Cash vs. Credit: When’s The Best Time to Use Each?

October 3, 2023 |
Article | 5 min
| Personal Insights

Weighing the pros and cons of cash vs. credit can help you strategize your spending habits and get the most out of your money. If you’re wondering if you should carry cash or rely on plastic, consider your financial goals first. Here’s a guide to getting started.

You have plenty of ways to spend your money, between cash, credit, debit and digital wallets. But ultimately, it boils down to just two choices: cash vs. credit. Debit cards and digital wallets don’t grow the funds within; they’re just electronic cash. Meanwhile, credit cards allow you to buy now and pay later. Which is superior? When should you use one over the other, and what are the pros and cons of each?

Pros and Cons of Cash

Some believe paying cash helps them save money. Most people are willing to spend more on their plastic than in cash.

Paying cash also avoids the interest charges on credit cards. If you can’t pay your statement balance in full each cycle, you’ll accrue interest charges.

Some downsides to cash include the risk of loss, theft, and hygiene. If cash is lost or stolen, it is gone and very hard to recover. The phrase dirty money also has two meanings: According to NPR, the average dollar bill carries 3,000 types of bacteria.

Pros and Cons of Credit Cards

Credit cards can be your best friend if you use them responsibly. They allow for quick, efficient purchases that you don’t have to pay in full immediately. However, if you don’t clear the balance before your next billing cycle, you’ll be charged interest.

The most significant advantage of credit cards over cash is their rewards programs. For example, you might get 1% cash back on all purchases, 3% at restaurants, and 5% on fuel. Then you can then roll those rewards into gift cards or plane tickets.

Credit cards can also help cover surprise expenses, like auto and home repairs, provided you allocate funds to cover that expense before the next billing cycle. Finally, credit cards help build credit—which helps when taking out loans or opening new cards.

There are disadvantages to using credit cards unwisely, however. Thankfully, you can easily avoid these if you know what you’re looking for. Interest charges can easily become insurmountable, so always repay your entire statement balance to avoid extra charges.

Some cards—especially those with better rewards and benefits—come with annual fees. Look for cards with no annual fees or consider whether your spending habits are enough to cover the fee in cash-back rewards.

Credit card debt is sometimes referred to as “bad debt” because of the high interest rates and the types of frivolous purchases people often put on credit cards. Aim to pay off credit cards before worrying about debts like student loans, mortgage payments, and auto loans. These are considered “good debt,” as they help your long-term financial situation.

When To Consider Using Cash

There are several situations when keeping cash on hand proves beneficial. For example, some small mom-and-pop stores require minimum amounts for credit card purchases to minimize ACH fees. Some small businesses even go cash-only to avoid this problem altogether. They’ll likely have an ATM nearby—but those can still cost you withdrawal fees.

Technology can also glitch, or the power might go out. In those cases, cash means you can still buy what you need. Ultimately, it’s good to keep some cash on you for emergencies—or to buy small items like coffee or a pack of gum.

Cash is also the preferred method of tipping. Servers and bartenders will always prefer a cash tip over a credit card tip; when traveling, keep some cash on hand to pay cab drivers, pop-up vendors, and small business owners.

When To Use a Credit Card

If you can, use your credit card for almost everything—especially your larger transactions. The most important thing is paying off your balance before accruing interest. Never spend more than you can afford; don’t let rewards programs push you into debt. If you use a card with no annual fees and you pay off your balance every month, you’re essentially making money for spending money.

Keep in mind, credit cards are also safer when shopping online. If someone obtains your information, the credit card company will go after them.

Know Your Spending Pattern

Your spending habits will help settle the cash vs. credit debate. Cash is better if you tend to overspend or need help maintaining a budget. Credit cards will help build credit and earn rewards if you spend more responsibly.

You may also lean toward cash if you plan on taking out a loan or mortgage in the near future. Credit card utilization factors into your credit score: If you rack up a high percentage—even if you plan on paying it off this cycle—it could still hurt your score and your loan options.

According to the Federal Reserve, the average consumer uses four payment methods monthly. It’s not about cash vs. credit vs. debit vs. E-wallet. It’s about understanding your spending habits and knowing when each is more advantageous.

Budget Your Way to Success

Using a combination of cash and credit can help you make the most of your money. The most important thing is to make decisions that align with your financial goals. If you’re sticking to a tight budget, cash may be preferable. Meanwhile, credit cards provide many valuable benefits if you’re more flexible and can pay off the balance each month.

In any case, leaning on a trusted financial partner like New Mexico Bank & Trust, a division of HTLF Bank to help put your spending habits in perspective. Our team can help point you toward a credit card that fits your financial goals. Together, we can determine your optimal payment methods and overall financial wellness.