cash and credit are still the primary methods in which people make purchases, and so we hope to break down the benefits — and detriments — of both forms of payments.
Benefits of using cash:
Awareness — There is a very real sense of a “pain of paying” and researchers Priya Raghubir and Joydeep Srivastava broke it down into two reasons why those who pay in cash tend to spend less as explained in this article from Dr. Utpal Dholakia with Psychology Today. By paying in cash, we see the immediate transfer instead of receiving a bill later down the line. Second, with a credit card, we get the charges consolidated into one bill whereas with cash, we become more aware of how much we’re spending on what. Paying in cash reintroduces the pain of paying but also helps us stay aware of where we’re putting our money.
Budgeting — The cash you have is limited, which means you’re more likely to stick to the budget you have because you don’t even have the means to go over your budget. In Paula Pant’s article on The Balance, she goes even further to explain more benefits of a cash-only budget, including an envelope system for distributing cash between the different categories in your budget.
Detriments of using cash:
Vulnerability — by going cash-only, there is an increased vulnerability not just in the case of theft, but also in the case of emergencies. When you lose your wallet, you can call the credit card company to discontinue your credit card, putting an effective stop to theft. The cash inside, though, is at the mercy of whoever took the wallet or found the wallet. In the sense of emergencies, unless you usually keep a whole lot of cash on you, paying for a costly emergency room visit could prove difficult without the assistance of a credit card.
Accessibility — In the age of the internet, booking hotels ahead of time and booking flights all require credit card information. With the rise of online shopping, too, cash just won’t cut it for the plane ticket or a new novel featured on Amazon.
Benefits of using credit:
Points and Perks — with credit, it’s possible to earn rewards for spending cash. Arguably, this feeds the cycle of consumerism, but when under control, can lead to more savings as discussed in this article from Peachtree Financial Solutions. For example, certain corporations now have their own credit cards, which can lead to discounts in-store that adds up in savings.
Financial records — Every credit card purchase made is recorded and accessible to you, so it’s one less thing to keep track of. It’ll even make it easier to start budgeting by already having a digital record of what you spend where. With credit, the responsibility of record-keeping is not on you.
Convenience — the biggest thing about credit is you don’t necessarily need to have all the money to spend money. We’ll talk later on why this is dangerous, but it certainly comes in handy to jump on good deals. Even if it’s not a good deal, having to replace a major appliance is costly, and having a credit card on hand to buy the replacement even though you don’t have the cash ready makes the stressful time just a tad less so.
Detriments of using credit:
Debt — while there’s only one detriment listed, this is a very dangerous risk of using credit cards. By the end of 2017, Americans held a total of $830 billion in credit card debt, according to Brittney Mayer’s article on CardRates.com. On the more personal scale, credit card debt incurs high interest and when unpaid, greatly damages credit scores which in turn makes it harder to borrow money to, say, buy a house. This domino effect is the reasons credit card users should exercise plenty of discipline and awareness. Latoya Irby goes more in depth on the risky side of using credit with her article on The Balance.
Through this list, we can see many pros can just as easily turn into cons, and so the best suggestion is to incorporate a budget where you use both cash and credit to capture as many benefits as possible. Perhaps have a credit card on hand, but go cash on other purchases, such as those for food or clothing. By diversifying your spending habits, it becomes a practice in self-discipline and awareness which works toward improving financial planning.