Tuesday, 27 October 2015

Cash vs. Credit

Should you use cash or credit?
I'm going to go ahead and assume that at one point in all our lives we've been given the advice that we should only use cash and avoid credit cards at all costs. Probably the advice came from an older relative or a personal finance pro like Gail Vax-Oxlade, but is it actually that helpful? Well, I would argue that both have a time and place. If you are fighting to get yourself out of debt and have a problem with spending then yes, cash is likely the best solution, but credit cards can provide you with cash back or travel rewards that are very worthwhile if you can keep your bill paid in full at all times. That's the real key...paying off your credit cards every month means you can take advantage of the rewards but even coughing up the interest once or twice can eliminate any benefit. 

To break this down even further we're going to chat about the pros and cons of both cash and credit cards to make your decision easier. 

Cash - Pros 
  • Accepted pretty much everywhere
  • No additional fees 
  • Makes you consider large purchases (usually there would be a time lag between wanting something and having to go to the bank to pull out enough cash)
  • Easier to budget with because you have a visual representation of how much is left
Cash - Cons
  • If it's stolen it's as good as gone
  • Doesn't help build your credit 
  • Easier to waste cash on small purchases (I'm more likely to stop and grab a coffee if I've got $5 in my purse than if I'd have to put it on a card) 
  • Can't use to shop online 
Credit Cards - Pros
  • Many come with cash back or travel reward programs 
  • Helps build up your credit 
  • Can cancel if stolen and many cards have programs in place to refund fraudulent purchases 
  • You can buy stuff online and have more options available to find the best price
  • Easy to track your spending by looking through transaction history
Credit Cards - Cons
  • High-interest rates mean big payments if you don't pay your balances
  • Easy access to a high limit you may not be able to afford 
  • Encourage impulse buying 
  • Can damage your credit
  • Ever tried to pay for something but the store's credit/debit machine is down? That's a pain.
Knowing all of the pros and cons is great but you really need to know yourself. If you've had problems with credit card debt in the past then you may want to stick with using cash, or ensure your card has a LOW credit limit to keep you out of trouble. 

Some personal finance gurus (Dave Ramsey and Gail Vaz-Oxlade) are strong proponents of an all cash budget and I think for people trying to pull themselves out of debt that's a solid plan. For those who have control of their spending, I think the benefits of credit cards can be really great. The most important thing is to make sure you can pay off your balance EVERY month (have I made that clear yet?). I use credit cards for almost all of my purchases and I do so for many of the perks I listed above. I find they are more convenient than always ensuring I have cash on hand and the travel rewards I earn mean free stuff down the road. I also like to online shop. I find I can often find better deals on the internet and I only buy what I need instead of browsing at the mall. 

The takeaway is that credit cards can be a great way to get added benefits from your purchases, but you must know your limitations and use them properly.

Should you use cash or credit?

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