Credit Card or Cash: Which To Use?

Making purchases with credit cards is often more convenient than paying with cash. But in some situations, using cash has more advantages.

Learn how your financial situation and the type of credit card you are using can play a role in whether it's best to use cash or credit to make a purchase.

When To Avoid Using a Credit Card

While it may be easy to use a credit card, you may find that in some circumstances it's best to use cash to make a purchase instead. Here are a few examples of when cash is likely a better way to pay.

With a Transaction Fee

Using a credit card to pay expenses like your income taxes, mortgage, health insurance premium, or another recurring bill may cost you, even if you earn reward points, miles, or cash back. Even if the servicer allows credit card payments, they may charge a convenience fee that may outweigh the value of any reward.

For example, the IRS allows credit cards for tax payments, but with a 1.82% to 1.98% processor fee (in addition to the interest rate on the credit card if you don't pay your bill in full).

In contrast, the IRS allows short-term payment extensions for no fee and installment plans for a fee of $31 to $225 (depending on the taxpayer's financial situation). Late payments are subject to a penalty (0.5% per month) and interest (the federal short-term rate plus 3%), but the total might be lower than the cost of using the credit card.

Without Negotiating

Whether you are facing large medical bills or another significant expense, contact the company's billing department before you charge a credit card and potentially start a debt cycle that can be difficult to escape.

You may find the company is willing to offer a payment plan with terms that are more advantageous than your credit card's terms. They may even be willing to reduce the balance.

While Getting Mortgage

Mortgage underwriters are wary of changes in your creditworthiness between the time you apply for a loan and the time it closes. If your credit card utilization suddenly increases, your credit score could take a hit, and you may not qualify for the loan. If you're in the process of getting a mortgage, use your credit cards very sparingly or not at all.

When Buying Beyond Your Budget

If you can't afford a purchase, whether it's a restaurant meal, a new outfit, or a vacation, avoid using a credit card. Without the cash flow to pay the credit card balance, you will face interest charges that can snowball your debt.

If you have credit card debt, you can't afford to use your cards. Instead, pay down the balance before you add any new charges to the mix, or you risk getting stuck in a cycle of debt. Making only minimum payments on your credit cards could mean you are paying for purchases for years.

Reasons To Use a Credit Card

Using a credit card carries risk, but there are many situations when it makes sense to use a credit card over cash, such as for convenience, card benefits, security, or rewards.

Convenience

Credit cards are often more convenient and secure than carrying cash. As long as you can pay your bill in full each month, using a credit card is typically more advantageous than using cash for in-person purchases. You also need to use a credit card for online transactions as you can't pay in cash.

Warranty or Purchase Protection

A credit card can help you to protect a major purchase, as card issuers may offer purchase protection and an extended warranty for items bought with the card. For example, Visa will extend the original manufacturer warranty for up to one year, up to the maximum sum insured that applies, when you pay in full for an item with your Visa card.

Stronger Fraud Liability Limits

Credit and debit cards both limit cardholder liability in the event of fraud, but credit card protection is typically stronger.

A cardholder's liability for fraudulent use ranges from $0 (if the loss is reported before any fraudulent charges are made) to $50 (if the loss is reported after unauthorized use occurs). On a debit card, however, liability can be unlimited. It is $0 when the loss is reported before unauthorized charges are made, $50 if the fraud is reported within two business days, $500 if the fraud is reported more than two but less than 60 days after it occurs, and unlimited when the fraud isn't reported until more than 60 days after it occurred.

Card Benefits

Co-branded credit cards typically offer exclusive benefits specific to the brand. For example, some airline credit cards offer free checked bags to people traveling on tickets purchased with the card.

Earn Rewards

Many credit cards offer rewards programs that provide a range of benefits, from cash back to travel points. You can potentially earn hundreds, even thousands of dollars back each year with rewards returns, including on everyday household spending.

For example, the American Express Blue Cash Preferred card pays 6% cash back on grocery store spending up to $6,000 per year, for a potential rebate of $360. Cardholders earn a similar or smaller percentage back for other categories of spending.

Security While Traveling

People who travel are more vulnerable to fraud because they are in unfamiliar territory, where they may not know the local language. Lost or stolen cash can't be replaced, but you can report a credit card lost or stolen so it can't be used by anyone else and you can receive a replacement card.

The Bottom Line

Both cash and credit cards offer advantages to making payments. Avoid using a credit card when you can't afford the purchases, because your debt can snowball rapidly. Focus on using credit cards as tools to get added value from your planned spending through rewards and protections.