Personal finance experts break down when to pay with cash or credit — and plastic is a must while on vacation.
Paper money, or plastic?
Cash remains king in America, despite credit and debit cards, mobile wallets like Apple Pay and peer-to-peer money transfer apps like Venmo providing more payment options than ever. In fact, about a quarter (24%) of Americans still use cash for all day-to-day purchases, making it the most-used payment method, according to the Global Cash Index. Americans dropped more than $2.3 trillion in cash in 2015, and about two-thirds prefer using cash for anything $10 or less.
Discover’s summer travel survey released Monday also found that the youngest vacationers are the most likely to use cash. More than one-third (35%) of Gen Zers (ages 18 to 21 in this report) pay in cash while away, compared to just over a quarter of Millennials and Gen Xers. “I’m certain that age is a big factor here, since many in their teens and early 20s may not have a credit card yet,” suggested Emina Dautovic, Discover’s senior marketing manager.
But once you get a credit card (or two), when and where should you use them? While research shows people often spend less when paying with cash versus credit, financial experts told Moneyish that using cash for travel expenses and big-ticket items can cost you big time in liability and lost rewards. So Kim Palmer, credit card expert at NerdWallet, and Greg McBride, chief financial analyst at Bankrate, break down when to pay cash, and when to swipe your card.
Bills are accepted almost anywhere — especially small business, which will appreciate cash over credit because it saves them on processing fees from running your card. So if you’re frequenting a local coffee shop for your morning joe or lunchtime sammie, pay them in cash. When traveling, local artisans and smaller vendors may only take cash.
It keeps you on budget. Research shows people spend more money — up to 83% more in some cases — when they mindlessly swipe credit and debit cards than they do when parting directly with their hard-earned cash. “If you struggle to stick to a budget, or you feel tempted to overspend, then it can be useful to use cash instead,” said Palmer. “If you can only afford to spend $50 grocery shopping, just bring that with you, and you don’t run the risk of overdrawing your bank account or going over budget.”
It’s best for tipping service workers and delivery workers. Take out cash on vacation to tip $5 or $10 to the bellhop, housekeeper, cab drivers and bartenders. Or keep cash handy when doing dinner with friends to tip the server. “The recipients of the tips prefer cash, because when you tip on your credit card, they often only get that at the end of the week,” said Palmer, “whereas cash is more immediate.” And an instant boost for those living paycheck to paycheck.
It’s riskier than credit. If you drop that $20 bill, or your wallet gets lost or stolen, kiss that cash good-bye. “If you lose cash or it gets stolen from you, you are out of luck,” said McBride. Palmer agreed. “If you’re traveling in an unfamiliar city, you could be pickpocketed or lose track of your cash, and then it’s gone,” she said. “But if you use a credit card, you can just immediately cancel it and get that money back.”
You don’t earn rewards. Once you’ve spent that money, you’ve spent it — whereas the cash back earned using a rewards card for things you’d be buying anyway puts money back in your pocket. NerdWallet’s Best Travel Credit Cards Report found that Americans can earn $46.08 back on average using their travel credit cards; if you just use cash or a debit card, you’re leaving almost $50 on the table.
It’s harder to track spending. When paying for things in cash, the onus is on the spender to get receipts and save them to keep tabs on where they’re spending all of their money. “When using a credit card, you can pull up your statement each month and see exactly what you spent and where it’s going,” said Palmer.
Bottom line: Keep some cash on hand for tipping or in case you come to a vendor that doesn’t take credit — but don’t carry more than you can afford to lose, since that money isn’t protected. Carrying cash for a planned grocery or clothes shopping trip can also help you stay on budget.
You’re covered in case of theft or fraud. “Credit cards have built-in fraud protection, so the most you would possibly be liable for is $50, and most card issuers even waive that,” said Palmer. So when shopping online or just covering day-to-day transactions, she recommends using a credit card over cash — and especially over a debit card. “The only thing I use my debit card for is the ATM to withdraw cash,” she added. “If someone steals your debit card, or steals your card number after you’ve swiped it at a gas station, they have access to drain your bank account in minutes, and that’s a very scary thing. Your bank will probably help recover those funds — but you could end up defaulting on all of your bills connected to it in the meantime.
It’s easier to get refunds. “If a merchant won’t give a refund or swap out out a defective item, like a new TV, for another item, you can still dispute the transaction through your card issuer,” said McBride. “And some some cards even offer price protection, so if you buy a TV, and it goes on sale less than two weeks later, you can get the difference in price.” Which is especially useful with big-ticket purchases like electronics, or booking a hotel room or flights for your family.
You can earn rewards on everyday expenses. “When you’re traveling and incurring travel expenses, you can earn double points or even triple points on a travel card,” said Palmer. Or using a gas rewards credit card, or using an Amazon rewards card for Amazon.com purchases, can earn up to 5% cash back. “Our report found that the average American can earn $277 per year putting all of their expenses on a travel rewards card, and with signup bonuses they can earn $901 the first year,” added Palmer.
It’s easy to get into debt. The country’s credit card debt is on pace to hit a collective $4 trillion by the end of the year, according to LendingTree data released Monday, as many people borrow more than they can afford. “Credit card debt is among the most expensive debt that households have, and should be avoided like the plague,” said McBride. “And if you have credit card debt, your financial priority should be paying off that card, and not buying any more stuff with it.”
Interest rates can wreck your rewards. “The fork in the road is this: Do you pay your credit card balance in full every month without fail?” asked McBride. “Because if you carry a balance, even occasionally, it will wipe out whatever reward you’re earning.” Rewards cards return cash back at 1% or 2% the total purchase on average, or up to 3% or 5% for specific purchases (Amazon’s rewards card gives 5% back on Amazon.com purchases.) “The average interest rate on credit cards is approaching 17%, so if you carry a balance for even a month, it wipes out whatever rewards you earned,” he said.
Bottom line: Protect yourself by making all big-ticket purchases, such as electronics or vacation transportation and accommodations, on a credit card, which covers the consumer for theft or fraud, and can help with getting refunds. And using a rewards credit card for everyday expenses puts extra money in your pocket for purchases you’d be making anyway. But you must be able to pay off the balance every month, or else the interest cancels out those rewards.
A note on debit cards: While debit allows you to access the cash in your checking account to cover dinner with friends or an unexpected expensive instead of adding to your credit card debt, it also exposes you to more risk than a credit card. If it gets stolen or hacked, a thief can wipe out your bank account. “I never pull my debit card out of my wallet, unless I’m at the ATM,” said Palmer. “It’s too risky. If you swipe your debit card at a gas station, and those numbers get stolen, someone now has access to your bank account, and that’s a very scary thing.”
And if you use a debit card to rent a car or book a hotel room, the vendor often puts a hold on it in case of incidentals — which means that chunk of change is taken out of your checking account, sometimes for several days after you return the car or check out. “They may put a hold of $500 on there,” warned McBride. “That might not be a big deal for someone with a lot of money in their account, but if you’re cutting it pretty close, that could be the difference between incurring overdraft fees or not.”
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