Charge It: 5 Reasons Using Plastic Beats Cash
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photo: Damon Duncan
The next time you’re sifting through your change purse to pay for your morning latte, consider this: reaching for a credit or debit card instead will save you time – and perhaps even some money.
These days, you can pay with plastic pretty much anywhere – and the benefits are clear, says Curtis Arnold, founder of CardRatings.com. “The added security and convenience of plastic over cash are often cited and fairly straightforward,” he says.
Just last week, one of his coworkers had her purse stolen. “Believe me, she is so thankful that she only had credit cards and no cash,” Arnold says. Someone did end up using one of her cards, but her out-of-pocket costs will be $0 thanks to the fraud protection offered by credit-card companies.
Although credit cards do carry risks – chief among them going into debt and forking over hefty interest charges and fees –the benefits often outweigh those risks. David Weliver, publisher of Money Under 30, says that even those years ago he learned a tough lesson overspending on credit cards, he still prefers them over cash for almost everything. Only now, he makes sure to pay off the balance in full each month.
“Credit cards act as an intermediary between my money and the things I buy,” Weliver says. “If I buy from a shady merchant or somebody steals my card, the merchant or thief doesn’t get the money directly from my bank account.” (That’s not the case with debit cards, of course, those $0 liability protections are universal among these products as well.)
Still not convinced? Here are five benefits to using plastic you should consider:
1. Free money or miles
When you use cash to pay for groceries, gas, or anything else, you are not getting any rewards whatsoever. With a good credit card, you can earn 2% cash back or more on anything you buy. Spend $2,000 a month, and that’s an extra $40 in your pocket: $480 a year.
Many debit cards, such as the one from PerkStreet Financial, now offer cash back as well. And the Chase United Mileage Plus debit card offers air miles (albeit for a $65 annual fee). When was the last time cash gave you a free flight?
2. Accountability
Most people benefit from accountability and automatic record-keeping. When you purchase a $500 ad campaign for your small business or charge a work-related expense with a credit or debit card, a record is automatically created for you. And the banks keep those records – electronic versions of your account statements – for as long as seven years.
That accountability is great during tax time. You can download all transactions into the personal finance software of your choice and automatically categorize everything, and many issuers send out year-end reports that are very helpful in preparation for April 15th, Arnold says. (Accountability is not good if you are maxing out the company credit card on flight upgrades and strip clubs, however.)
3. Free loan
If you pay your balance in full and on time each month, you can take advantage of your credit card’s grace period (typically at least 21 days from the statement date) and not pay a dime of interest. That’s basically “getting something for nothing,” says Gerri Detweiler, personal finance advisor at Credit.com. “At a minimum, you have the float—the use of the bank’s money for up to two months.” This short-term loan frees up your money, so it can earn for you in a high-yield savings account.
4. Purchase protection
American Express has a purchase protection policy that reads like something out of a fairy tale. Except it’s true: buy anything that turns out to be defective or breaks within 90 days, and AmEx will pay for the repair or replacement of the item – or will reimburse the amount charged on the card. (There are limits, of course: up to $1,000 per occurrence or $50,000 per year.)
Visa, MasterCard and Discover cards have similar protections. (And get this: if you find a lower price for a new item you bought with your MasterCard within 60 days of the purchase, MasterCard may reimburse you for the difference.)
Your cost for all these perks? $0.
5. Convenience
Try shopping online without a debit or credit card. In most cases it’s a hassle, to put it mildly. Cards make it painless for us to spend, both online and at the store.
Of course, depending on who you ask, painless spending is not always a benefit. “Typically, a person who shifts to using cash saves 20 percent,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. The knowledge that you’ll be paying with cash makes you more contemplative of your purchases, so instead of mindlessly shopping you only buy what you truly want or need, Cunningham says.
David Seaman, a personal finance writer based in New York City. He wants to be your Facebook friend: www.facebook.com/seaman.
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26 Comments so far
leave a commentI used to use my Amazon rewards card every month and pay off the balance. Recently I’ve switched to using mainly cash, and you know what, I spend less. Even though I’m on the same budget, somehow I spend less.
I still use the card online and at Amazon and when I make big purchases for the extra protection they offer, but I like using cash. There is something definitive about it… I’ve paid for it and it’s done.
So I guess you aren’t going to discuss the major problem of using cards instead of cash, the Interchange fees that inflate the price of all goods by 3%-5%.
That’s a macroeconomic concern, and not a microeconomic one.
When you’re standing in the checkout line, with cash in hand and credit in the other, they’re both the same cost to you.
I listen to Dave Ramsey, who abhors debt and he says that on average you’ll spend 18% more with a credit card than you will if you paid cash. Seems to me all these perks with money back could only be paid by the CC company if they were making more money than if you were paying cash, so it seems to support Dave’s claim.
If that’s the case, I don’t really see any of the perks as useful other than maybe the last one for online shopping. Purchase protection should be a warranty already offered from your vendor or manufacturer, why would you need double protection from the CC company? Buy from a reputable merchant and you don’t have to worry about #4.
Unless you have gobs of money in a savings account, I don’t see you really benefiting from keeping a thousand or so in your savings for an extra month. The risk of not paying something off one month and getting hit with either a service charge or interest would negate months of any extra interest from the savings account.
