Cash or credit? Which spending method is safer?
Neither is. Safe spending depends on careful planning, not method of payment.
But both cash and credit have their pros and cons in different situations. Learn the best uses for cash and credit using the comparison below.
Cash is accepted pretty much everywhere. Though there are a few, certain businesses won’t take it, most everything you need can be bought with cash.
It’s so much easier to watch what you spend when you can literally watch what you spend. When you are spending from an account, it’s easy to lose track of your balance and get overdrawn or maxed out.
Not so with cash spending. When you only spend what’s in your pocket, you’ll see exactly what your balance is after each transaction.
If you only ever paid with cash, you would never pay interest on anything, ever. You’d never be in debt because you wouldn’t be borrowing anything.
The biggest con is it does nothing to build your credit. Literally: if you only use cash and never borrow, your credit score is zero. You’ll probably never be able to buy a house this way unless you have lots and lots and lots of cash.
And that’s the other big one. There are things that most people can’t afford without borrowing. If you don’t build your credit long before you need one of these things, you’ll be out of luck.
And while we said above that using cash helps you watch your spending, that’s not true for everyone. For some people, having a pocket full of cash makes them feel, and spend, like millionaires. It just depends on the person.
Also, if your cash is stolen, there’s a very slim chance it will be recovered. And if you carry a lot of cash, it’s easy for pickpockets to spot at the ATM or grocery checkout.
Identity protection may be too big a hassle for small-time crooks. But they know your cash is not protected so they might try for it.
Credit, on the other hand, is more protected, if you’re careful. PCI and other measures are being implemented to protect cardholders against fraud. Also, individual creditors also may offer fraud protection measures as a perk.
Even authorized credit charges may be protected. If a merchant doesn’t deliver after charging your credit card, you can dispute the transaction with your creditor to recover the cost.
Certain transactions are easier with credit, such as online and over-the-phone transactions. And it’s easier to reserve things like hotel rooms and rental cars with a credit card.
And borrowing responsibly builds up your credit, which is very important. Your credit score is the billboard of your reliability to all businesses you may need to deal with in the future.
Plus, it’s great to have a nice, big credit line in case of emergencies. You can’t get one of these without building credit over a long period.
Lastly, most credit spending earns you bonus rewards.
The above benefits of responsible borrowing come with a catch: borrowing is dangerous. It’s easy to get into credit card debt and difficult to get out.
If you’re not responsible, you’ll be overwhelmed by interest you can’t afford. You’ll go bankrupt, lose everything and leave your children nothing but debt when you die.
Cash or Credit?
So here’s the breakdown of whether to use cash or credit.
Use credit if you need to build credit for things like buying a house. If you’re careful to only borrow less than your income, you can pay it off immediately without interest, build your credit and earn bonus rewards. Credit is also good for emergency purchases you can’t otherwise afford.
Use cash when credit is not available. Or, if you’re already in debt, use only cash so you don’t add to your debt.
Either way, you have to spend responsibly. Neither cash nor credit will make you more responsible with your money. That’s up to you.
For more financial advice, read the essential financial tips for you.