Personally, I use a debit card to get most of the perks/conveniences listed here. I still try to pay with cash where I can to hopefully limit my spending though. I know I should could use an extra 18% cash in hand over the life of all my purchases than an extra plane flight or two.
Amen. People rationalize the free airfare and money back, but if you spent less, that is the same as getting money back.
@Tom, I couldn’t agree with you more. The only reason Mint publishes this kind of stuff, IMHO, is because they make money by recommending CCs. Don’t get me wrong, I love Mint and they need to make money, but pushing CCs is one of the reasons our country is in some of the huge problems we’re currently in. People aren’t responsible with money! CASH is KING!
Agreed that the last thing we need is more people using credit cards. Cut up your credit cards and get on a budget. Nobody becomes wealthy with bonus miles, only by living on less than you make.
I work for PerkStreet Financial. I agree with many of the comments here highlighting how easy it is to spend more when using a credit card instead of a debit card or cash. That’s the reason Dave Ramsey is such a big fan of debit cards.
We started PerkStreet because we believe that people who live within their means and spend responsibly using debit cards instead of high interest credit cards deserve to be rewarded.
We offer 1% back on debit purchases with no annual fee and no minimum balance requirement.
Laurie McLachlan
You’ve conveniently forgot to mention that PerkStreet charges $4.50 if there is no activity during one month period.
@Alex:
Great point.
To avoid paying an inactivity fee, just use your card once to make a purchase or use it at any one of 37,000 free ATMs in our network. (We give customers access to more free ATMs than Bank of America and Chase combined.)
Other things you can do to avoid the inactivity fee including making a deposit, writing a check that clears the account or using Online Bill Pay.
I agree with this article 100%. Next month we’re flying FIRST CLASS to London for free, thanks to credit cards.
How much did you have to spend to get the “free trip”?
if you pay your balance every month, and don’t buy anything you wouldn’t with cash, you would have to be an idiot to be spending more vs cash.
the problems of the past couple years were not created by credit cards.. it was by people who do not know how / when to use credit cards.
i switched to all cash one month and spend exactly the same, difference being I had no clue where my money went
You can say that again….You “have no clue”
From a consumer perspective, credit cards are fine for about 10 – 20% of the population that is disciplined enough to not carry a balance. The rest of the us, who are actually human in that we give into impulse, live with a little bit of passion and are willing to overspend, show run not walk away from credit cards.
Spend what you have and when you run out of the cash in your pocket, you are done – Simple, Easy, Clean.
You will always spend more using plastic than cash. If you only have $20.00 on you, guess what, you can only spend $20.00.
@The Truth – That’s the truth!
I’d like to add that waiting behind people in line using credit cards is frustrating – It just takes longer
excelent comments, i liked! Thanks!
Another factor in the use of credit cards is safety. If you only use cash, you face the possibility of losing the money, having a purse or wallet stolen with no real recourse. If you lose your credit card or it is stolen, you can notify the credit card company and you will not be out the cash.
Credit cards encourage bad money management skills. Cut your cards and pay off your debt. You’ll be surprised how much more money you actually have each month. Build up an emergency fund (aka: savings) so that when something comes up you are prepared.
Credit = BAD!
One of the reasons our country is in the financial dire straights it is, is because we spend more than we make, individually and as a nation. Why do the credit card companies give the perks? Because they know that most people use those “come ons” as a reason to pay on credit AND because they know that most people won’t pay off their balance every month. You know that the CC companies wouldn’t give away their profit! They are preying on the weak minded clients that can’t abide by the buy only what you can pay for.
I use my Bank of America debit/credit card everywhere. it is like using cash – but I enrolled in the keep the change program and they automatically transfer the difference to nearest dollar into my savings and match it 100% on the first $250! In 2 months I have $78 saved up from this program. By the end of the year, I can take this money and use it for something big that I would formerly bought on credit. I love seeing the amount increase after each purchase. I am aware that I will be sent a 1099-INT for the matching, but it is worth it in that it helped me save up money I would not have done on my own!
To maximize our points/rewards potential, we use gift cards at various stores to pay for small purchases. $25 or $50 gift cards from McDonald, Panera, super markets and convenience stores are charged to our credit card and now we earn points on even a two dollar purchase. Yes, there is a small downside, the float. But at the piddly interest rate we are giving up, who cares?
I like cash because no one asks me for photo ID when I pay with cash. When I attempt to pay with my signed credit card, I get asked for photo ID.
For people who say they spend more money when they are using a debit/credit card, I’d posit that only people with low self-control need a psychological ploy like switching to cash-only to spend less.
No matter what means I use to spend (cash, credit or debit) I spend the same amount!
The only difference is with cash, I’m never one to take receipts so keeping track of what you spent is a hassle. Debit cards give you automatic accountability of where you spent what, and credit cards give you accountability and cash-back!
For all those people that say “rewards are the same as spending less money”…not exactly.
Look at it this way. I ALWAYS spend about $120 on gas per month. My commute to work never changes, and this is a constant. This is a cost that I HAVE to incur every month, I have no choice. You could say the same thing about groceries.
Paying for this gas purchase with cash is foolish. Using a credit card to gain rewards based on purchases you must make every month is a very smart thing to do. The problem only comes when you spend money just to get rewards, which IS foolish.